Avenue Supermarts D-Mart Note

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Patience Wood
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Avenue Supermarts D-Mart Note Key Market Indicators (Standalone) Latest Date 04-Sep 2017 Latest Price (Rs) 1020.00 Previous Close (Rs) 1048.35 1 Day Price Var% -2.70 1 Year Price Var% 59.

1 Avenue Supermarts D-Mart Note Key Market Indicators (Standalone) Latest Date 04-Sep 2017 Latest Price (Rs) Previous Close (Rs) Day Price Var% Year Price Var% Week High (Rs) Week Low (Rs) Beta 0.53 Face Value (Rs) Industry PE TTM Period TTM EPS(Rs) 7.73 TTM CEPS(Rs) 9.75 Price/TTM CEPS(x) TTM PE (x) Price/BV(x) EV/TTM EBIDTA(x) EV/TTM Sales(x) 5.29 Dividend Yield% 0.00 MCap/TTM Sales(x) 5.32 Latest Book Value (Rs) Market Cap (Rs. In Crores) EV (Rs. In Crores) Latest no. of shares (In Crores) Share Holding Pattern as on Promoter % FII % - Free Float % Avenue Supermarts (DMART) owns and operates an emerging national supermarketchain, D-MART. Focused on value retailing. Over the last five years, it has expanded its total area of operations at a CAGR of 21% to 4.1m sf and grown its sales and PAT at a CAGR of 40%and 51% respectively. Key Takeaways From FY17 Annual Report Of DMART DMART s larger focus of expansion would be in states where it is already present. Tight control over costs was noticed in FY17 which help to increase margin. FCF was negative but maintained at similar levels as last year with stable capex. Entered new geographies - NCR, Daman,Rajasthan and Tamil Nadu. Within the older states, significant store additions were seen in Karnataka (+5), Telangana & AP (+4) and Gujarat (+3). ROE moderated to 18% (vs 24% in FY16) owing to equity raising despite improvement in net margins. Fixed asset turnover improved to 4.4 (vs FY16: 4). Debt/Cash levels. Total debt stood at Rs1100cr while Net cash stood at Rs770cr and will use IPO money to payoff debt and we can see debt free company E-commerce investments. DMART s associate Avenue E-Commerce registered loss of Rs26cr in F17 (Rs12 consolidated as DMART own 49.2% stake). Revenue for E-commerce entity was Rs1.6cr Company s basic business model (Key reason for growth) Every day low cost/ every day low price strategy: to offer higher value to customer Focus on higher volume in business and at the same time keeping operating cost low At the same time, focused on expansion to leverage a better buying power and economies of scale, that allow company to retain margins while offering fantastic prices Owned store model, centralized sourcing and efficiency Page 1 of 8

2 10 Stores, stores, stores, Stores,2002 From 1 store in 2002 to 131 at present D-Mart has a consistently growing presence across India. Today,131 stores in ten states and one union territory. larger focus of expansion would be in states where company already has a presence. In FY 2017, company added 21 new stores. D-mart has strong presence in Western india and the states where D-mart operates it constitute 44% of India s population Where V-Mart has strong presence in UP, Bihar and NCR D-mart sells stuff that are part of day to day life plus discritionary Foods(Dairy,grocery) 27% 20% 53% Non-Food(personel care,home care product) General merchandies and appereals Value points 1. Industry private consumption constitutes 60% of India s GDP, of which retail is around 50%. Share of organised Retail was 9% of total retail in FY 2016 which will grow at 11% CAGR and is expected to touch 12% market share by FY 2020 thereby providing huge opportunity of growth for DMART. 2. DMART derives ~80% of its total revenues from Maharashtra and Gujarat which accounts for 21% of total retail spends in India. DMART intends to invest 75% of its profits in the existing clusters and plans to add 25 stores annually (83.5% increase in area to 7.5m sf by FY21) embellishing its growth potential.

3 3. Key matrices for dmart FY12 FY13 FY14 FY15 FY16 FY17 No.of stores YOY % 20% 18.5% 23.5% 20% Revenue per 13,000 18,458 21, ,636 29,010 sqft YOY - 42% 16% 11.8% 7% 13% Growing retail business area with store and consistent increase in revenue per square foot and Because of that Revenue has posted a strong 40% CAGR 4. Owned store model saves from rental costs and its escalation (FY16 data) Since inception, DMART has understood the basic needs of the customer. It follows no-frills store layouts, opens stores in high catchment residential areas rather than in malls, offers fewer choices of no-frills products and owns most of its stores, resulting in lower operational costs and best-in-class revenue per square foot. But owing a property comes with its own drawback unlike other retailers who will have significant tax credits on service tax paid on rentals, DMART will not benefit. 5. DMART V/S OTHERS Companies Dmart Hyper City Spencer's More Bazaar Future Retail Lease 0.2% 5.5% 5.3% 5.3% 3.9% 8.4% Rentals DMART saves alot in lease and rental which is main cost in retail industry already they run on paper thin margin so saving on lease helps DMART a lot to maintain margin with giving heavy discount on products D-mart maintaining an inventory period at days and total WC cycle at 9-10 days 6. DMART V/S GlOBAL RETAILERS Company P/E EV/EBITDA P/B ROE 5 year AVG Name PAT growth GLOBAL Walmart % Costco % Target %

