Avenue Supermarts Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Retailing

Company

Avenue Supermarts Ltd

Reco Price
Rs. 693.50
Price Target (1 Year)
Rs. 833.00
Upside
20.12%

Date

April 07, 2017
Sensex
29706.61
CNX Nifty
9198.30

Exchange

Code

NSE
DMART
BSE
540376

Better store metrics, lower cost structure backed by esteemed management can re-rate this stock further.

Better store expansion strategy could help D-mart gain considerable market share:
D-mart plans to add 2.1 million sq-ft of store area over the next two years, with the aim to enhance penetration further in Maharashtra/Gujarat and its expand store network to Andhra Pradesh, Telangana, Madhya Pradesh, Karnataka, Chattisgarh and Northern India (opened new stores in NCR, Rajasthan in FY17)(currently has 3.59 million sq-ft of cumulative store area). This expansion will be complemented by enhancing distribution center capability as well (from 22 currently). Nearly 70-75% of new stores will be located in existing markets with the rest being in the newer markets. This is in line with the cluster-based strategy which allows more efficiency for the company.

Operating efficiency and low cost structure makes for good store economics:
The primary operating principle for D-mart is to retail quality goods at best prices. Competitive prices are ensured by sharp/optimal product assortment, better understanding of local market knowledge (consumer spending patterns, new product launches depending on local customer needs) and supply chain efficiencies. Cluster-based store expansion strategy has further allowed higher cost efficiencies due to economies of scale in supply chain/inventory management and concentrated brand visibility due to focused implementation of marketing initiatives. Lower prices are funded by
1) Lower operating costs (e.g., minimize rentals, lower inventory days/WC needs),
2) Direct goods procurement from manufacturers,
3) Efficient logistics and distribution system, and
4) Smarter product merchandising/assortment.

Shift to organized retail from unorganized kirana’s:
Contribution of organized retail to overall retail is fairly low at 9% ($55 Billion). Modern retail has been in India for over two decades now. It witnessed rapid expansion till 2006 as many new players entered across various categories and cities. However, after 2008, pace of growth moderated due to impact of the global financial crisis. Share of organized retail moved up modestly to 9% in 2016 from 7% in 2012. It is expected to grow to 12% by 2020. In the past few years, this industry has gone through a period of consolidation even as many stores/malls had to shut down. Now with economic recovery setting in, the industry is again starting to look upwards. We see a new wave of confidence and better operating models from existing retailers who are looking to add more retail space.

Return ratios to gradually improve:
D-mart has witnessed gradual improvement in key return ratios over FY12-16. ROE has risen to 21% in FY16 from 9% in FY12, led by significant improvement in margins, better asset turnover and leverage. With equity fund raising, we expect ROE/ROCE levels to compress in FY17 before starting to improve in the forthcoming period as the debt levels reduce and operating margin expands.

Stock Data

CMP (Rs)
751.20
Face value (Rs)
10
52 Week Range (Rs)
668.40 - 558.30
Market cap (Rs Crores)
46837.54
Price To Book Value (x)
13.81
P/E Ratio
151.76
EV/EBIDTA (x)
70.43

One Year indexed Stock Performance

Return (%)
1m
6m
12m
36m
Absolute
-
-
-
-
Sensex
2.44
5.86
20.34
32.95

Shareholders

(in %)
20-Mar
Promoter
82.20
Public
17.80
Others
0.00
Total
100

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research@stockaxis.com

 

Industry

Total Retail market forms around ~30% of the country's GDP (and 50% of private consumption) and is worth $616 Billion as of FY16. Of this, organized retail is pegged at $55 Billion, which translates into ~9% share of the overall retail market. As per Technopak estimates, overall retail market is expected to grow at a CAGR of 12% with organized formats to grow at a CAGR of 20%+ taking up the share to 12% by FY20. Share of urban in retail, which is currently at 49% is expected to grow to 52% by 2020 on account of increasing urbanization, higher increase in urban household income, and increasing penetration of organized retail in urban centers.

Profile

Avenue Supermarts Ltd. (ASL) is a leading supermarket chain with a focus on value retailing and operates its stores under the D-Mart brand. ASL was founded by Mr. Radhakishan Damani. The first store was launched in 2002 in Mumbai and since then the retail chain has expanded to 118 stores spread across 3.59 million sq-ft. product portfolio comprises of Foods (53% share), Non Foods FMCG (21% share) and General Merchandise & Apparel (26% share, includes apparel, plastic goods, home furnishing, toys, etc).

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18E
Income:-
  • Net Sales
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • % Margin
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Taxation & Exceptional Items
  • Exceptional Income / Expenses
  • Tax
  • Profit After Tax
  • Share of Associates
  • Consolidated Net Profit
  • Adjusted EPS
  • 4686.50
  • -
  • 4344.39
  • 342.11
  • 7.30
  • 14.70
  • 356.81
  • 54.60
  • 302.21
  • 57.00
  • 245.21
  • 0.00
  • 83.50
  • 161.71
  • -0.10
  • 161.61
  • 3.00
  • 6439.40
  • 37.40
  • 5980.40
  • 459.00
  • 7.13
  • 17.80
  • 476.80
  • 71.90
  • 404.90
  • 81.50
  • 323.40
  • 0.00
  • 110.90
  • 212.50
  • -0.80
  • 211.70
  • 3.90
  • 8588.10
  • 33.37
  • 7924.60
  • 663.50
  • 7.73
  • 17.40
  • 680.90
  • 90.20
  • 590.70
  • 98.40
  • 492.30
  • 0.00
  • 171.60
  • 320.70
  • -1.80
  • 318.90
  • 5.70
  • 11636.88
  • 35.50
  • 10624.47
  • 1012.41
  • 8.70
  • 20.80
  • 1033.21
  • 113.10
  • 920.11
  • 124.50
  • 795.61
  • 0.00
  • 276.40
  • 519.21
  • -8.50
  • 510.71
  • 8.19
  • 15127.94
  • 30.00
  • 13789.12
  • 1338.82
  • 8.85
  • 22.90
  • 1361.72
  • 26.70
  • 1335.02
  • 151.60
  • 1183.42
  • 0.00
  • 406.20
  • 777.22
  • -12.00
  • 765.22
  • 12.28
Source: Stockaxis Research, Company Data

Valuation

At a CMP of Rs. 693.5, the company is trading at 3.17 times its sales. Its global peers on the other hand, like Wal-mart and Costco use to trade at 4 times to their sales in their high growth phase, like D-mart is in as of now. Store expansion strategy can give topline a boost of 25%+, which will further increase its price to sales ratio in the future. We hence recommend BUY for Supermart Avenues Ltd.

 

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