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.
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.
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.
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.
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.
Globally, India is seen as one of the key consumer markets with consumption expenditure set to increase to USD 2 trillion by 2020 and will surpass the consumption expenditure of several other developed economies. Key factors that will continue to drive this momentum are (i) favourable demographics (ii) rapidly rising education levels (iii) steady growth of urbanisation (iv) increasing penetration of mobile technology and internet infrastructure (v) increasing aspirations and affordability and (vi) Government’s focus on reforms, skill development, job creation, infrastructure, manufacturing and investments.
Private consumption continues to be the largest driver of the economy in the country. Retail industry accounts for ~50% of this consumption. India’s expected GDP growth and consequent private consumption will translate to an increase in the retail market from USD 616 billion in 2016 to USD 960 billion in 2020. The food and groceries (F&G) segment constitute a majority share of the retail market (67%), followed by apparel & accessories, consumer electronics and home & living categories.
The past year has seen significant development in the E-tail market in India. This growth trajectory is likely to continue and by 2020, we expect this market to grow to ~USD 55 bn, forming ~5.7% of retail market.
|Gross Profit Margin||15.67%||20.98%||23.44%||24.00%||24.00%|
|Power & Fuel Cost||79.24||99.41||121.26||154.74||193.42|
|Employee Benefits Expenses||149.04||192.51||282.58||350.73||438.42|
|General & Administration Exp||48.67||71.40||96.55||115.54||144.42|
|Selling & Distribution Exp||0.00||860.45||1471.97||1856.83||2192.09|
|Profit Before Tax & Exceptional Items||491.77||760.01||1203.59||1611.61||2178.46|
|Profit Before Tax||491.77||760.01||1203.59||1611.61||2178.46|
|Profit After Tax||320.30||491.72||787.80||1047.55||1416.00|
|Share of Associates||-0.12||-12.97||18.46||0.00||0.00|
|Consolidated Net Profit||320.18||478.75||806.26||1047.55||1416.00|
We expect the company to continue to deliver high earnings growth aided by accelerated growth in store additions, pick up in e-commerce business, low debt and change in strategy. DMart is currently trading at a P/E of 60x its FY20E earnings. Hence, we recommend ‘Buy’ with a target price of Rs. 1,840 at a valuation of 81x its FY20E earnings.