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TP Rs1,604 Key Stock Data

Avenue Supermarts BUY CMP Rs1,398 Bloomberg / Reuters
Perfect proxy to India’s consumption growth story Potential upside / downside +15% Sector Retail
Shares o/s (mn) 624
Summary V/s Consensus Market cap. (Rs mn) 872,252
EPS (Rs) FY20E FY21E Market cap. (US$ mn) 12,594
We initiate coverage on Avenue Supermarts (DMART) with a BUY rating and target
IDBI Capital 19.5 28.0 3-m daily average value (Rs mn) 605.2
price of Rs 1,604 based on FY21E EV/EBITDA of 35x. Superior business model (ability to
Consensus 19.1 23.9 52-week high / low Rs1,696 / 1,127
provide highest discount consistently on a profitable basis) and huge scope of
% difference 2.2 17.2 Nifty / Sensex 39,395 / 11,789
penetration should help DMART to outperform competition. Concern on margin
pressure due to rise in discounting intensity by online players is temporary (as has been
Shareholding Pattern (%) Relative to Sensex (%)
proved globally) and not structural. To capture convenience driven online retail,
Promoters 81.2
DMART ready is best placed to drive aggressive growth. We forecast revenue/EBITDA
FII 5.9
/EPS to grow at 28%/32%/37% CAGR over FY19-21E.
DII 3.0
Key Highlights and Investment Rationale Public 9.9

 Ability to consistently outperform competition in discounting is the primary moat…

Price Performance (%)
Based on our first of its kind survey of 23000 SKUs over April – June 2019, we note
-1m -3m -12m
that DMART consistently outperformed all other retailers in terms of offering
Absolute (0.5) (11.5) (11.0)
discount (22-30%) across all categories.
Rel to Sensex 0.3 (14.0) (20.6)
 …by Passing on the benefit of lowest execution cost; are the hallmarks of ethics
and discipline Financial snapshot (Rs mn)

DMART has been able to consistently maintain lowest execution cost with the help of Year FY17 FY18 FY19 FY20E FY21E
right strategy; (i) cluster based expansion (lower distribution cost) (ii) outsourcing Revenue 118,811 150,112 199,163 242,420 324,212
EBITDA 9,637 13,374 16,422 20,437 28,439
>80% employees (25-30% lower employee cost) (iii) getting cash discounts from
EBITDA (%) 8.1 8.9 8.2 8.4 8.8
vendors (by paying off in 8-10 days) (iv) lower fixed cost (by owning stores). This has
Adj. PAT 4,826 7,847 9,364 12,156 17,502
helped DMART to maintain consistency in offering discount to customers.
EPS (Rs) 8.6 12.6 15.0 19.5 28.0
 Best positioned to tap convenience driven online retail through DMART ready EPS Growth (%) 51.8 46.3 19.3 29.8 44.0
In the online space, we believe DMART ready is superior business model compared to PE (x) 162.6 111.2 93.2 71.8 49.8
competition as (i) cost of last mile delivery is on the customer (ii) lower distribution Dividend Yield (%) - - - - -
EV/EBITDA (x) 80.6 65.0 53.2 42.7 30.5
time/cost due to proximity from DMART stores, and (iv) ability to directly retail (at
RoE (%) 18.0 18.5 18.3 19.6 22.8
the pick-up points) high margin general merchandise (GM) and high turnover dairy
RoCE (%) 22.1 23.8 26.2 27.0 32.1
products (Milk, Curd etc). Source: Company; IDBI Capital Research
July 1, 2019
 Avenue Supermart | Initiating Coverage

Huge scope of penetration in grocery retailing for organized retailers in India

Organized retail industry in India is likely to grow at 21% CAGR during FY17-21E led by accelerated shift from
unorganized retail to organized modern trade. Penetration of organized food and grocery retailing is the lowest at 3%.
Consequently, food and grocery retail is likely to grow the fastest at 27% CAGR during FY17-21E thereby increasing
penetration from 3% in FY17 to 6% in FY21E.

Exhibit 1: Break up of retail market in India (USD bn) Exhibit 2: Penetration % category wise
Categories FY07 FY12 FY17 FY21E Categories FY07 FY17 FY21E
Total Retail Spending 259 398 710 1,106 Total Organized Retail (USD bn) 10 67 148
Food and Grocery 70.0% 67.5% 66.7% 65.8% Food and Grocery 1% 3% 6%
Apparel and Accessories 8.0% 8.3% 7.9% 7.7% Apparel and Accessories 14% 24% 36%
Jewellery and Watches 6.0% 7.3% 7.7% 8.2% Jewelry and Watches 6% 28% 35%
Consumer Electronics 6.0% 5.2% 5.9% 6.8% Consumer Electronics 3% 27% 13%
Home and Living 2.0% 4.2% 4.3% 4.4% Home and Living 6% 11% 13%
Pharmacy and Wellness 2.0% 2.8% 2.9% 3.0% Pharmacy and Wellness 21% 11% 30%
Foot apparel 1.0% 1.2% 1.2% 1.2% Foot apparel 10% 27% 34%
Source: Technopak, IDBI Capital Market Research Source: Technopak, IDBI Capital Market Research, figures in USD billion

Exhibit 3: Organized retail spending: % CAGR during FY17-21E

30% 27%
24%
25% 22%
19% 19% 19%
20% 17%
15% 14%

10%

5%

0%
Food and Apparel & Footwear Jewellery & Pharmacy & Consumer Home & Living Others
Grocery Accessories Watches Wellness Electronics

Source: Technopak, IDBI Capital Market Research

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DMART leads organized grocery retailing industry in terms of offering highest discount

DMART outperforms competition in discounting

 In grocery retailing, we note that DMART's ability to consistently stand by its core principle of "every day low cost
(EDLC)", which translates into "every day low price (EDLC)", is the primary moat which differentiates the company
from its competitors.
 Based on survey of 23,000 SKUs of last three months, we note that DMART consistently offered higher discount (at
23-30%) across food and non-food segments compared to other online (Groffers, Big Basket and Star Quick) and
offline retailers (Big Bazaar, Reliance Fresh and Star Bazaar).
 Amongst brick and mortar retailers, Star Bazaar competes strongly by offering discount from 7-18% across personal
care, grocery, packaged foods and home needs segment. We note that discounting intensity of Big Bazaar is lowest
at 11% on an overall basis.

