INSTITUTIONAL EQUITY RESEARCH

Avenue Supermarts (DMART IN)

Solid execution + best store economics = Premium valuations
30 April 2021
INDIA | RETAIL | INITIATING COVERAGE
Avenue Supermarts, which owns and operates the DMart chain of supermarket stores, is the BUY
only retailer in India to grow consistently and profitably. Our positive view on this company
CMP RS 2890
stems from industry-leading asset turnover, high throughput due to its core offering of ‘Every
Day Low Price’ driving high customer footfalls, and conversion and loyalty. Best-in-class store TARGET RS 3320 (+15%)
economics, aggressive store expansion, right product mix, and low inventory days give it an
COMPANY DATA
edge over competitors. We believe that the company’s premium valuations factor in a big
O/S SHARES (MN) : 648
opportunity for the organised groceries market, a strong moat, and execution excellence. MARKET CAP (RSBN) : 1930
Based on these dynamics, we initiate coverage with a DCF-based target of Rs 3,320. BUY. MARKET CAP (USDBN) : 26
52 - WK HI/LO (RS) : 3330 / 1954
Slow and steady approach towards online: We believe DMart’s strategy of slowly expanding in
LIQUIDITY 3M (USDMN) : 3.9
bigger cities would be fruitful, as the online grocery category remains at low-single-digits as a PAR VALUE (RS) : 10
percentage of the overall grocery market. Our analysis of competition suggests that DMart Ready
(DMart’s online market) is present in only 9% of the cities where DMart offline stores exist. SHARE HOLDING PATTERN, %
However, its online presence already covers 45% of the population where its offline stores are Mar 21 Dec 20 Sep 20
present. Flipkart and Grofers have the least overlapping presence with DMart’s covered cities. Promoters 75.0 75.0 75.0
DII 6.7 6.7 6.1
Our analysis of 50 SKUs suggests that the order fulfilment rate is highest for Big Basket, followed
FII 10.1 10.1 10.3
by DMart Ready. Overall, DMart Ready and JioMart offer the lowest prices for 50% of their Others 8.2 8.2 8.6
inventory, while overall discounting is highest for DMart Ready.
Leased, cluster-based approach for store opening will yield benefits: We expect DMart to open PRICE VS. SENSEX
126 stores over the next three years (FY22-24) compared to a mere 103 stores over FY18-21. The 280
company is moving towards controlled aggression in store openings – it is now looking for leased 240
properties vs. its earlier ownership model, since it has aggressive store-opening ambitions. Its
200
average area per store has seen a 4.1% CAGR from 28,500 sq. ft. in FY14 to touch 36,450 sq. ft. in
FY20. We have modelled a 4.7% CAGR over FY21-25 to 46,500 sq. ft. per store by FY25. DMart 160
follows a 70:30 rule, where it opens 70% of its stores in existing markets and 30% in new 120
markets. While overall, Maharashtra and Gujarat account for 52% of its total stores, in last three 80
years, it opened only 29% of its new stores in these two states.
40
Best-in-class store economics: Our analysis of 10+ grocery retailers (listed and unlisted) suggests Jan/18 Jan/19 Jan/20 Jan/21
that while DMart is the second-largest grocery player in India in terms of revenue, it has the Avenue Super BSE Sensex
highest operating margins. It has consistently outperformed peers in SSSG; we model 30%/16% Source: PhillipCapital India Research
SSSG for FY23/24. Its revenue per sq. ft. CAGR was 4% over FY17-20; we have modelled a higher
10% over FY22-24. Its gross margin is below the industry’s average, as it offers the highest KEY FINANCIALS
discounts to its customers. Its cost of retailing is the lowest, with the lowest employee and rental Rsmn FY21E FY22E FY23E
costs in the industry. With no A&P spends and low opex, DMart has one of the highest operating Net Sales 2,38,013 3,08,648 4,38,020
margins in the sector. It is also one of the only grocery retailers to have positive operating cash EBIDTA 17,427 23,669 38,188
flow, because of its lowest inventory days. Net Profit 11,268 14,891 24,363
EPS, Rs 17.4 23.0 37.6
Financials: For DMart, we expect revenue CAGR of 34% over FY22-24 to Rs 553bn, higher than PER, x 166.1 125.7 76.8
19% over FY17-21. SSG growth of c.18% should lead revenue growth and the rest will come from EV/EBIDTA, x 106.0 78.2 48.6
store addition, as the company expands to 360 stores by FY24. We are building 15.4% gross P/BV, x 15.3 13.6 11.6
margins for FY24 and EBIDTA CAGR of 44% over FY22-24 to Rs 49bn in FY24 vs. Rs 21bn in FY20; ROE, % 9.2 10.8 15.1
PAT CAGR of 45% over FY22-24 to Rs 32bn. Free-cash-flow generation will start only from FY24, Source: PhillipCapital India Research Est.
while cumulative operating cash flow will be Rs 68bn over FY22-24. RoIC will be at historic highs
of 17% in FY24, while RoE/RoCE should be at 16%% each, due to high cash on the books.
Ankit Kedia, Research Analyst
Valuation and view: Avenue Supermarts is one of the strongest grocery retailers in India due to (+ 9122 6246 4122) [email protected]
the following factors – market share gains, one of the best sales per sq. ft. ratios, lowest cost of
retailing, good product assortment, highest operating margins across organised retailers, and one
of the lowest inventory days. Its relentless focus on efficiency and offering the best value to
customers has given it strong customer loyalty. We initiate coverage on Avenue Supermarts with
a BUY rating and a DCF-based target of Rs3320, implying a valuation of 49x Sep’23 EV/EBIDTA.
Key risks include – being underinvested in e-commerce, competitive intensity leading to higher
discounting, and a delay in FCF generation because of elevated capex.

