Avenue Supermart Limited

KEY INFORMATION FOR AVENUE SUPERMART LIMITED

Date	11-Dec-20
Market Price (INR)	2622
52Week H/L	2755/1700
Market Cap (INR Mn)	16,98,465
Shares Outstanding (Mn)	647.8
Industry	Retail
Recommendation	Sell
Target Price	2,337
Upside/Downside	-10.87%

Key Financial	FY20	FY21E	FY22E	FY23E
Sales	2,48,702	2,60,737	3,35,726	4,17,235
Growth (%)	24.32%	4.84%	28.76%	24.28%
EBITDA	21,283	20,116	28,329	37,410
Margin (%)	8.56%	7.71%	8.44%	8.97%
PAT	13,011	12,693	18,430	24,813
EPS	20.55	19.92	28.93	38.95
Growth (%)	44.17%	-3.08%	45.21%	34.63%
ROE (%)	11.74%	10.32%	13.15%	15.29%
ROCE (%)	15.35%	9.88%	12.74%	14.88%
EV/EBITDA(x)	78.7x	83.3x	59.1x	44.8x
P/E(x)	125.7x	129.7x	89.3x	66.3x

Share Holding Pattern (%)
Promoter	75.0%
FIIs	10.3%
DIIs	6.1%
Others	8.6%

Not yet out of COVID impacts but recovering fast

D Mart’s sales declined by 12.3% YoY in Q2-F21 and 34% YoY in Q1-F21 mainly due to pandemic. Post lockdown, improvement in footfalls have witnessed significant improvement in Non-FMCG sales from last quarter, which is aiding faster recovery in margins.

Still King in Retail Segment?

D Mart is among few players to have mastered the Retail game via its strong execution strategy, store locations, and EDLC/EDLP focus. D Mart is King in offline retail segment through their execution strategy backed by strong management. E-commerce division, D Mart Ready, has to replicate offline Retail’s success into online Retail.

Available at a richly valued price

We estimate Revenue CAGR of 14%, EBITDA CAGR of 18%, and EPS CAGR of 22% over the FY19-23E. The stock currently trades at 66X of FY23E EPS, which we find to be a very rich valuation.

Avenue Supermart Limited - Company Profile

D-Mart was conceived by value investor Mr. Radhakishan Damani in 2000, operating a single store in Maharashtra. With a mission to be the lowest priced retailer in their operation area, D-Mart has grown steadily over the years and operates 220 stores. It follows a cluster-based expansion approach focusing on deepening penetration in the areas already present before expanding to newer regions.

Avenue Supermart Limited - MANAGEMENT PROFILE

Name	Designation
Ignatius Navil Noronha	CEO, Director & MD
Narayana Bhaskaran	Chief Operating Officer
Nildari Deb	Chief Financial Officer
Udaya Bhaskar Yarlagadda	Chief Operating Officer
Ashu Gupta	Secretary & Compliance Officer
Dheeraj Kampani	Vice President
Hitesh Shah	Vice President

AVENUE SUPERMART BOARD MEMBERS

Name	Designation
Ramesh Damani	Chairman
Chandrashekhar Bhave	Independent Director
Kalpana Unadkat	Independent Director
Manjri Chandak	Non-Executive Director
Elvin Machado	Whole Time Director
Ramakant Baheti	Whole Time Director & Group CFO

Not yet out of the COVID impacts but recovering fast

D Mart’s sales declined by 12.3% on YoY in Q2FY21, mainly due to the slow recovery in footfalls, partial local lockdowns, and subdued sales in general merchandise and apparel category. SSSG came in at -12.5% for stores that have been operating for more than two years. However, with relaxation in restrictions norms, the company has seen MoM improvement as the revenue dropped by 34% YoY in Q1FY21.

Company continued expanding its presence, added 8 new stores, and shut the 2 two stores in the first of FY21. We expect that store addition is likely to accelerate in the second half of FY21 on the back of a recent QIP of ~41 bn.

Faster Recovery in Margins

Gross Profit/EBITDA declined by 102/90 bps YoY and stood at 14.05% /6.2%. The impact was mainly due to lower sales and lower non-FMCG Mix due to pandemic led disruption. With more relaxation in restrictions and the resultant improvement in footfall; non-FMCG sales have witnessed significant improvement since last quarter, which is aiding faster recovery in margins.

Improvement seen in PAT Margins

PAT de-grew by ~37% YoY in Q2FY21 v/s de-growth of 85% YoY in Q1FY21 due to lower sales and margins. We expect that improvement in margin and lower- tax rates will support the growth. The company has repaid all their long term debt from recent QIP.

Still King in the Retail Segment?

The company is the dominant player in the offline retail segment via its execution strategy. Food and Grocery remain the value migration play in Retail, which provides a vast opportunity as a low single-digit share from organized retail players. Despite this enormous opportunity, most of the players have failed on execution like Future Retail. They are among few players who have mastered the game through their presence in key locations.