Exhibit 4: DMART: discount comparison vs brick and mortar retailers Exhibit 5: DMART offers highest discount compared to competition in online space

24% 29.6%
22%
18% 23.4% 23.9%
22.5%
16%
14% 13% 13%
12%
10% 14.4%
9% 11.6%
7% 7% 7% 10.4%
5%
3% 4.6%
1%

DMART % discount Star Bazaar % discount Reliane Fresh % discount Big Bazaar % discount Food Non Food
Personal Care Grocery Packaged Food Home Needs DMART Groffers Big Basket Star Quik

Source: Technopak, IDBI Capital Market Research Source: Technopak, IDBI Capital Market Research, figures in USD billion

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Exhibit 6: DMART: category wise % discount trend during 1QFY20

39%
38%
37%

35%
33%
32%

27%
27%
26%
26%

25%

25%
24%

24%

23%
23%

23%
22%

21%
18%
17%

14%
13%

13%
Home & Kitchen Home Needs Packaged Food Grocery Personal Care DMart Grocery Beverages Dairy
Apr-19 May-19 Jun-19
Source: Industry, IDBI Capital Market Research

 DMART’s ability to offer highest discount on a consistent basis (by passing on the benefits of cost savings) as
opposed to event/festival based promotional offers being resorted to by other retailers like Big Bazaar, Reliance
Retail etc. drives superior customer loyalty for DMART. Consequently, DMART has been able to drive improvement
in Revenue per square feet consistently since last four years from RS 26,388 in FY15 to RS 35,647 in FY19

Exhibit 7: DMART: Total number of bill cuts rises at 27% CAGR during FY15-19 Exhibit 8: Increase in customer footfalls led to increase in revenue psf at 8% CAGR
during FY15-19
200 40,000 Revenue per square feet (RS)
172 35,647
180 32,719
35,000 31,120
160
134 28,136
140 30,000 26,388
120 109
25,000
100 85
80 67 20,000
60
15,000
40
20 10,000
0
5,000
FY15 FY16 FY17 FY18 FY19
0
Total number of bill cuts (in mn) FY15 FY16 FY17 FY18 FY19

Source: Company, IDBI Capital Market Research Source: Company, IDBI Capital Market Research

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Keeping execution cost lowest is the primary strength of DMART

Ownership model saves rental cost; Management hints towards controlled aggression through lease model as well
 As per management interaction we note that currently DMART owns 85-90% of its stores. Store ownership not only
helps in getting rid of periodical rental escalation threat by lease operators but also in keeping low fixed cost. We
understand that DMART passes on the benefit of rental savings (5-7% of revenue) to customers in terms of lower
prices.
 However, since land buying is a complicated process in India which requires paper work w.r.t deed execution and
other government approvals, it slows down the rate of store addition. In this regard, we note that DMART has
augmented its project execution team on a priority-basis to ramp up store addition rate.
 Further, the company has also showed inclination towards adding stores on long term lease (>9 years) basis,
particularly in non-metro cities. We believe, over the period DMART has become more flexible towards lease model.
Management hints towards controlled aggression in its strategy towards store addition going forward.
Centralized procurement reduces distribution cost and improves re-fill rate
 As per our industry interaction, we note that during FY16-19, DMART has implemented centralized procurement (vs.
store level procurement) strategy in a staggered manner at most of its stores. This has helped DMART to create a
lean supply chain (low distribution cost) and consequently maintain strict inventory control (very few stock outs of
products at stores).
 As per our survey and industry interaction we note that ability to maintain 100% product availability is one of the
primary USP of DMART vis-à-vis other B&M retailers.
Lean employee base
 Low procurement cost (through a lean supply chain) and relatively lower operational cost (by outsourcing >80%
employees from third parties) allows DMART to offer low prices daily as against special sales or promotion offered
by other retailers on few products for any specific period of time (festivals, online sale, etc.)
 DMART's operational costs with respect to employee expense are significantly lower than its competitors. Per
month weighted average (contractual plus permanent employees) salary paid by DMART is 25-30% lower than
Future Retail Limited’s Big Bazaar.

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Exhibit 9: Number of employees: permanent vs contractual Exhibit 10: Salary per employee per month (RS): permanent vs contractual
40,000 37,701
38,626
35,000
30,000
27,768
25,000
20,063
20,000
14,576
15,000
9,485
10,000
6,113
5,000
0
Permanent Contractual Permanent Contractual Permanent Weighted Average Permanent
DMART Future Retail Limited DMART Future Retail Limited

Source: Company, IDBI Capital Market Research Source: Company, IDBI Capital Market Research

Passing on the benefit of cash discount to customers in terms of lower price

 DMART pays its creditors in 8-10 days, which is the shortest, benchmarked to any other retailers globally/in India.
Consequently, manufacturers/suppliers are more than willing to pass on cash/early payment discounts to DMART
that it, in turn, passes on to customers.