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Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research
is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by
Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
 AVENUE SUPERMARTS INITIATING COVERAGE

DMart: Slow and steady approach towards online

Online grocery is very competitive, with all players making significant losses in this
model. Currently, it is a six-player market, with online-only players such as Big Basket,
Grofers, Amazon and Flipkart marking significant inroads. Among online players,
JioMart and DMart are the only two players that have significant offline presence.

Given that 85-90% of online grocery business is from top-10 cities, DMart’s strategy Dmart’s management has followed a
of slowly expanding in the biggest cities should prove fruitful, as online grocery slow-and-steady approach to grow its
continues to occupy low-single-digits in the overall grocery market. DMart Ready is online business while competitors are
present only in bigger cities such as Mumbai, Pune, Ahmedabad, Bangalore, and aggressively expanding their presence
Hyderabad. It offers customers a choice of self-pickup through designated pick-up in smaller cities
points, or home delivery for a small convenience fee.

Service offerings across online grocery players

Company App Cities Minimum Delivery Fee Delivery Timelines Loyalty Membership Membership Fee Daily orders
Downloads Presence order value Benefit approx.
Jio Mart 10mn + 200 0 Free 1-3 days You earn 1 point Free 500,000
(Android) for every Rs. 200 spent
and value of 1 point is
Rs 0.70.
Amazon 100mn + 300 200 Rs.59(non-prime), Next day delivery Amazon prime, Delivery Rs.129/month or 150,000
Pantry (Android) Rs.30(prime) & free /scheduled delivery. fee benefit, Prime early Rs.999/year
above Rs.799 Delivery date is access
displayed
Big Basket 10mn + 30 0 < Rs.600 - Rs.50, Delivery slots for up No Delivery Charge Rs.299/6 months 280,000
(Android) Rs.600-Rs.1199 - to 6 days. Express above Rs.600, access to
Rs.30-35, > Rs.1200 delivery in next 60 priority slots, Additional
- Free. minutes for express offers, Special promos,
items only
Grofers 10mn + 27 0 Rs.49 & free above Delivery slots for up Available at wholesale Rs.79/month, 190,000
(Android) Rs.800 to 7 days prices, priority support Rs.249/6 months,
and exclusive offers Rs.449/year
Flipkart 100mn + 50 600 Rs.50 & free above Delivery slots for up Early access to sales, 4 Rs999/year or NA
Supermart (Android) Rs.1200 to 7 days supercoins earned for earning 200
every Rs.100 spent. super coins in
last 12 months
DMart 5 mn+ 7 1000 Rs.49 -79 Delivery slots for up No Membership NA NA
Ready (Android) to 4 days program
Source: Company, Phillip Capital India Research

Online grocery – Rs 1.17tn opportunity by FY24… …but continues to remain sub 3% of overall F&B market
1400 2.5%
1171
1200
2.0%
1000

1.5%
800
669

600
1.0%
396
400
242
0.5%
200 151
101
62
0 0.0%
2018 2019 2020e 2021e 2022e 2023e 2024e 2019 2024e

Source: Netscribers Source: Redseer

 DMart Ready has started to offer top-up orders for a basket size of only Rs 500.
This helps it to garner repeat orders from customers, who in the past were going
to the nearest kirana store for top-up refill orders.

