Avenue Supermart Limited (DMART) Research Report By Axis Securities

Value Retailing + Execution Finesse = DMART

We are initiating coverage on Avenue Supermart Limited (DMART) with a BUY recommendation and a Target Price of Rs 3,100 which implies 16% upside from the current levels. DMART’s strong execution capability with a stellar execution track record, places it on top of the list among all Food & Grocery (F&G) retail players. Tested business model with consistency in providing highest discounts on a profitable basis helps DMART to outperform competition.

The company has ramped up its store expansion and its cluster based expansion aids in trimming costs and supporting margins. DMART has delivered strong growth with a CAGR of ~36%/40%/47% in Revenue/EBITDA/PAT respectively, over FY12-20.

We expect the company to deliver healthy growth over FY20-23E with a CAGR of ~23%/24%/25% in Revenue/EBITDA/PAT respectively on account of 1) Value retailing (cosnistency in providing discounts) remains the primary moat 2) Low cost of operation (majority of the stores are company owned) 3) Continuous store expansion through a cluster based approach 4) healthy SSSG and balance sheet with no liquidity constraints, 5) Superior Return ratios despite heavy investment in assets. At CMP, the stock trades at 41x EV/EBITDA on FY23E earnings (3year avg EV/EBITDA is 54x), which we believe is attractive given the strong revenue growth over FY20-23E with large headroom for expansion going ahead.

OUR INVESTMENT THESIS IS BASED ON THE FOLLOWING PREMISES

Value retailing remains the primary moat

DMART’s strategy is to offer lower prices on products on a daily basis (EDPL/EDLC), rather occasionally. The company targets lower-middle, middle, and aspiring upper-middle-income consumers for whom value for money plays an important role. Despite larger revenue dominated by food and grocery business (52% of revenue) coupled with thin margins (8.6% EBITDA margin), DMART provides lowest cost offerings to customers consistently, in turn gaining loyalty, a key factor for driving footfalls. DMART has maintained the lowest execution cost aided by a cluster-based expansion strategy, lowest operation cost among peers by outsourcing ~80% employees and minimal rental cost (owns the majority of stores) and optimum working capital with the timely payment of payables reaping higher cash discounts. With a higher share of food and grocery in revenue, it has witnessed a higher number of bill cuts per year, which has risen at a CAGR of ~25% over FY13-20 to 20.1 cr cuts suggesting good new customer traction. Average bill size has also expanded significantly over the same period. Consequently, DMART has been able to drive improvement in Revenue per square feet consistently for the last few years from Rs. 26,388 in FY15 to Rs. 35,647 in FY19 with FY20 impacted by COVID.

Large headroom for expansion with focus on D-Mart Ready

The company has a strong presence in southern and western regions which majorly contribute to the revenues. DMART has established an extensive cluster-based distribution network comprising of 220 stores and ~225 DMART Ready stores as of Q2FY21. The cluster-based approach has reduced the distribution and inventory cost for the company in turn bettering margins. We expect the company to add ~100 stores till FY23E with ~80% of the stores in the existing clusters and ~20% would be new clusters for which it successfully raised Rs. 4,000cr through QIP in FY20.

Strong Balance Sheet and Return Ratios

Despite capital intensive strategy, the company has maintained high ROE and ROCE in comparison to the industry. The company has maintained healthy operating cash flows, asset turns (~5x) and EBITDA Margins over the years making it a capital efficient business. It has sustained an average ROE and post tax ROCE at 15%+/13% respectively which are expected to be maintained going forward given strong execution capabilities. Balance sheet remains strong and comfortable with Net Debt/EBITDA and Net Debt/Equity of -0.05x/ -0.01x respectively in FY20.

Robust long-term growth outlook – Initiate with BUY

Initiate coverage with BUY rating on the stock and a target price of Rs 3100 (48x FY23E EV/EBITDA). We believe DMART is well placed in the domestic retail industry given its strong execution capabilities, disciplined EDLP/EDLC strategy, lower cost of operation and streamlined distribution network aiding DMART to penetrate in to newer markets. At CMP, stock trades at 41x EV/EBITDA which we believe is attractive given the strong revenue growth and large headroom for expansion going ahead.