Exhibit 11: Number of creditor outstanding days across grocery retailers globally

85

53

39
34 35
30

DMART Cost Sainsburry Tesco Walmart Target Carrefour

Source: Company, IDBI Capital Market Research

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Cluster-based expansion aids revenue growth while reducing distribution cost

 Once a store matures (reaches full capacity utilization), DMART launches a new one within 3-5kms range (also
known as cluster-based expansion strategy).
 Study of last 6 years (FY13-19) store addition trend of DMART indicates that 70-90% of new store addition has
always been in existing geographies. As on FY19, 59% of DMART stores are located in only two states; Maharashtra
and Gujarat.

Exhibit 12: Count of new store addition by DMART across geographies in India
State FY13 FY14 FY15 FY16 FY17 FY18 FY19
Maharashtra 6 6 4 8 2 2 8
Gujarat - 3 5 4 3 1 4
Telangana 1 2 2 4 1 5 2
Karnataka - 2 - 1 5 1 4
Andhra Pradesh - - 1 2 3 4 1
Madhya Pradesh and Chattisgarh - - 2 2 1 4 -
Rajasthan - - - - 3 2 -
NCR - - - - 1 - -
Daman - - - - 1 - -
Tamilnadu - - - - 1 2 1
Punjab - - - - - 3 1
Source: Company, IDBI Capital Market Research

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Exhibit 13: Cluster based expansion strategy differentiates DMART from other retailers

Source: Company, IDBI Capital Market Research

 We note that cluster based expansion may give rise to temporary cannibalization w.r.t the nearby store, however it
contributes significantly to increase in the overall revenue growth of the company through (1) higher footfalls : as
new store reduces congestion/rush at billing counter of the existing stores, (2) word-of-mouth publicity of the brand
DMART in the neighborhood, and (3) better fill rate due to proximity from warehouse (better supply chain
management).
 We believe, cluster based expansion strategy has benefited DMART immensely in terms of increasing store level
productivity mapped by revenue per square feet. During FY12-19 revenue psf increased at 14% CAGR.

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 Further, ability to invest in real estate is far better in regions which are well known to the company. Consequently,
cluster based expansion suits well for ownership model of DMART stores.
 Management expects to continue with cluster based expansion strategy by adding 80-90% stores in existing
geographies going forward.

Exhibit 14: Revenue per square feet trend (in Rs) Exhibit 15: Average store size of grocery retailers in India (in sqft)
40,000
35,647
32,719 69,660
35,000
31,120
30,000 28,136
26,388
25,000 23,419
20,149 42,456
20,000 33,523
14,210
15,000 22,949
10,000

5,000 3,733
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Reliance Retail Spencer DMART Big Bazaar Hypercity

Source: Company, IDBI Capital Market Research Source: Company, IDBI Capital Market Research

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Focus on product assortment differentiates DMART from other retailers

Clear focus on product assortment drives footfalls at DMART stores

 On product assortment, we note that during FY12-19 food has been the largest proportion of DMART’s sales. We
note that despite food being least margin accretive, DMART will continue to focus on this category to attract
customer foot falls.
 Share of non-food FMCG and general merchandise are likely to vary based on regions. Small towns are likely to be
more value accretive as acceptance of general merchandise (kitchen appliances, apparels etc) products is much
higher in these regions.
 We understand that, in order to not complicate the general merchandise business, DMART will refrain from retailing
large appliances, which require special in-store display and extra sales effort.
 Also, we note that fresh food will never be DMART’s primary focus (few stores do retail fresh food as per the
discretion of store managers, supported by data on demand and throughput) as it demands wide shelf space, high
refill rates, and heavy employee intensity.

Exhibit 16: Segmental revenue break up (%) Exhibit 17: Total number of bill cuts rises at 27% CAGR during FY15-19
120 200
180 172
100
160
134
80 140
53 53 53 53 53 53 52 51
120 109
60
100 85
40 21 20 20 21 80 67
21 21 22 21
60
20
26 26 25 26 26 27 28 28 40
0 20
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
0
General Merchandise (incl. apparel) Non food (FMCG) Food FY15 FY16 FY17 FY18 FY19

Source: Company, IDBI Capital Market Research Source: Company, IDBI Capital Market Research

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 Avenue Supermart | Initiating Coverage

Playing high margin private label play very conservatively

 There are private labels (FMCG branded products) and white labels (self-branded dry grocery, plastic ware utensils
etc). White label products are not margin accretive as these products are only a function of DMART’s procurement
skills. However, in FMCG branded space (like detergents, home cleaners etc) it is extremely difficult to compete with
the likes of HUL and P&G in terms of investments on market research and A&P.
 Further, we note that in categories like detergent; companies such as HUL do not make abnormal margins.
Consequently, making in-roads for a private label player in these categories is extremely challenging.
 Building large private label business demands 10-20 years of prudent investments to build a reliable vendor
ecosystem, which is the biggest challenge in India.
 We do note that globally companies like Costco and Adil did maKe a successful mark in private label space. But,
these successes have been largely on account of investments over many decades.
 Consequently, we note that unlike other grocery retailers (Grofers, Reliance Retail etc), DMART is in no hurry to
launch private label products aggressively only to drive high margin at the cost of quality. DMART, rightfully, is
treading waters in branded private label space very carefully.
Focus shifting towards opening large size DMART stores: more space for high margin GM and apparels
 We note that now DMART is gradually changing its strategy towards opening large size (50000 square feet) stores as
against its earlier strategy of 30,000 square feet stores.
 In FY19 most of the new stores added were of 50,000 square feet size.
 We believe, having bigger size stores (i) is better than having 2-3 stores in same locality (ii) leads to more space to
allocate for high margin general merchandise (GM) and apparel

Exhibit 18: DMART: average store size (in square feet)

33,523

30,273

28,387

FY13 FY16 FY19

Source: Company, IDBI Capital Market Research

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 Avenue Supermart | Initiating Coverage

Exhibit 19: DMART advertisement; to drive sales of high-margin general merchandise category

Source: IDBI Capital Market Research

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 Avenue Supermart | Initiating Coverage

DMART ready best positioned to capture fast growing online retail

DMART leads in online retailing space by offering highest discount

 DMART ready stores are strongly positioned to capture fast growing online grocery retailing market in India and is
primarily targeted towards customers who are looking for convenience (customers can order online > choose a
convenient time slot for pick-up from nearest DMART ready pick-up point, instead of waiting in a long que at DMART
offline stores) or those who cannot be serviced by DMART’s existing stores (due to high real estate cost).
 Based on survey of 23,000 SKUs we note that Pricing of DMART ready store is far superior (cheaper) compared to
other online retailers viz; Groffers, Big Basket and Star Quik. Grofers is the only online retailer which competes
head-on with DMART on pricing.