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 AVENUE SUPERMARTS INITIATING COVERAGE

 We believe the recently launched offering of fresh fruits and vegetables (which
its competitors offer online and which DMart does not sell in its stores) would
also help it to garner incremental customers on its platform, as these perishable
products are for home-delivery only, and not for pick-up from the nearest DMart
Ready store.
 Further, it has launched multiple general merchandising products such as
innerwear, footwear, kitchen appliances, etc., on the platform, which gives it
higher customer wallet share and increases loyalty.

DMart Ready has started to offer a Top-Up service DMart Ready offers fruits and vegetables for home delivery

Source: Company, Phillip Capital India Research

Our analysis of competition suggests that DMart Ready is present in only 9% of the
cities where DMart offline stores are present. However, its online presence covers
45% of the population where its offline stores are present. Interestingly, Amazon
Pantry is the only online player to have presence in 100% of the cities where DMart
stores are present, while JioMart is at 67%. Flipkart and Grofers have the least
overlapping presence with DMart’s covered cities.

DMart’s online city presence as % of offline city presence Online population addressed as % of DMart offline
population across all cities
120% 120%
100% 100%
100% 100% 89%

80% 80% 72%

67%
59%
60% 60% 52%
45%
40% 40%
23%
20% 15% 13% 20%
9%

0% 0%
Dmart Amazon Jiomart Big Basket Grofers Flipkart Dmart Amazon Jiomart Big Basket Grofers Flipkart
Ready Ready

Source: Various Websites, Phillip Capital India Research

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 AVENUE SUPERMARTS INITIATING COVERAGE

Our analysis of 50 SKUs across product categories showed:

 Big Basket’s fulfilment rate was the highest, followed by Amazon Pantry and
DMart Ready.
 Flipkart Supermart had the least fulfilment rate over the last five months.
 Overall, DMart Ready and JioMart offered the lowest price for 50% of their
respective inventories, while overall discounting was highest for DMart Ready
followed by JioMart.
 Discounting was highest for personal care products followed by staples, while it
was lowest for dairy and household products.

Analysis by grocery segment:

 Dairy: Flipkart offers no discounts in dairy products, DMart and JioMart offer
average discount of 7-8%.
 Staples: Average discounting for this category is 17% with DMart, Grofers, and
JioMart offering c.19% discount.
 Packaged Food: Average discounting is 14% with DMart/JioMart offering c.20%
discount.
 Beverages: While average discount is 9%, DMart offers 15% discount.
 Personal care: DMart offers 28% discount against average discount of 20%
across players.

Fulfilment rate is highest for DMart and Amazon Pantry Overall DMart, JioMart offer lowest price for 50% of
inventory
Amazon Pantry Grofers Amazon Pantry Grofers
Big Basket D-Mart Big Basket D-Mart
JioMart Flipkart Supermart JioMart Flipkart Supermart
110% 80%

100% 60%
90%
40%
80%

70% 20%

60%
0%
50%

40% -20%
15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr

Source: Various Websites, Phillip Capital India Research

Discounting is highest for hygiene, followed by staples DMart offers highest discounts across categories
Dairy Staples Amazon Pantry Grofers
Packaged Food Drinks & Beverages Big Basket D-Mart
Hygiene Household JioMart Flipkart Supermart
30% 25%

25% 20%

20%
15%
15%
10%
10%
5%
5%

0% 0%
15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr

Source: Company, Phillip Capital India Research

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Dairy: JioMart, followed by DMart, offer highest discounts Staples: Highly competitive category with 15-20% discount
Amazon Pantry Grofers Amazon Pantry Grofers
Big Basket D-Mart Big Basket D-Mart
JioMart Flipkart Supermart JioMart Flipkart Supermart
14% 40%
12% 35%
10%
30%
8%
25%
6%
20%
4%
15%
2%
10%
0%
-2% 5%
15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr

Source: Various Websites, Phillip Capital India Research

Packed Food: DMart/ JioMart lead discounting Beverages: DMart offers highest discounts
Amazon Pantry Grofers Amazon Pantry Grofers
Big Basket D-Mart Big Basket D-Mart
JioMart Flipkart Supermart JioMart Flipkart Supermart
30% 25%

