DMART’s Q4FY21 earnings beat estimates by a wide margin: (i) DMART’s standalone sales/Ebitda/PAT grew by 17.9%/47.6%/ 51.6% y-o-y respectively. Sales was currently guided in DMART’s Q4 operating statement (in April), whilst Ebitda/PAT beat consensus by a wide margin. (ii) Gross margin expanded by 117bp (implying income mix normalised) whilst reduced rise in other costs led to 170bp rise in Ebitda margin to 8.4% (on a benign base, considering that Q4 last was impacted due to COVID-19 wave). (iii) DMART opened 22 shops in FY21 (13 in Q4) and converted two shops into fulfilment centres for its ecommerce segment. Overall a sturdy functionality, one that once again highlights DMART’s organization model has remained formidable regardless of the disruptions of FY21.
Q3 and Q4 beats enhance conviction that disruptions are short-term: Even as (i) the second wave is disrupting, with c80% of its shops impacted due to decreased working hours and restriction on non-critical sales, the provide chain is in great shape. In reality inventory is in excess now (constructed up as normality was increasingly visible in Feb-March). (ii) DMART’s method has remained firmly intact: It has managed to retain its pricing edge against most on-line retailers regardless of disruption and also upped its game of on-line delivery across essential cities, so it is at least greater ready (getting learnt from last year’s crisis). (iii) Withstood rise of on-line (led by COVID-19) nicely: Margin improvement in Q4 allays fears of margin erosion due to elevated competitors from e-retailers and reaffirms that its customer franchise remains formidable. (iv) Stock has been resilient (down c12% from March peak vs c30% through initially wave), and we think that after COVID-19 fears subside, a sturdy income rebound is imminent. Last year’s base is benign which must assistance earnings development. We pencil in FY22e income/PAT development of 28%/56% y-o-y, respectively.
Its investment case rises above a couple of months of disruption: (i) Barring COVID-19, structurally, we see grocery retailing ($545 bn as of FY20-finish, expanding at c9%, whilst modern day retail with just 4% penetration can provide 2x development price) as a multi-decade chance. (ii) DMART has constructed a big scale, formidable customer-centric organization model with a clear method of low fees and most effective rates as its competitive edge and thrived in ‘trial by fire’ disruption. (iii) DMart’s presence is nonetheless nascent at 234 shops, and we anticipate network rollout to now accelerate from FY22 the network must more than quadruple in the coming decade, creating income and PAT double every single 3 years.
Retain Buy, TP Rs 3,430: We reduce estimates (COVID-19 led) and roll forward valuation base, and remain Buy on DMART with a new TP of Rs 3,430 (from Rs 3,500 previously).