Exhibit 20: DMART offers highest discount compared to competition in online space

29.6%

23.4% 23.9%
22.5%

14.4%
11.6% 10.4%

4.6%

Food Non Food

DMART Groffers Big Basket Star Quik
Source: Industry, IDBI Capital Market Research

Increase in discounting intensity narrowed down pricing gap between DMART ready and competition
 During last three months we note that due to increase in discounting intensity by other online retailers, led by new
round of fund raising (Groffers raised USD 200mn in May 2019, Big Basket raised USD 150mn in March 2019),
DMART has to step-up its online discount offering by 220bp from 26.9% in April 2019 to 29.1% in June 2019.

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Exhibit 21: DMART: category wise % discount trend during 1QFY20

38.6%
38.2%
37.1%

34.6%
33.2%
32.0%

26.7%
26.6%
25.9%
25.5%

25.1%

24.5%
24.2%

23.7%

23.1%
23.0%

23.0%
22.3%

20.6%
18.5%
17.1%

13.6%
12.6%

12.5%
Home & Kitchen Home Needs Packaged Food Grocery Personal Care DMart Grocery Beverages Dairy
Apr-19 May-19 Jun-19

Source: Industry, IDBI Capital Market Research

 Further, discount offered by DMART ready stores are now higher (by around 40bp) as compared to discount offered
at DMART offline stores. Price differential is highest in home care products (like detergents) by 130bp to 8.2%.
Around 2-3 months earlier discount offered at DMART online portal was lower compared to discount at DMART
offline stores.

Exhibit 22: % discount comparison: DMART offline stores vs DMART online

30.0%
23.9% 24.2%
25.0% 21.5% 21.9%
19.1% 19.5%
20.0%
13.9%
15.0% 12.5%

10.0% 8.2%
6.8%
5.0%

0.0%
Personal Care Grocery Packaged Food Home Care Grand Total
DMART % DMART Ready %

Source: Industry, IDBI Capital Market Research

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Pressure on gross margin due to increase in competitive intensity by online retailers is temporary and not a structural
concern
 We note that in United States of Amercia, despite Amazon growing at aggressive rate in the online space across all
categories, Walmart has been able to withstand the disruption in grocery retailing without much impact on gross
and EBITDA margin. Gross margin during FY1995-2019 improved by 400bp from 21% during FY1995-1999 to 25%
during FY2015-2019.

 Consequently, we believe the current concern on gross margin pressure for DMART is temporary and not structural.
Structurally, grocery retailing in the online space is extremely tough nut to crack in terms of profitability due to low
margin (at 15-17%) and high distribution cost.

Exhibit 23: Walmart (U.S.): gross margin never declined over FY1995-2019 Exhibit 24: Walmart (U.S.): EBITDA margin improved over FY1995-2019
30% 9.0%
8.1%
25% 25% 7.8%
24% 24% 8.0% 7.5%
25% 7.0% 7.1%
22% 6.7%
21% 21% 7.0%
5.9%
20% 6.0%
5.0%
15%
4.0%
10% 3.0%
2.0%
5%
1.0%
0% 0.0%
1985-1989 1990-1994 1995-1999 2000-2004 2005-2009 2010-2014 2015-2019 1985-1989 1990-1994 1995-1999 2000-2004 2005-2009 2010-2014 2015-2019

Source: Company, IDBI Capital Market Research Source: Company, IDBI Capital Market Research

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DMART’s business model is superior to other grocery retailers in the online space
 We note that, despite giving higher discount, DMART ready is relatively better placed in terms of breaking even
quickly compared to competition as (i) unlike other online retailers, cost of last mile delivery is not borne by DMART
(delivery is chargeable to DMART online customers at the rate of RS 49 or 3% of order value whichever is higher)
(ii) distribution cost is much lower compared to competition due to proximity of DMART ready stores to DMART
stores, and (iii) DMART ready retails high margin general merchandise and apparels at their pick-up points which are
more offline driven category than online.

Exhibit 25: Minimum order size and cost of delivery Exhibit 26: DMART ready stores retail general merchandise and apparels
Minimum order value to be INR 1,000 Delivery Charges

Source: IDBI Capital Market Research Source: IDBI Capital Market Research

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 Avenue Supermart | Initiating Coverage

 To drive customer foot falls we note that DMART ready pick up points have also started retailing pouch milk (1 litre
of Prabhat Gold or Govardhan Gold) at a heavy discount of 13-15% from MRP. Pouch milk can be purchased at
DMART ready pick-up points by paying cash (no need to order online).
 Based on store surveys we note that retailing pouch milk has been one of the DMART ready’s most super-hit ideas.
At most of the DMART ready pick up points, milk pouch doesn’t last for more than 3-4 hours.
 Therefore, by seeding such innovative ideas (directly retailing pouch milk, general merchandise and apparels) at
DMART ready pick-up points, we believe DMART is competing with other online grocery retailers in a unique and
value accretive manner.

