Profile:
Avenue Supermarts Limited (DMart) is a national supermarket chain, with a focus
on value-retailing. The Company offers a wide range of products with a focus on
Foods, Non-Foods (FMCG) and General Merchandise & Apparel product categories.
As of December 31, 2020, the Company had 221 operating stores with Retail Business
Area of 8.17 million sq. ft. across Maharashtra, Gujarat, Daman, Andhra Pradesh,
Karnataka, Telangana, Tamil Nadu, Madhya Pradesh, Rajasthan, NCR, Chhattisgarh and
Punjab.
Value retailing to a well-defined target consumer base
D-Mart follows Everyday low cost - Everyday low price (EDLC-EDLP) strategy which
aims at procuring goods at competitive price, using operational and distribution
efficiency and thereby delivering value for money to customers by selling at competitive
prices on daily basis. The company strategy is to target lower-middle, middle and
aspiring upper-middle income consumers as getting value for money is the most compelling
factor in daily shopping decision-making for these income groups. The majority of
the products stocked by the company are essential products forming part of basic
lifestyle rather than discretionary products. This allows to maintain consistency
in footfalls throughout the year and are least affected by seasonality or remain
temporarily depressed due to macroeconomic conditions.
Cluster based store expansions to continue
DMart follows a cluster-based approach. It has deepened store network in southern
and western India and is gradually expanding network in other parts of India. This
approach allows the company to create store clusters within a region and helps better
to understand local needs and preferences and tailor its offerings according to
the demand. Such clusters have also led to increased penetration and presence in
under-served markets with higher cost efficiency due to economies of scale achieved
through supply chain and inventory management with concentrated brand visibility
due to focused implementation of marketing and advertising initiatives.
Owning Stores helps to reduce operating cost
DMART pre-dominantly operates on an ownership model or on a long-term lease arrangement
model rather than a rental model. The company takes a particular property on lease
for a period of more than 20-30 years which allows them to minimize operating costs
thus offering long term competitive advantages like avoiding escalation in rental
expenses thus keeping fixed cost low. DMART’s rental costs are just 0.4% (negligible)
vs average 5-6% of net revenues for other retail players like Future Retail/Spencer
Retail. Despite having lower gross margins in comparison with its peers, Company
has higher EBITDA margins than its peers due to tight control on operating costs.
Over the last 2-3 years however, company has shown an interest towards adding stores
on the long-term lease basis to accelerate the pace of store expansion. DMART’s
Fixed asset turnover has remained consistently higher than peers at ~4x given its
lower operating cost due to negligible rental expenses and higher discounts. Also
inventory turnover ratio has been ~14x from FY16-20. The company has maintained
a higher ROCE and ROE at an average of ~23%/ 17% respectively over FY16-20.
DMART Ready is next growth opportunity
Dmart is addressing e-retail business (DMart Ready) through its subsidiary, Avenue
E-Commerce Ltd through which it offers customers the choice to self-pick-up their
online orders from any of the designated pickup points or get them delivered at
their residence (for a nominal delivery charge). DMART Ready provides its consumers
agility and convenience on a day-to-day purchase, widen its reach in regions where
it doesn’t have presence through Brick & Mortar format owing to high real
estate and other costs. Unlike other online players, DMART wants to expand its e-commerce
business gradually analysing every aspect of the online business model so as to
get a deeper understanding of the store economics as, in grocery e-retailing attaining
breakeven is difficult due to higher revenues from lower margin products, higher
cost of technology and administration and delivery expenses. In Q3FY21, DMART has
launched DMart Ready in select pin codes of Ahmedabad, Bangalore and Hyderabad.
In addition, at some of its brick-and-mortar stores, company has leased some part
of the space to Avenue E-Commerce Limited (AEL) to commence E-Commerce operations
in those cities. Post Covid-19 environment is creating opportunities to launch DMart
Ready in more cities. However, DMART will continue with their approach of small
trials, reviews and controlled acceleration for DMart Ready.
We believe DMART is well placed in the domestic retail industry given its strong execution capabilities, disciplined EDLP/EDLC strategy, adding new stores, penetrating into new market. At the CMP of 3,123, Avenue supermarket ltd is trading at the PE multiple of 211.2 on the basis of TTM EPS.
Consolidated Financials
Particulars (in cr) | 2016 | 2017 | 2018 | 2019 | 2020 | 9MNFY21 |
---|---|---|---|---|---|---|
Revenues | 8,661 | 12,758 | 15,033 | 20,005 | 24,870 | 16,731 |
EBITDA | 664 | 981 | 1,353 | 1,633 | 2,128 | 1,131 |
EBITDAM | 7.66% | 7.69% | 9.00% | 8.16% | 8.56% | 6.76% |
Profit Before Tax | 492 | 760 | 1,204 | 1,422 | 1,745 | 940 |
Net Profit | 320 | 479 | 806 | 903 | 1,301 | 686 |
PATM | 3.70% | 3.75% | 5.36% | 4.51% | 5.23% | 4.10% |
Adj EPS Priority | 5.70 | 7.67 | 12.92 | 14.46 | 20.09 | 10.58 |
Key Ratios - Consolidated
Particulars | 2016 | 2017 | 2018 | 2019 | 2020 |
---|---|---|---|---|---|
ROE (%) | 23.56 | 18.34 | 18.57 | 17.71 | 15.67 |
ROCE (%) | 24.22 | 21.91 | 24.18 | 25.78 | 20.84 |
Fixed Asset Turnover | 4.0 | 4.4 | 4.4 | 4.3 | 4.1 |
Inventory Turnover(x) | 14.4 | 14.9 | 14.4 | 14.6 | 14.2 |
Price: Avenue Supermarts has gained 2.83% and got close on intraday high. The stock after finding bottom at Rs.2610 made on 29 January 2021, which also ended short term to medium term down trend in the stock. The stock has been significantly outperforming NIFTY over month on month basis. We expect the stock to continue its outperformance in the coming weeks. The stock has bounced from the support level with increased in volume which indicates the strength in the counter.
Indicator: The stock is trading above important moving average 21SMA & 50SMA on daily charts as well as weekly chart. Bollinger Band (20, 2, S) set up on daily chart has started to slightly expand and currently the stock is trading above the upper band of Bollinger Band indicating the volatility expansion on the higher side. RSI (14) on daily chart is pegged at sub 66.90 levels, indicating the stock has not yet been over bought. The Parabolic SAR is trading below its price action on daily charts reflect up trend in the stock will remain intact in near term. The DMI+ (26.73) on the daily timeframe is also currently trading near the 25-mark suggesting that the stock is likely to witness more momentum in coming days.
Volume: Price and volume analysis plays an important part in determining overall strength or weakness in the stock. Price and volume pattern are moving in the same direction which reflects the true movements in the stock. AVENU SUPERMART stock has seen the profit booking with thin volume, which still shows the movement of this stock, is still on bull side.
Conclusion: Considering all the above data facts, we recommend buying for medium term. Trader may go long around current level Rs.3123 with keeping the stop loss Rs.3100 for target Rs.4250.