Analyst corner: Maintain ‘hold’ on Avenue Supermarts with TP of Rs 2,864

Avenue supermarts (DMart) got back on growth track inQ3FY21with 9% growth (14% above estimate, Q2FY21:- 11%). Other key highlights, strong open control: Other expenses fell 7% YoY despite the revenue growth, driving EBITDA margin to multi-quarter high. Stepped up eCommerce aggression: In addition to opening fulfilment centres and entering Pune, DMart entered three more cities during the quarter. We believe the aggression on e-commerce along with potential market share gains in modern trade channel bodes well for long-term growth sustenance and thus raise target multiple to 60x EV/EBITDA and TP to INR 2,864. We still maintain ‘HOLD’.

Continued aggression and overall performance will drive further rerating. DMart reported much better-than-expected recovery with revenue rising 9% YoY to INR 74bn (Q2FY21: -11%) led by benefit from a surge in the festive season. December didn’t trend as well as the festival months of October and November. December, mature stores (two years and older, 162 stores of 221) recovered ~96% due to curbed store operations in a few cities post-Diwali due to tonight curfews and weekend closure. Gross margin rose 60bps QoQ as overall sales and sales mix are now trending close to pre-covid levels.

Key highlight was the contraction in other expenses, which saw the firm reporting EBITDA margin of 9.3% (Q3FY20: 8.8%, Q2FY21: 6.2%) with EBITDA jumping 16% YoY. DMart continues to maintain its cost structure to covid times,  with recovery exceeding pre-pandemic level. Also, FMCG firms are highlighting Modern T-rade is back on a growth trajectory. We see market share gains for DMart as Big Bazaar struggles due to group level issues. Factoring beat in performance, we revise up FY21/22E PAT11%/8%. Also, increased-com aggression and potential market share gains enhance growth sustenance visibility. Hence, we raise target multiple to 60x (from 50x) EV/EBITDA as we roll forward to Q1FY23, leading to TP of INR 2,864 (INR2 ,131 earlier). Maintain ‘HOLD.’