Exhibit 27: Pouch milk at DMART ready pick up point

Source: IDBI Capital Market Research

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Distribution cost of DMART ready stores are lower compared to other online retailers
 Currently there are 196 DMART ready pick up points. All the stores are located in Mumbai with an average store size
of 200-300 square feet.
 In terms of serviceable pin codes, we note that DMART has penetrated heavily in Thane and other suburban regions
in Mumbai: Andheri, Chembur, Borivali, Ghatkopar, Malad and Kurla. Also, DMART has penetrated high cost (w.r.t
real estate) locations in South Mumbai like Cumballa, Colaba, Malabar Hills, Mahalaxmi, Bandra and Girgaon as well.
 Most of the DMART ready pick up points are located in Corporate Housing Society whereby maintenance and power
cost are relatively lower compared to high common area maintenance (CAM) charges and power cost (due to high
electricity usage as a group) at large commercial hubs.
 Since most of the stores are located in vicinity of existing DMART stores, distribution cost is much lower as
compared to other online retailers who have to deliver products at the customers’ door-step. Last mile deliveries for
DMART ready customers are chargeable at RS 49 or 3% of orders value whichever is higher.

Exhibit 28: DMART ready pick up point: count of serviceable pin codes

5 5
4 4 4
3 3
2 2 2 2 2 2 2 2 2 2 2 2 2 2
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Charni…
Borivali

Bandra

Govandi

Sewri
Chembur

Mulund

Jogeshwari

Mahim

Malabar
Kurla
Ghatkopar

Kandivali

Juhu

Mumbai
Powai

Colaba

Mahalaxmi
Andheri

Parel
Dahisar

Wadala
Cumballa

Agripada
Thane

Malad

Santacruz

Sion

Goregaon

Cotton

Byculla
Tardeo

Dadar
Vile Parle

Lal

Lower Parel

Bhandup

Khar
Girgaon

Mazgaon
Chinchpokli
Source: IDBI Capital Market Research

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Store economics

DMART ready: requires 22 orders per day to break even

 At store level, DMART ready pick up points require a minimum of 22 orders per day to break even (excluding
distribution and other fixed costs). As per our store visits, we note that most of the stores are able to garner 24-25
orders per day.
 PBT losses of Avenue E-commerce limited declined from 108% of revenue in FY18 to 35% in FY19 as the count of
number of stores doubled from 58 stores in FY18 to 196 stores in FY19.
 We believe, as the company continues to ramp up store addition, Avenue E-commerce should be able to quickly
approach break even in 3-4 years.

Exhibit 29: DMART ready store economics

DMART ready stores (Particulars) Amt (Rs mn) Assumption

Store size 240 12*20 sq ft

Break even revenue (per store) 78,00,000

Gross Profit 8,58,000
Gross margin 11%
Rent 5,46,000 7% of revenue
Employee 2,40,000 RS 10,000 per staff (2 staff/store)
Power 72,000 RS 25 psf pm

EBITDA -

Min. order size (RS) 1,000

No. of orders per month 650
No. of orders per day 22
Source: IDBI Capital Market Research

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Exhibit 30: Avenue E-Commerce limited financials

Particulars (Rs in mn) FY18 FY19
Number of stores 58 196
Total revenues 446 1,442
COGS (409) (1,278)
Employee expenses (128) (161)
Other expenses (283) (401)
Total expenses (820) (1,840)
EBITDA (374) (398)
Finance costs - -
Depreciation and amortization (106) (111)
PBT (480 (509)

Gross margin (%) 8 11

PBT margin (%) (108) (35)
Expense as % of Revenue
Employee 29 11
Other 63 28
Source: Company, IDBI Capital Market Research

DMART offline: owning real estate is not the primary moat

 We believe, either on owned or rental model, DMART makes superior return at store level (27% in case of Owned
model and 47% in case of rental model) primarily due to high inventory turn (at 11x) which is a function of value
price which DMART offers to its customers.

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 Avenue Supermart | Initiating Coverage

Exhibit 31: DMART offline store economics

Store economics D-Mart (owned) D-Mart (leased)
Revenue per sq ft (RS) 32,000 32,000
Gross margin (%) 15 15
EBITDA margin (%) 9 6
EBITDA per sq ft (RS) 2,880 1,920
Depreciation (10% of Capex) 650 200
EBIT (RS per sq ft) 2,230 1,720
Capex per sq ft (RS) 6,500 2,000
Net working capital days 22 22
Net working capital per sq ft (RS) 1,666 1,666
Capital employed (RS/sq ft) 8,166 3,666
ROCE (%) 27% 47%
Payback (in years) 3.2 1.5
Source: IDBI Capital Market Research

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 Avenue Supermart | Initiating Coverage

Financials

 We forecast revenue to grow at 27% CAGR primarily led by new store addition and improvement in SSSG. We expect
SSSG to moderately improve from 17.8% in FY19 to 18% in FY21E led by higher proportion of young stores. Further,
we expect store addition rate to improve from 21 stores in FY19 to 27 stores in FY20e and 30 stores in FY21E led by
ramp up in the project execution team.

Exhibit 32: Revenue (RS bn) and Same Store Sales Exhibit 33: Store addition rate to accelerate led by ramp
growth (%) up in project execution team
350 22.4% 25.0% Number of stores added annually
21.5% 21.2%
300 30
17.8% 18.0% 20.0% 27
17.0%
250 24
14.2%
15.0% 21 21 21
200
150 10.0% 14
13
100
5.0%
50
64 87 119 150 199 243 322
- 0.0%
FY15 FY16 FY17 FY18 FY19 FY20e FY21e
Revenue (INR bn) SSSG (%) FY14 FY15 FY16 FY17 FY18 FY19 FY20e FY21e

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

 We expect gross margin to remain stable at 14.6% thereby factoring in the increase in discounting intensity by
online retailers. We forecast, EBITDA to grow at 32% CAGR led by 60bp improvement in EBITDA margin to 8.8% over
FY19-21E.