25%
20%
20%

15% 15%

10%
10%
5%
5%
0%

-5% 0%
15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr

Source: Various Websites, Phillip Capital India Research

Personal Care: DMart’s average discount offered is 28% Household products: DMart, JioMart offer high discounts
Amazon Pantry Grofers Amazon Pantry Grofers
Big Basket D-Mart Big Basket D-Mart
JioMart Flipkart Supermart JioMart Flipkart Supermart
35%
30%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr
15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr

Source: Various Websites, Phillip Capital India Research

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Financials Analysis of online grocery players

Financial analysis across online players suggests that all companies are making
significant losses with online gross margins significantly lower than offline gross
margins, given that the revenue mix is skewed towards lower-margin food products
with minimal share from general merchandise. While revenue growth continues to be
high, losses have not moved in the same proportion with normalising A&P spends.
Amazon F&B offers private-label products of the company online, while DMart Ready
continues to be small compared to Big Basket and Grofers.

Financials across online grocery peers

Rs Mn DMart Ready Big Basket Grofers Amazon F &B
FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY19 FY20
Revenue 441 1436 3540 15832 27546 37900 5328 12823 1390 7144
% growth 225 147 74 38 141 414
COGS 409 1278 3177 14,285 25,449 34,881 4,934 11,996 1,405 6,188
Gross Profit 33 158 363 1547 2097 3019 393 827 -15 956
Gross Margin % 7% 11% 10% 10% 8% 8% 7% 6% -1% 13%
Employee Expenses 128 161 266 1540 2732 3435 1560 2490 111 174
% of sales 29% 11% 7% 10% 10% 9% 29% 19% 8% 2%
A&P / Discounts 25 15 10 944 1889 1481 742 2104 0 0
% of sales 6% 1% 0% 6% 7% 4% 14% 16% 0% 0%
Freight/Distribution 17 40 74 265 598 818 755 990 220 964
% of sales 4% 3% 2% 2% 2% 2% 14% 8% 16% 13%
Other Expenses 258 386 498 1866 2437 2371 695 1926 932 2744
% of sales 59% 27% 14% 12% 9% 6% 13% 15% 67% 38%
Total Expenses 837 1,880 4,025 18,899 33,105 42,986 8,687 19,506 2,668 10,070
EBIDTA -396 -444 -484 -3068 -5560 -5086 -3359 -6683 -1278 -2926
EBIDTA Margin% -89.7% -30.9% -13.7% -19.4% -20.2% -13.4% -63.0% -52.1% -91.9% -41%
Depreciation 106 111 327 238 547 841 243 440 10 107
EBIT -485 -514 -738 -3306 -6106 -5926 -3602 -7122 -1288 -3033
Source: Company, Phillip Capital India Research

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Leased, cluster-based approach for store opening to

yield benefits
We expect DMart to open 126 stores over next three years (FY22-24) compared to a mere
103 stores opened over FY18-21. It has faced multiple challenges in the past such as:
 Availability of quality locations at affordable price points, because DMart follows
an ownership model.
 Learning curve in new clusters/cities stayed steep.
 In metro markets, high rentals and regulatory clearances elongated the store-
opening process.
 Store opening was slow due to high internal KPIs for new-store openings,
coupled with focus on profitable store economics rather than aggressive store
openings; DMart has had zero store closures in the past due to its unique store-
ownership model.

Aggressive leased store openings might depress margins but will raise RoIC
With its new store-opening ambitions (controlled aggression), DMart has started
looking for leased properties vs. its earlier exclusively ownership-driven model. It is
looking at leasing properties for a longer duration, which gives it an edge to build a
brand and pull customers over the medium to long term. We believe it has
strengthened its real-estate team and has a strong deal pipeline for both owned and
leased properties with an aim of faster store opening.

The ownership model has been successful for the company in the past, as moving
rentals (which account for 4-5% of the operating cost for any retailer) to the balance
sheet, gave DMart an edge in aggressively discounting its merchandise, and
strengthening its value proposition. However, this strategy forced it to commit
significant capital upfront and the success of its properties became extra critical for it
to get the desired results. Hence, the company was extremely conservative in terms
of opening stores in the past, which also resulted in lower RoICs, as it got its capital
blocked in sub-par assets. However, with the management willing to open stores on
the leased model, we believe store opening velocity will rise over the next three
years. This model results in lower margins, but high RoICs.

