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Earnings growth healthy, but competitive intensity still high
1QFY20 revenue growth was steady with operating standalone revenue surging 26.8% YoY to INR57.8b (in-line).
There were eight store additions in 1QFY20 (v/s +2 stores in 1QFY19 and +12 stores in 4QFY19). The quarter saw 50bp YoY improvement in gross margins to 16.1% v/s our estimate of 14.7%. PAT grew 34% YoY to INR3.35b (20% beat) with 30bp margin improvement; management attributed this to continued operational efficiency, which in turn, supported higher margins.
IND-AS impact neutral on PBT, but EBITDA was higher:
EBITDA grew 41% YoY to INR6b (21.5% beat) with 100bp margin improvement YoY. This was due to higher gross margins coupled with 30bp gain from IND-AS116, as part of the other expenses was reallocated in depreciation and interest costs. However, on LTL basis, EBITDA grew 36% YoY to INR5.77b while PAT grew 35% YoY to INR3.38b (see Exhibit 3).
Is the revival in margins sustainable? Maintain Sell:
While DMART’s gross margin improvement has led to steady earnings growth, our channel checks indicate that pricing points across other retailers are in a similar range. Additionally, management has cautioned that 1QFY20 margins need not be a reflection of the entire year. Thus, to adjust for 1QFY20, we have marginally revised up our estimates. However, we have factored in gross margin/EBITDA margin at 15%/8.9%, ~100bp lower than 1QFY20 levels, given the ongoing hyper competitive intensity. Subsequently, we arrive at a TP of INR1,215 (earlier TP at INR1,115) based on 26x EV/EBITDA on FY21E EBITDA of INR28.5b.
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