E-Commerce is a small part of their overall operations but aggression is visible with the launch of fulfillment centers and the extension of existing e-commerce. D Mart is getting ready to battle with E-commerce players like Big Basket, Jio Mart, Groffers, and Amazon Pantry. We believe the company would maintain their position in offline retailing. But heavy competition from players like Reliance and Spencer’s and willingness to take entry into Indian Retail industry like Wal-Mart may hurt the business witnessed in last 10 quarters.

Reliance Retail has also cracked the formula to serve both the retail segment offline and online. D Mart Ready has to ramp up their business if it has to replicate their offline success in E-commerce. We believe that the ecommerce platform and offline presence would drive the growth but not as compared to last 5 year’s growth which could be a crucial trigger for the PE re-rating.

SalesGrowth	1QFY19	2QFY19	3QFY19	4QFY19	1QFY20	2QFY20	3QFY20	4QFY20	1QFY21	2QFY21
Spencer’sRetail				3.6%	14.7%	8.1%	5.9%	5.9%	-27.0%	-13.3%
Reliance Retail	123.75%	121.47%	89.26%	51.61%	47.53%	27.33%	27.41%	4.22%	-17.23%	-0.25%
Dmart	26.7%	38.9%	33.1%	32.1%	26.8%	22.1%	23.9%	23.0%	-33.7%	-12.3%

We build a sales projection with a CAGR of ~16% for F19-F23E and expect improvement in EBITDA margin to 9% in F23E from 8.2% in F19 on account of ramp up of D Mart Ready, Higher sales in offline retailing, and dominance presence in key location.

Improvement in Sales to lead Improved Return Ratio

We expect EBITDA to grow at an 18% CAGR due to higher revenue growth and a faster recovery in the second half. The EBITDA margin expands 80 bps to 9% in FY23E on the back of improvements in operating margins over FY20-23E.

We expect that gross margin would remain in the range of 14.8-15.1%. EBIT margin to increase by ~50 bps to 7.6% in F23E. Cash conversion cycle remains steady, which indicates a strong execution by the management.

The Return on equity (RoE) declined to 15.6% in F20 from an average of 18% in F17-F19. We expect RoE to improve to 16.4% in F23E on account of faster recovery in margin and progress in MoM sales.

Outlook and Valuation

We expect that the faster recovery, improvement in sales, and strong execution drive business growth and project the sales with a CAGR of 16% for F19-F23E, which is lower than the growth CAGR of 24% F16-F20. We project that earnings remain healthy with a growth of 22% for F19-F23E which is lower than the growth of 29% on account of lower sales growth compared to previous years mainly due to heavy competition in offline and online Retail. Currently, the stock is trading at PE 66.3x EPS of F23E of INR 38.95, which we believe a rich valuation sees a healthy competitive landscape in the retail segment. We valued at PE of 60x F23E EPS arrived on the recommendation of SELL, with a price target of 2337, a downside of 10%.

Key Financials

Income Statement	2019	2020	2021E	2022E	2023E
Net Sales	2,00,045	2,48,702	2,60,737	3,35,726	4,17,235
Purchase of stock in trade	1,74,455	2,14,417	2,27,754	2,92,921	3,63,829
Change in inventory of stock in trade	(4,447)	(3,388)	(5,736)	(7,386)	(9,179)
Cost of materials	1,70,008	2,11,029	2,22,018	2,85,535	3,54,650
Gross profit	30,037	37,673	38,719	50,191	62,585
Employee costs	3,554	4,561	5,197	5,860	6,625
Other expenses	10,150	11,829	13,407	16,002	18,551
EBITDA	16,333	21,283	20,116	28,329	37,410
Depreciation & amortisation	2,125	3,744	4,404	5,044	5,696
EBIT	14,208	17,539	15,711	23,285	31,714
Other income	484	600	2,050	2,214	2,391
Finance charges	472	691	726	762	800
Net Profit before tax	14,219	17,448	17,036	24,737	33,305
Less: Current tax, FBT	5,195	4,438	4,344	6,308	8,493
Tax Rate	0	0	0	0	0
Minority and associates	1	1	1	1	1
PAT	9,025	13,011	12,693	18,430	24,813
EPS (period end)	14.5	20.7	20.2	29.3	39.3