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 Avenue Supermart | Initiating Coverage

Exhibit 34: Gross margin (%) trend Exhibit 35: EBITDA and EBITDA margin (%) trend
30 10.0%

25 8.0%
15.7% 8.9% 8.7%
8.1% 8.2% 8.4%
15.5% 20 7.6%
7.0% 6.0%
15.0% 15
14.7% 14.7% 4.0%
14.6% 10
14.5%
5 2.0%

- 0.0%
FY15 FY16 FY17 FY18 FY19 FY20e FY21e FY15 FY16 FY17 FY18 FY19 FY20e FY21e
Gross Margin EBITDA (INR bn) % Margin

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

 We forecast EPS to grow at 32% CAGR to RS 28 over FY19-21E led by 500bp expansion in ROE from 18% in FY19 to
23% in FY21E.

Exhibit 36: EPS likely to grow at 32% CAGR Exhibit 37: ROE to expand by 500bp
EPS (RS) 28 ROE (%)
23%
20%
18% 19% 18%
20

15
13

9
6
4

FY15 FY16 FY17 FY18 FY19 FY20e FY21e FY17 FY18 FY19 FY20e FY21e

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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 Avenue Supermart | Initiating Coverage

Valuation

 We value the stock at an EV/EBIDTA multiple of 35x FY21E to arrive at a target price of RS1,604. The stock is
currently trading at an EV/EBITDA of 43x FY20e and 31x FY21E. We note that, the stock has traded at an average one
year forward EV/EBITDA multiple of 45x since listing.

Exhibit 38: Valuation table

Avenue Supermarts Ltd (Rs mn) FY21E
EV/EBITDA 35
Enterprice Value 99,538
Less: Net Debt (586)
Market cap 1,00,123
Outstanding shares 62.409
Target price (FY21 EBITDA) 1,604
CMP 1397
% Upside 15%

Source: Company; IDBI Capital Research

Exhibit 39: EV/EBITDA band chart Exhibit 40: Price/EPS band chart Exhibit 41: Price/book value band chart
1Yr fwd Ev/ebitda 1 Yr fwd PE 1 Yr fwd P/BV
2,500
1,400,000 2,500
1,200,000 2,000
2,000
1,000,000
1,500 1,500
800,000
600,000 1,000 1,000
400,000
500 500
200,000
0 0 0
Jun-17

Dec-17

Jun-18

Dec-18

Jun-19
Oct-17

Oct-18
Feb-18

Apr-18

Feb-19

Apr-19
Aug-17

Aug-18
Mar-17
Jun-17

Dec-17

Jun-18

Dec-18

Jun-19
Oct-17

Oct-18
Feb-18
Apr-18

Feb-19
Apr-19
Mar-17

Aug-17

Aug-18

Jun-17

Dec-17

Jun-18

Dec-18

Jun-19
Oct-17

Oct-18
Feb-18

Apr-18

Feb-19

Apr-19
Aug-17

Aug-18
Mar-17
1Yr fwd EV 30x 39x 46x 59x 1 yr fwd PE Min 51 -sd 66 Avg 79 Max 102 CMP Min 9 -sd 12 Avg 13 Max 17

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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 Avenue Supermart | Initiating Coverage

DMART’s valuations will continue to be at premium led by high growth expectations

 We note that historically (over FY85-19) Walmart has traded on an average at 13x EV/EBITDA multiple. We believe,
this has been largely on account of lower growth rate in profitability. EBITDA during the same period (FY85-19) grew
at 13% CAGR.

 Consequently, we believe DMART is likely to trade at higher multiple (EV/EBITDA >30x) led by ability/opportunity to
grow earnings at 25-30% CAGR over next 15-20 years.

Exhibit 42: Walmart: EV/EBITDA vs EBITDA CAGR Exhibit 43: Walmart: Price/EPS vs EPS CAGR
18x 19x 16%
20x 26% 30% 30 20%
23%
15x 25% 5% 6%
15x 13x 25 2% 10%
15% 20%
13% 9x 20 -4% 0%
10x 9x 15%
9% 8x
10% 15 -10%
5x 4%
1% 5%
10 -20%
0x 0% -30%

1985-1989

1990-1994

1995-1999

2000-2004

2005-2009

2010-2014

2015-2019
5 -30%
27x 17x 15x 14x 15x 20x
0 -40%
FY02-04 FY05-07 FY08-10 FY11-13 FY14-16 FY17-19
EV/EBITDA EBITDA % CAGR Price/EPS EPS (% cagr)

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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 Avenue Supermart | Initiating Coverage

Exhibit 44: Peer valuation table

Market cap. EV/EBITDA EV/Sales P/E ROE (%) 2019-2021E CAGR (%)
Companies (USD mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E Revenue EBITDA PAT
Avenue Supermart 11,933 56.3 39.2 30.5 4.6 3.2 2.6 101.7 69.3 53.0 17.6 19.2 20.7 27.3 29.1 31.9
Future Retail 3,377 24.2 19.6 15.0 1.2 1.1 1.0 31.1 27.0 24.5 21.1 19.4 17.5 14.7 28.5 13.9
Walmart Inc (U.S.) 3,17,559 10.1 12.0 11.7 0.6 0.7 0.7 19.5 22.9 22.0 8.9 18.7 19.0 2.8 1.0 45.6
Target Corp (U.S.) 44,430 7.1 8.5 8.3 0.6 0.7 0.7 13.2 14.5 13.7 25.6 26.6 26.4 3.3 0.8 3.4
Source: Company, Bloomberg, IDBI Capital Market Research

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 Avenue Supermart | Initiating Coverage

