Buy Avenue Supermarts; target of Rs 2300: ICICI Direct

ICICI Direct's research report on Avenue Supermarts

Avenue Supermarts’ results were a mixed bag with lower-than-expected revenue performance but a beat on EBITDA for Q2FY21. Nonetheless, the management’s commentary had a positive bias with the scenario matching normalcy levels. Despite 95% of stores resuming operations, stringent measures by local authorities had an impact on working hours. By August, most stores started operating at pre-Covid operating hours. Withstanding challenges, D-Mart’s core ‘Food & FMCG’ segment (currently ~77% of sales) has reverted to the growth path with positive trajectory seen across all stores in September. Discretionary categories (GM & apparels) are currently laggards owing to subdued demand but are gradually picking pace (revenue contribution: 22.7% vs. 27.3%; implied de-growth 26% YoY). In the first half of FY21, the company incurred capex worth Rs 651 crore (vs. Rs 768 crore in H1FY20) and added eight new stores (vs. 13 additions in H1FY20). It has also shut two stores and converted them to fulfilment centres (FC) to scale up its e-commerce business (‘D-Mart Ready’). Further, it has expanded its e-commerce operations in select pin codes of Pune. Trends indicate enhanced focus on e-commerce owing to change in industry dynamics with grocery e-commerce industry gaining significant traction during the pandemic.

Outlook

The stock price has corrected ~15% since our last update. Hence, we upgrade our rating from HOLD to BUY with a revised target price of Rs 2300 (38.0x FY23E EV/EBITDA, previous TP: Rs 2360).

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