DMART Q1FY22 results tracked ahead of our expectations. (i) Standalone sales rose 31.3% y-o-y. This was impressive as Q1 was marred by lockdowns and disruption amidst a second wave of COVID-19 (which not only restricted the number of hours stores could remain open, but also mandated that they sell only essential supplies). (ii) Ebitda and PAT grew 103% and 132%, respectively, which were 7% and 13% above our estimates. This is commendable, despite the gross margin contraction of 129bp y-o-y due to lockdowns and various restrictions. However, efficient cost control led Ebitda margin to expand 156bp y-o-y. (iii) DMART opened four stores in Q1FY22 (20 in FY21). Overall, a good performance amidst all the disruption.
What messages should one take away from this?: This is hardly a quarter to make any structural judgement but it is reasonable to deduce that despite disruptions, DMART has stuck to its core principles of doing business. Its value proposition has remained essentially unscathed despite being largely a physical retailer. Even though growth looks good, it is from a low base, and revenue is still below that of Q1FY19. However, healthy profits despite the challenges shows how resilient DMART’s business model is .
We believe DMART still has a compelling investment case: (i) We expect revenue to rebound in FY22e, driven by strong SSSG due to the lower base and network rollout. We estimate revenue growth of 30% and earnings growth of 54% for FY22e. FY23e is likely to witness an exponential rebound in revenue growth and profits in our view. We pencil in revenue growth of 48%. (ii) We think DMART has a successful business model for value-seeking consumers. (iii) DMART’s presence is still nascent at 238 stores, which could more than quadruple over the next decade, making it one of the most lucrative network rollout plays in our coverage.
Maintain Buy: DMART’s current valuation demands earnings grow at a CAGR of c19% over the next 15 years, which is achievable, in our view. We raise our FY22-24e earnings and roll our valuation base forward to July 2021 from June 2021. As a result, our TP increases to `4,000 (from Rs 3,900). Our DCF-based TP implies c18% upside from current levels.