Exhibit 45: Discounted cash flow valuation

FCF Calculation FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY27E FY32E FY38E
Free Cash Flow to Firm (1,696) (1,009) (699) (5,512) 1,920 6,686 8,692 31,032 90,913 2,71,465
Growth (%) (40.5) (30.7) 688.0 (135) 248.2 30.0 30.0 25.0 20.0
PV of FCF (5,121) 1,617 5,104 6,014 7,087 13,138 39,013

Assumptions Sensitivity Analysis

Average Risk Free Rate 6.9% Terminal Growth Rate
Market Premium 3.5% 3.0% 4.0% 5.0% 6.0% 7.0%
Beta 1.04 8.3% 2,319 2,709 3,335 4,499 7,425
Ke [=Rf+Beta(Rm-Rf)] 10.5% 9.3% 1,742 1,965 2,290 2,811 3,782

WACC
Kd 11.1% 10.3% 1,347 1,482 1,668 1,940 2,376
Tax Rate 33.0% 11.3% 1,066 1,151 1,264 1,420 1,648
After Tax Kd 7.4% 12.3% 858 915 987 1,081 1,212
Debt to Capital 5.2%
Equity to Capital 94.8%
WACC 10.3%
Terminal Growth 5.0%

Calculation FCFF Assumption

PV of Free Cash Flows 3,45,358 Stage Year Growth rate
Terminal Value 53,56,828 1st Stage 2022-26 30%
PV of Terminal Value 6,97,826 2nd Stage 2027-31 25%
Implied TEV 10,43,185 3rd Stage 2032-38 20%
Less: Net Debt 2,116
Equity Value 10,41,069
# Share 624

Equity Value 1,668

Current Price 1,398
Potential Upside 19%
Source: Company, IDBI Capital Market Research

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Company Background

Avenue Supermart (DMART) is an emerging national supermarket chain, with a focus on value-retailing. The company is
one of the largest and most profitable food and grocery retailer in India. From the launch of its first store in Powai
(Mumbai) in 2002, DMart today has presence in 176 locations across Maharashtra, Gujarat, Andhra Pradesh, Madhya
Pradesh, Karnataka, Telangana, Chhattisgarh, NCR, Tamil Nadu, Punjab, Rajasthan and Daman. The company operates
predominantly on an ownership model (including long-term lease arrangements, where lease period is more than 9
years).

Exhibit 46: Revenue Contribution (%) as on FY19 Exhibit 47: Store presence (%) as on FY19

5% 6%

28%

30%

51%

60%
20%

General Merchandise & apparels Non Food FMCG Food North South West Central
Source: Compay, IDBI Capital Market Research Source: Compay, IDBI Capital Market Research

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 Avenue Supermart | Initiating Coverage

Exhibit 48: Key Managerial Personnel

Name Designation Background
Mr. Radhakishan S. Chairman and He is a commerce graduate from H.R. College of Commerce and Economics from University of Bombay and a post-graduate in Business
Damani Independent Director Administration, Marketing from California State University, Northridge. He has 18 years of experience in securities market. Prior to joining DMART,
Mr. Damani founded Ramesh S Damani Finance Private Limited, a stock broking company. At Present, he is also a director of Ramesh S Damani
Finance Private Limited.
Mr. Ignatius Navil Managing Director He holds a graduation degree in Science from S.I.E.S College of Arts, Science and Commerce, Mumbai and a post-graduation degree in Marketing
Noronha Management from Narsee Monjee Institute of Management Studies, Mumbai. He has 20 years of experience in the consumer goods industry. Prior to
joining DMART, he has worked with Hindustan Unilever Limited for 8 years, there he was the Key Account Manager - Modern Trade.
Mr. Ramakant Chief Financial Officer He holds a graduation degree in Commerce from Maharishi Dayanand Sarswati University, Ajmer. He is a chartered accountant and a member of the
Baheti & Executive Director ICAI. He has 19 years of experience in finance. Prior to joining DMART, he was the Manager-Finance of Bright Star. He was also a director of Damani
Share and Stock Brokers Private Limited, a stock broking company.
Mr. Manjari Non-Executive Director She holds a graduation degree in Commerce from University of Mumbai, Mumbai and a postgraduation degree in Finance and Investment from
Chandak University of Nottingham, United Kingdom. She has 7+ years of experience in the retail industry. At Present, she is also a director of two retail
companies, named Bombay Store Retail Company Limited and Bombay Swadeshi Stores Limited. Prior to joining DMART, she was a Research
Associate in ASK Investment Managers Private Limited for around one year.
Mr. Elvin Machado Executive Director He holds a graduation degree in Economics from St. Xavier's College, University of Mumbai, Mumbai. He has 28 years of experience in the sales and
marketing. Prior to joining DMART, he has worked with Hindustan Unilever Limited for 18 years. There he was designated as the Branch Operations
Manager - East (Rural) and he has also worked with Mayo Health Care Private Limited. He is responsible for real estate acquisitions made by DMART.
Mr. Chandrashekhar Independent Director He holds a graduation degree in Electrical Engineering from Jabalpur Engineering College. He has 20 years of experience in the state and central
B. Bhave administrative services and securities regulation. Prior to joining DMART, he has been in the Indian administrative services and has worked in
different positions with the State Government and the Central Government.
Source: Compay, IDBI Capital Market Research

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 Avenue Supermart | Initiating Coverage

Financial Summary
Profit & Loss Account (Rs mn) Cash Flow Statement (Rs mn)
Year-end: March FY18 FY19 FY20E FY21E Year-end: March FY18 FY19 FY20E FY21E

Net sales 150,112 199,163 242,420 324,212 Pre-tax profit 11,959 14,476 18,143 26,122

growth (%) 26.3 32.7 21.7 33.7 Depreciation 1,536 1,988 2,337 2,693

Operating expenses (136,738) (182,741) (221,983) (295,734) Tax paid (4,534) (3,612) (5,987) (8,620)

