Avenue Supermarts Ltd

Avenue Supermarts Ltd (DMart), incorporated in 2002, is an India-based company founded by Mr. Radhakishan Damani. It owns and operates DMart stores. DMart is a supermarket chain that offers customers a range of home and personal products under one roof. Each DMart store stocks home utility products (including bed and bath linen, dairy and frozen foods, fruits and vegetables, crockery, grocery and staples, etc.) toys and games, apparel for children, women and men, and DMart brands. DMart is present in over 155 locations across Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh, Karnataka, Telangana and Chhattisgarh. The company has multiple stores in cities such as Mumbai, Ahmedabad, Baroda, Bengaluru, Hyderabad, Pune and Surat.

Promoter:
Mr. Radhakishan Damani is an established and well-known value investor in the Indian equity markets. Through his investing style, he developed a very keen understanding of the Indian consumer sector and was anxious to start a business beyond investing. After a couple of years of introspection and research, he decided to start a grocery retail chain, focusing primarily on the value segment.

DMart was conceived by him in the year 2000. It took 8 years to set up its first 10 stores. This wasn’t because of dearth of investment opportunities, but more because of his belief in the importance of validating the business model from a perspective of both profitability and scalability.

Steady expansion:
DMart was established in the year 2000 with a single store operating in Maharashtra with a mission to be the lowest priced retailer in its area of operation. DMart’s total retail business area covers 4.9 million sq. ft spread across 45 cities, 9 states and 1 Union Territory in India. It has a consistently growing presence across India and has added 24 new stores during FY2018, taking the total store count to 155 at the end of the year against 45 stores in FY 2011. The company further plans to expand its store network by opening additional 50-60 stores over the next 2-3 years with more than 75% in existing clusters. Though the management has pre-dominantly followed the ownership model (where stores are owned and operated by the company) it may also consider evaluating the lease model (where franchisees may be permitted to own and operate stores under the brand name ‘D-Mart’) to accelerate growth. The management firmly believes in capturing the opportunity in the existing markets after which it will enter the untapped North-East markets. Hence, we expect the revenue growth to sustain in the coming years as well.

‘Dmart Ready’ picking up well:
DMart launched ‘DMart Ready’ stores in Mumbai, which act as pickup points for items ordered by customers online or delivered at home for a charge. The objective is to enhance shopping convenience, tackle deepening competition from e-commerce and de-congest mature stores. ‘DMart Ready’ stores are not very large (about 300-400 sq. ft. in area) and through this, the company is entering the online space to meet competition. Currently, 58 stores have been set up and through this format, the company is also ensuring that sales loss at mature stores can be prevented by offering customers the convenience of home delivery. We expect this initiative to result in revenue growth of 25% over FY19-20E.

Store Strategy:
The company operates stores in locations where it has the maximum growth possibility. The company focuses on opening a new store within 3-5 kms, once an existing store matures. This strategy not only improves efficiency of the two nearby stores, but also reduces congestion/rush at billing counters. While this may give rise to cannibalization, it improves company-wide SSSG (Same Store Sales Growth). However, during FY2018, SSSG declined to 14.2% from 21.2% in FY2017 due to the increase in the number of matured stores. The management highlighted that new stores deliver a healthy SSSG, whereas matured stores grow closer to the inflation rate. Hence, as new stores are opened, there will be healthy growth trajectory going ahead. And as the number of matured store increases, the management expects SSSG to further moderate to a certain extent.

Financial performance:
DMart has a strong track record of high growth and profitability. Revenue/PAT have grown at 24/37% in the past five years. EBITDA margin is higher among peers due to better asset turnover and lean cost structure. The recent strategy revamp to include leased stores along with owned ones will accelerate its pace of growth. The company has also significantly reduced its debt by paying Rs 899 crores till the end of Q1FY19 out of allocated amount of Rs 1,080 crores from IPO proceeds. We expect PAT growth of 16% CAGR over FY19-20E.

Consistently improving margins in a low margin industry:
While growing its business, the company has not compromised on its profitability, which can be seen in its healthy operating profit margins over FY2014-18. While it continues to attract consumers by consistently offering products at low prices on a daily basis, it also maintains lower operating costs with strong discipline, which is the result of the management being involved in the day-to-day operations. While margins are not likely to go up from the current levels, focus on strong operational efficiency is likely to improve margins from the current levels.