JMFL
Avenue Supermarts (Buy)
CMP: ₹1,393.9
Target: ₹1,740
Avenue Supermarts Ltd is an India-based company, which owns and operates DMart stores.
3QFY19 turned out to be another disappointing quarter for DMart — whilst the gross margin impact of its now-known strategy of driving higher throughput at stores by lowering prices across categories has been built into forecasts, the disappointment this time round was led by a surprisingly sharp surge in ‘Other Expenses’ (+45 per cent) — DMart’s ‘Other Expenses’ has rarely grown at a significantly faster clip versus sales growth in the past.
Management cites ‘pre-loading of certain expenses’ relating to capability building to be the reasons for the same, and also pointed to some overspending to “manage festive season better through longer operating hours” — this has, however, not resulted in sales-growth acceleration versus 2Q level despite festivals falling entirely in 3Q this year.
FY19E is a margin-reset year for the company with relatively ‘muted’ EBITDA growth (we forecast 18 per cent versus FY15-18 CAGR of 43 per cent), post which profit growth would trend higher (28 per cent over FY19-21E). Any sharp stock correction should be used as a buying opportunity.