Balance Sheet	2019	2020	2021E	2022E	2023E
Freehold Land	16,212	22,629	25,602	30,043	34,610
Leasehold Land	4,070	-	-	-	-
Building	21,160	27,123	29,770	33,568	37,401
Others	7,134	9,551	10,784	12,595	14,423
Gross tangible assets	48,576	59,303	66,156	76,207	86,434
Less: Accumulated depreciation	(5,835)	(8,229)	(12,419)	(17,261)	(22,770)
Net Tangible assets	42,740	51,074	53,737	58,946	63,664
Right Use of Assets	-	7,173	7,173	7,173	7,173
Gross intangible assets	1,304	1,397	1,445	1,515	1,585
Less: Accumulated amortization	(222)	(329)	(544)	(745)	(933)
Net Intangible assets	1,082	1,068	901	769	652
Capital WIP (Tangible)	3,768	3,644	3,644	3,644	3,644
Non-Current Investments	181	165	165	165	165
Long term loans and advances	324	31,309	31,309	31,309	31,309
Other non-current assets	1,136	2,854	2,854	2,854	2,854
Cash	2,191	1,079	14,668	25,521	41,523
Trade Receivables	644	196	440	566	704
Inventory	16,087	19,474	18,700	24,042	29,852
ST loans and advances	756	1,237	1,361	1,497	1,647
Other current assets	1,149	1,491	1,640	1,804	1,985
Total current assets	20,826	23,477	36,809	53,431	75,710
Total assets	70,057	1,20,765	1,36,593	1,58,292	1,85,172
Short term borrowings	3,042	37	37	37	37
ST Lease Liabilities	-	744	744	744	744
Trade Payables	4,633	4,335	4,723	6,082	7,564
Other current liabilities	4,467	1,991	2,190	2,409	2,650
Short term provisions	128	152	152	152	152
Current liabilities	12,269	7,258	7,846	9,424	11,147
Long term borrowings	1,257	-	3,000	6,000	9,000
LT Lease Liabilities	-	2,211	2,211	2,211	2,211
Deferred tax liabilities	633	474	474	474	474
Other long term liabilities	18	20	20	20	20
Total liabilities	14,177	9,963	13,550	18,128	22,851
Share Capital	6,241	6,478	6,478	6,478	6,478
Reserves and surplus	49,634	1,04,320	1,16,561	1,33,682	1,55,839
Minority Interest	6	5	5	5	5
Total capital and liabilities	70,057	1,20,765	1,36,593	1,58,292	1,85,172

Cash Flow statement	2019	2020	2021E	2022E	2023E
Net Profit before tax	14,219	17,448	17,036	24,737	33,305
Depreciation & Amortisation	2,125	3,744	4,404	5,044	5,696
Finance Costs	472	691	726	762	800
Others	(224)	(395)	-	-	-
CFO before WC changes	16,593	21,488	22,166	30,543	39,801
Increase/(Decrease) in payables	1,460	(298)	389	1,359	1,482
Increase/(Decrease) in other liabilities	(198)	191	199	219	241
(Increase)/ Decrease in debtors	(309)	448	(244)	(127)	(138)
(Increase)/ Decrease in inventory	(4,452)	(3,388)	774	(5,342)	(5,810)
(Increase)/ Decrease in other assets	(7)	(716)	(273)	(300)	(330)
WC changes	(3,507)	(3,762)	844	(4,191)	(4,555)
Taxes Paid	(5,018)	(4,924)	(4,344)	(6,308)	(8,493)
Cash Flow from operations	8,068	12,801	18,666	20,044	26,754
Investments sold/(purchased)	3,991	2,216	-	-	-
Divestments	-	-	-	-	-
Capex	(14,168)	(17,122)	(6,900)	(10,121)	(10,297)
Others	(3,393)	(31,660)	-	-	-
Cash flow from investment	(13,569)	(46,566)	(6,900)	(10,121)	(10,297)
Equity issued	-	41,869	-	-	-
Dividend Paid	-	-	(450)	(1,308)	(2,655)
Debt raised/(paid)	2,600	(7,613)	3,000	3,000	3,000
Interest income	-	-	-	-	-
Finance Costs	(510)	(682)	(726)	(762)	(800)
Cash flow from finance	2,090	33,574	1,824	930	(455)
Net increase/(decrease) in cash	(3,411)	(190)	13,589	10,853	16,001
Cash at the beginning of the year	5,602	2,191	1,079	14,668	25,521
Cash at the end of the year	2,191	2,001	14,668	25,521	41,523

Key Ratio	2019	2020	2021E	2022E	2023E
EPS	14.5	20.7	20.2	29.3	39.3
Gross Profit Margin	15.0%	15.1%	14.9%	15.0%	15.0%
EBITDA Margin	8.2%	8.6%	7.7%	8.4%	9.0%
EBIT Margin	7.1%	7.1%	6.0%	6.9%	7.6%
Net Profit Margin	4.5%	5.2%	4.9%	5.5%	5.9%
ROE	17.6%	15.6%	10.9%	14.0%	16.4%
ROCE	16.5%	15.3%	9.9%	12.7%	14.9%
Inventory days	30	31	31	31	31
Receivable days	1	1	1	1	1
Payable days	8	8	8	8	8

Avenue Supermart Limited

KEY INFORMATION FOR AVENUE SUPERMART LIMITED