Interestingly, DMart is opening larger stores over the past few years, as it is attaining
new store maturity much faster than anticipated, and hence flattening the growth
curve. It is using higher space to display a high assortment of general merchandise
products that have higher margins and lastly the incremental capex needed for the
larger stores in less and offers higher RoCE. Hence, its average area per store has
seen a CAGR of 4.1% from 28,500 sq. ft. in FY14 to touch 36,450 sq. ft. in FY20. We
have modelled a CAGR of 4.7% over FY21-25 to 46,500 sq. ft. per store by FY25.

We expect aggressive store opening from FY22 Total area to reach c.16mn sq. Ft. by FY24
No of Stores New Addition (rhs) Area/store (sqft) Total Area (Mn sqft)
400 60 49000 18
350 46000 16
50
300 43000 14
40 12
250 40000
10
200 30 37000
8
150 34000
20 6
100 31000 4
10
50 28000 2
0 0 25000 0
FY16 FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Source: Company, Phillip Capital India Research

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 AVENUE SUPERMARTS INITIATING COVERAGE

Store lease model offers high RoIC

Rs Mn Own Model Lease Model
Revenue 246750 246750
Gross Margin % 14.8% 14.8%
Gross Profit 36591 36591
Staff 4247 4247
% of Revenue 1.7% 1.7%
Rent 847 6576
% of Revenue 0.3% 2.7%
Other Expenses 11,112 11,112
% of Revenue 4.5% 4.5%
Total Expenses 226366 232095
EBIDTA 20385 14656
Margin % 8.3% 5.9%
Depreciation 2550 944
EBIT 17835 13711
EBIT Margin % 7.2% 5.6%
RoIC 17% 31%
Source: Company, Phillip Capital India Research

DMart follows a cluster-based approach for store opening, as opening more stores in
an existing state/city offers better operating leverage. This is because cost structures
are far better utilized, given that it understands the consumer better, and this gives it
higher ability to grow sales per sq. ft. and gross margins than it would have in a new
market. This approach offers a multiplier effect in terms of lower costs and higher
customer traction. We believe the company follows a 70:30 rule – where it opens
70% of its stores in existing markets and 30% in new markets.

Barring Maharashtra and Gujarat, in all its new states, DMart has expanded to
multiple stores only after a 3-4 year learning curve. In Karnataka, its store count
expanded to 20 stores in FY20 from three stores in FY13, while in Telangana/AP, to 41
stores in FY20 from 4 in FY12. In Madhya Pradesh and Tamil Nadu too, store count
expanded after two years of understanding the market.

While overall, Maharashtra and Gujarat account for 52% of its total stores, in the last
three years, it opened only 29% of its stores in these two states. South Indian states –
Telangana, Andhra Pradesh, Karnataka and Tamil Nadu – accounted for 47% of new
stores.

Presence in existing cluster gets stronger

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Maharashtra 34 40 46 50 58 60 62 70 76
Gujarat 14 14 17 22 26 29 30 34 37
Telangana/AP 4 5 7 10 16 21 29 32 41
Karnataka 3 3 5 5 6 10 12 16 20
Madhya Pradesh/ CG 2 4 5 9 9 16
Tamil Nadu 1 3 5 10
Rajasthan 3 5 5 7
Punjab 0 3 4 5
NCR 1 1 1 1
Daman 1 1 1 1
Total 55 62 75 89 110 131 155 177 214
Source: Company, Phillip Capital India Research

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Maharashtra accounts for 35% of overall stores Stores opening in the last 3 years outside core regions

13.6% 10.8%
19.3% Maharashtra
Maharashtra Gujarat
5.1% 10.8%
35.5% Gujarat Telangana
7.9% Telangana Karnataka
Karnataka 9.6%
Madhya Pradesh
Andhra Pradesh 12.0%
AP
9.3% Madhya Pradesh Tamil Nadu
Others 12.0%
Others
11.2% 13.3%
17.3%
12.0%

Source: Company, Phillip Capital India Research

We believe that over the next 12-15 years, the company has the potential to open
1,230 stores (5.3x FY21 store count) through its cluster-based approach, leased model,
pan-India network; it will expand its store presence to 780+ cities from the current 90+
cities. Total area could reach 55mn sq. ft. from current 9mn sqft. We believe the
company has started to open stores in cities/towns that have a population of less than
100,000; average population per stores for 26 cities is less than 200,000. In larger cities
such as Pune and Hyderabad, DMart has 16/20 stores with average population per
stores at 200,000/340,000. This gives us confidence that the company will penetrate
deeper into a city to gain higher market share in the long run.

