DMART: ‘Neutral’ rating with TP of Rs 2,878

Recovery trends steady until the second Covid-19 wave hit DMART published its Mar’21 performance, which offers a positive trend before the second Covid wave once again impacted performance. Standalone revenue grew 18% YoY to Rs 73billion in 4QFY21. In FY21, revenue declined 3.6% to Rs 238 billion. We maintain our neutral rating with a TP of Rs 2,878 per share, ascribing 46x EV/EBITDA on a FY23E basis.

While this is 6% below our expectation, management commentary for Jan-Feb’21 (before getting hit by the second wave) is 6% SSSG, implying an estimated revenue growth of 25% (in line with our full quarter numbers). It indicated it witnessed a 9.4% YoY decline during the first fortnight of Mar’21 due to full or partial lockdown across cities due to rising cases. The second fortnight of March saw significant sales YoY on a lower base due to the countrywide lockdown last year.

Store additions welcoming: DMART added 13 stores (net) in 4QFY21 (v/s our estimate of eight store additions) to reach 234. In FY21, it added net 20 stores (v/s 38 stores in FY20) after adjusting for two stores converted into fulfillment centers for its e-commerce business. This is a very decent addition despite a lockdown for nearly 4-5 months of the year.

Uncertainty ahead but holds strong recovery potential. DMART is facing restrictions in certain cities and towns that it operates in. Some stores are restricted from selling non-essential products on certain days of the week or for a continuous period until Apr’21. The company has about 84 stores in Maharashtra (36% of total stores), which is estimated to contribute ~50% to total revenue. With nearly 27% of business being non- essential (i.e. general merchandise and apparel), it could see a 10-15% revenue impact in Apr’21 and the same could extend depending on the intensity of the lockdown across the country. Our FY22E estimate (standalone), which factors in 283% EBITDA growth, may see a downward revision. However, revenue trends in FY21 indicate that once stores resume operations fully, its targeted value offerings witness a swift recovery.

Valuation: With the emergence of the second COVID-19 wave, the stock has corrected 14% over the last one month, yet it continues to garner rich valuation with FY23E EV/EBITDA and P/E of 46x and 74x, respectively. The increase in COVID intensity could see a further correction.