4 Tesco % INDIAN RETAILERS Trent % V-Mart % sdmart % Main global comparison for DMART is walmart Walmart has larger history and last 5 year PAT Avg is 3% Both companies into discount retails and Walmart is successful in US market and has sustain throughout where DMART has shorter history to look out Overall industry work on paper thin margin so, turnover is more important metric than PAT margin PAT margin going to be added advantage for DMART for some year On the other side Tesco is in branding n luxury stores totally different when compare towalmart and DMART Quarter Result Quarter On Quarter (Standalone) (Rs in Crore) Particulars Q on Q Var% Y on Y Var% Net Sales Total Expenditure PBIDT (Excl OI) PAT PBIDTM% (Excl OI) PBIDTM% PATM% Adj. EPS(Rs) Topline growth 36% led by an increase in sales per sqft from Rs31k to Rs35k and contribution from 14 new stores opened in 4QFY17and PAT growth of 48% and EBITDA remain stable so increase in profit is because of lower finance cost this year which directly reflected in PAT growth and PAT margin increased by 1 % with addition of 21 new stores Management is optimistic that GST will create excellent opportunities for small and medium businesses to become preferred suppliers to organized retail in the near to long term.

5 AGM highlights At present promoter shareholding is 82% and three year after listing company will reduce it to 75%. Out of total 131 stores 113 are owned (land may not necessarily owned) and remaining are leased. Average revenue per sqft is sustainable Total employee strength 5070 A single new store to generate profit it take at least a year There are pick-up stores in south Bombay but no planning to open a proper store in south Bombay because of affordability Size of opportunity is very huge and if company open stores in same region it will still work and having stores in same region has its own advantages like multiplier effects and cost saving Promoters of the company don t want to spend much on ecommerce business so that s why company don t have 100% stake in ecommerce business Cost of doing business in ecommerce is high as company are more focus on day to day stuff like grocery and that is bulky so cost of delivery is high Product assortment is more important than cost at which company sell its FMCG Products 95% space is utilized Shop revenue per store will minimum grow by inflation plus 2% as per company estimate Company haven t shut a single shop yet and no shop is running on losses except few new one Not focused on consumer electronics segment Will repay certain debts from IPO money but not full debt D-mart has started private label in FMCG space in Coffee and Toilet soaps, however the contribution to overall sales in negligible and is a non focus area. GST impacted sales for 15 days of July however business is now back to normal, at present the company is not able to quantify any positive benefits from GST

6 Sector- Retail (RS in CR) Mar- Mar Mar Mar Mar Mar Revenue 11, YOY 30% 33% 37% 39% 51% # Gross margin 15% 14% 14% 14% 14% 14% Total expense 10, YOY 38% 33% 38% 39% 51% # EBITDA YOY 50% 45% 34% 59% 56% # EBIT YOY 50% 47% 32% 64% 60% # PAT YOY 33% 52% 31% 72% 55% # PAT margin 4% 3% 3% 3% 3% 2% Interest YOY 33% 26% 30% 31% 64% # Interest % 1% 1% 1% 1% 1% 1% The minimum growth of PAT in last 5 year is 30% and that is very healthy where margin remain same for all of the year a small jump this year in margin which is a good change in retail company s Description ROE ROCE EV/EBIT FCF/share ROE and ROCE of company slowed down when compare to last two year where Free cash flow is still negative and big change in EV/EBITDA is because of ipo market cap added

7 Bottomline Stable cash conversion cycle which means Good inventory management Debt might reduce to zero ROCE of 20% CFO is equal to PAT this Year Growing at the rate of 40% Valuation wise Walmart: P/E 17,ROE 17 V-Mart: P/E 45,ROE 13 D-Mart: P/E 120,ROE 18 Financial Snapshot Payable days Receivable days Inventors days Asset Turnover(x) Inventory Turnover(x) Cash Profit Total Debt (Long Term plus Short Term) Capital Employed Gross Block Investments Cash and Bank balance Net Current Assets (Including Current Investments) 7 Total Current Liabilities Total Assets Cash Flow from Operations Cash Flow from Investing activities Key Ratios

8 Debt to Equity(x) Current Ratio(x) ROCE(%) RONW(%) PBIDTM(%) PATM(%) CPM(%) Disclaimer: This document has been prepared by NNM Securities Pvt. Ltd.(NNMSPL). This document does not constitute an offer or solicitation for the purchase and sale of any financial instrument by NNMSPL. This document has been prepared and issued on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst meticulous care has been taken to ensure that the facts stated are accurate and opinions given are fair and reasonable, neither the analyst nor any employee of our company is in any way is responsible for its contents and nor is its accuracy or completeness guaranteed. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. NNMSPL may trade in investments, which are the subject of this document or in related investments and may have acted upon or used the information contained in this document or the research or the analysis on which it is based, before its publication. This is just a suggestion and NNMSPL will not be responsible for any profit or loss arising out of the decision taken by the reader of this document. Affiliates of NNMSPL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. No matter contained in this document may be reproduced or copied without the consent of the firm.

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