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Margin pressures evident
Rich valuations restricting re-rating
* Revenue growth robust, but no relief on margins:
Revenue grew robustly by 33% YoY to INR54.5b (in-line) in 3QFY19. However, the company continued facing margin pressure (gross margin down 170bp YoY to 14.7% off a high base), mainly due to its focus on price competitiveness. Consequently, EBITDA increased by a modest 7.5% YoY to INR4.5b (5% miss), with the margin contracting 200bp YoY to 8.3%. PAT, too, grew by a marginal 2.1% YoY (8% miss) to INR2.6b due to lower other income (-37% YoY) and higher depreciation/finance cost (+33%/36% YoY).
* Four new stores added in 3QFY19:
DMART added nine new stores in 9MFY19, (four in 3QFY19), taking its store count to 164. The store addition trend appears similar to last year – 10 new stores added in 9MFY18. We, however, note that DMART tends to accelerate store addition toward the fiscal-end (14 new stores added in 4QFY18). In 4QFY19, too, it is likely to add 13-14 new stores.
* Valuations view:
Revenue prospects remain promising (30% CAGR over FY18-21; 22% SSSG), given continued store additions and benefits from its EDLC-EDLP (Everyday low cost-Everyday low price) strategy. However, margin expansion will be restricted by increased price competitiveness by peers (as indicated by channel checks). We expect EBITDA/PAT CAGR of 30%/31% over FY18-21 (FY20 EBITDA estimate raised by 10% led by revised growth and margin estimates). However, valuations appear rich at 73x/54x FY20/21E P/E. We, thus, see limited room for re-rating. Maintain Sell with a TP of INR1,400 (prior: INR1,285), ascribing 65x P/E on FY20E (on the back of strong competitive moat).
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