EBITDA 13,374 16,422 20,437 28,478 Chg in working capital (3,652) (2,277) (2,435) (4,779)

growth (%) 38.8 22.8 24.4 39.3

Other operating activities - - - -
Depreciation (1,547) (1,988) (2,337) (2,693)
Cash flow from operations (a) 5,309 10,576 12,057 15,416
EBIT 11,827 14,434 18,100 25,785
Capital expenditure (8,661) (14,046) (10,608) (8,894)
Interest paid (594) (472) (472) (139)
Chg in investments (818) (843) - -
Other income 726 514 514 514
Other investing activities (575) (835) - -
Pre-tax profit 11,959 14,476 18,143 26,161
Cash flow from investing (b) (10,054) (15,723) (10,608) (8,894)
Tax (4,112) (5,113) (5,987) (8,633)
Equity raised/(repaid) - (0) - -
Effective tax rate (%) 34.4 35.3 33.0 33.0
Debt raised/(repaid) (8,503) 1,716 - (3,000)
Minority Interest - - - -
Dividend (incl. tax) - - - -
Net profit 7,847 9,364 12,156 17,528
Chg in monorities - - - -
Exceptional items - - - -

Adjusted net profit 7,847 9,364 12,156 17,528 Other financing activities - - - -

growth (%) 62.6 19.3 29.8 44.2 Cash flow from financing (c) (8,503) 1,716 - (3,000)

Shares o/s (mn nos) 624 624 624 624 Net chg in cash (a+b+c) (13,248) (3,432) 1,449 3,522

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 Avenue Supermart | Initiating Coverage

Balance Sheet (Rs mn) Financial Ratios

Year-end: March FY18 FY19 FY20E FY21E Year-end: March FY18 FY19 FY20E FY21E

Net fixed assets 33,869 45,927 54,198 60,399 Adj. EPS (Rs) 12.6 15.0 19.5 28.0

Investments 1,458 2,301 2,301 2,301 Adj. EPS growth (%) 46.3 19.3 29.8 44.0

EBITDA margin (%) 8.9 8.2 8.4 8.8

Other non-curr assets 1,333 1,097 1,097 1,097
Pre-tax margin (%) 8.0 7.3 7.5 8.1
Current assets 19,464 20,648 25,530 35,748
ROE (%) 18.5 18.3 19.6 22.8
Inventories 11,470 15,762 19,195 25,702
ROCE (%) 23.8 26.2 27.0 32.1
Sundry Debtors 334 755 755 919 Turnover & Leverage ratios (x)

Cash and Bank 5,565 2,132 3,581 7,129 Asset turnover (x) 2.6 3.2 3.2 3.6

Total assets 56,125 69,973 83,126 99,546 Leverage factor (x) 1.3 1.2 1.2 1.2

Net margin (%) 5.2 4.7 5.0 5.4

Net Debt/Equity (x) (0.1) 0.0 0.0 (0.1)

Shareholders' funds 46,427 55,945 68,100 85,628
Working Capital & Liquidity ratio
Share capital 6,241 6,241 6,241 6,241
Inventory days 28 29 29 29
Reserves & surplus 40,186 49,704 61,860 79,387
Receivable days 1 1 1 1
Total Debt 2,533 4,248 4,248 1,248 Payable days 8 9 9 9

Secured loans 2,533 4,248 4,248 1,248

Other liabilities 471 649 649 649 Valuation

Year-end: March FY18 FY19 FY20E FY21E
Curr Liab & prov 6,694 9,131 10,129 12,021
P/E (x) 111.2 93.2 71.8 49.8
Current liabilities 6,576 9,004 10,003 11,894
Price / Book value (x) 18.8 15.6 12.8 10.2
Provisions 118 127 127 127
PCE (x) 92.9 76.8 60.2 43.2
Total liabilities 9,698 14,028 15,026 13,918
EV / Net sales (x) 5.8 4.4 3.6 2.7
Total equity & liabilities 56,125 69,973 83,126 99,546 EV / EBITDA (x) 65.0 53.2 42.7 30.5

Book Value (Rs) 74 90 109 137 Dividend Yield (%) 0.0 0.0 0.0 0.0
Source: Company; IDBI Capital Research

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 Avenue Supermart | Initiating Coverage

Notes

Dealing (91-22) 6836 1111 [email protected]

Key to Ratings Stocks:
BUY: Absolute return of 15% and above; ACCUMULATE: 5% to 15%; HOLD: Upto ±5%; REDUCE: -5% to -15%; SELL: -15% and below.

IDBI Capital Markets & Securities Ltd.

Equity Research Desk
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 Avenue Supermart | Initiating Coverage

Analyst Disclosures

I, Varun Singh, hereby certify that the views expressed in this report accurately reflect my personal views about the subject companies and / or securities. I also certify that no part of our compensation was, is or will be directly or indirectly related to the specific
recommendations or views expressed in this report. Principally, I will be responsible for the preparation of this research report and have taken reasonable care to achieve and maintain independence and objectivity in making any recommendations herein.

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have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant
banking or brokerage services from the subject company in the past 12 months. We or our associates may have received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research Analyst or his/her relative’s
may have financial interest in the subject company. IDBI Capitalor its associates may have financial interest in the subject company. Research Analyst or his/her relatives does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the
month immediately preceding the date of publication of Research Report. IDBI Capital or its associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research
Report. The Subject Company may have been a client during twelve months preceding the date of distribution of the research report. Price history of the daily closing price of the securities covered in this note is available at www.bseindia.com; www.nseindia.com and
www.economictimes.indiatimes.com/markets/stocks/stock-quotes.

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