Avenue Supermarts

Avenue Supermarts is entering the primary market on Wednesday 8^th March 2017 to raise Rs. 1,870 crore via fresh issue of equity shares of Rs.10 each, in the price band of Rs.295 to Rs.299 per share. Representing 10.02% of the post issue paid-up share capital, at the upper end, the issue closes on Friday, 10^th March and is scheduled to list on 21st March.

Avenue Supermarts, 91.36% owned by ace investor Radhakishan Damani and family, runs 118 food and grocery stores, under ‘DMart’ brand, covering 3.6 million sq.ft. retail space, mainly across Western India, with ~75% stores concentrated in Maharashtra and Gujarat. With USP of value-retailing, most of its stores are owned, unlike organized competition operating on leased premises, giving the company savings of nearly 7-8% of sales as lease rentals, a key edge over peers, mainly Reliance and Future Retail, in the listed space.

Company’s financial growth has been spectacular, to say the least. From FY14, while store count rose at 18% CAGR, from 75 to 117 (as of 31-12-16), revenue and PAT CAGR growth was much higher at 26% and 38% respectively, despite competition from e-commerce intensifying during this period. For FY16, on revenue of Rs. 8,588 crore, PAT of Rs. 319 crore was earned, translating into a net margin of 3.7%.

During first nine months of FY17, revenue and PAT has already surpassed full year performance of fiscal 2016, at Rs. 8,784 crore and Rs. 387 crore respectively, strengthening net margin to 4.4%. This kind of growth and margin strength on such high scale, with three quarter sales coming from food/ FMCG, amid tough competition, is a classic example of B-school case study, as retail is one of the most difficult businesses, given multiple operational challenges. Infact, world’s most well-respected investor Warren Buffet has described retail as a ‘have-to-be-smart-everyday-business’ given its complexity! 

Objects of issue comprise (i) repayment of debt / NCDs worth Rs. 1,080 crore over FY18-FY20 (Rs. 625 crore in FY18, Rs. 320 crore in FY19, Rs. 135 crore in FY20) and (ii) construction and fit outs of new stores covering 2.1 million sq.ft., over FY18-FY20. This is significant expansion – almost 60% growth from the current retail area.

On equity of Rs. 561.54 crore, EPS for 9MFY17 came in at Rs. 6.9, up from FY16’s Rs.5.68. Current net worth stands at Rs. 1,905 crore, of which, 91.36% is owned by promoter and balance is with employees. Since dilution is small at just about 10%, promoter stake will remain high at 82.2%, post IPO, also indicating low float. Total debt, as of 31-12-16, stood at Rs.1,408 crore, while cash and equivalents was at Rs. 66 crore. Repayment from issue proceeds will curtail the current debt equity ratio of 0.7:1 to 0.2:1, coupled with equity expansion.

At Rs.299 per share, Avenue will have market cap of Rs. 18,660 crore and enterprise value (EV) of Rs. about 19,375 crore. This leads to EV/EBITDA and PE multiple of 18x and 31x respectively, based on FY17E numbers, which is favourable vis-à-vis Future Retail (not comparable with Reliance Retail). On one year forward (FY18E) estimates, these multiples for Avenue are at 14x and 25x respectively. 

Below is a peer comparison for key large listed retailers:

*only considered 231 Big Bazaar (large format) stores and 379 Easy day (small format)

Since Avenue has one of the best inventory management (holding just 26 sale days inventory as against 80-100 days for Future Retail), its EBITDA of 9% v/s 3-4% of peers, despite lower gross margin (as shown in above table) is a huge differentiation, given the wafer-thin margins of the industry. Also, Avenue has stores located in rich corridor of West India, as it adopted cluster-based expansion to keep costs under check, as against top-down approach beginning with metros tickling down to tier 3 towns. Thus, all this gives it a better turnover per sq. ft., higher return on capital employed and faster growth.

To conclude, Avenue Supermarts scores on fundamentals and pricing. Promoter standing is a cherry on the cake, making the issue a subscribe, both for short and long term.

Disclosure: No interest.