Total store potential

Population Range Total Cities Potential Avg. Store/City Total Stores Potential
70,000 to 300,000 614 1 614
300,000 to 1,000,000 123 3 369
1,000,000 and above 47 1 per 400,000 247
Total 784 1230
Source: Phillip Capital India Research

From our competitor profiling, we gauge that 42% stores of Big Bazaar, Reliance
Smart (49%), More (56%), and Spencers (48%) are present in cities where DMart
stores are already present. Comparing cities, Metro Cash & Carry, Walmart Cash &
Carry and Spar are present in only 15-23% cities where DMart is present, while 75-
97% of their current stores are in cities where the DMart is present.

% of stores in cities where DMart is present % of cities overlapping with DMart

120% 60% 56%
52%
97%
100% 50%
84%
75% 75%
80% 40% 35%
31%
56% 57%
60% 49% 48% 30%
42% 23%
40% 20% 15% 15%
8%
20% 10% 4%

0% 0%

Source: Company, Phillip Capital India Research

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Superior store economics

DMart has consistently posted high-teens SSSG on superior store economics. We
have modelled SSSG growth of 30%/16% for FY23/24 as FY21/22 would be affected
negatively by Covid-19. DMart has outperformed peers in SSSG terms over the
medium term. It considers stores that have completed 24 months of operations to
calculate its LTL performance and 70-75%+ of its stores for SSSG calculations. We
believe older stores are maturing faster and growing in-line with inflation, which
could moderate SSSG over the long term. We calculate our SSSG growth by factoring
bill cuts/store and growth in average ticket size.

70%+ stores operational for 24 months and above High teens SSSG to continue
Stores operational for 24 months % of total 35
300 85%
30

250 25
80%
20
200 15
75%
10
150
70% 5
100 0

65% -5
50
-10
0 60% -15
FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY16 FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Source: Company, Phillip Capital India Research

 We expect revenue per sq. ft. to see 10% CAGR over FY22-24 to Rs 37,261, based
on aggressive store openings and the lower base of FY22 due to Covid-19.
 We have modelled 6.5% CAGR over FY22-24 in bill cuts per store, against 4.7%
CAGR over FY15-20. We have factored 1.14mn bill cuts per store in FY24 against
1.03mn in FY20. We believe bill cuts would increase with the increasing
frequency of customer walk-ins and modern trade gaining share from kirana
stores.
 We are building slightly higher 6% CAGR in ticket sizes over FY22-24 (5.1% CAGR
over FY15-20) due to inflation and rising share of general merchandise.

Sales/sq. ft. to grow at a healthy rate from FY22 Bill cuts/store CAGR of 4.5% over FY22-24
Sales/Sqft (Rs) % growth Bill Cuts (Mn) Bill Cuts/store
40000 20% 450 1.20

35000 15% 400

1.10
30000 10% 350
5% 300 1.00
25000
0% 250
20000 0.90
-5% 200
15000
-10% 150 0.80
10000 -15% 100
0.70
5000 -20% 50
0 -25% 0 0.60
FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Source: Company, Phillip Capital India Research

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Mastered its product offerings

 DMart has a deep knowledge of the customers across clusters, so it has mastered
the art of product assortment.
 It does not offer a significant choice to customers in terms of brands, while
Reliance Smart/Big Bazaar do, and stocks the most popular brands that more
than 90% of customers would buy.
 Its assortments are of large-size SKUs (for bulk buying) at favourable prices
rather than keeping more SKUs of unknown brands that would confuse
customers.
 DMart gets 27-28% of its revenue from general merchandise. These are high-
gross-margin products (unlike food/non-food products) and predominantly cater
to lower income classes and the mass market.
 It has improved its products offering over time, and competes effectively with
unorganised/street products, predominantly in the apparel category.
 In some branded products, the discounts it offers on are higher than what
general trade offers, such as in footwear and cookware.

Average ticket size CAGR of 6% over FY22-24 Revenue mix moving in favour of general merchandise
Average ticket Size (Rs) % growth Food Non-Food General Merchandise
1800 10.0% 100%
1600 25.9% 26.4% 26.8% 28.4% 28.3% 27.3%
1400 8.0% 80%

1200
6.0% 21.2% 20.6% 19.9% 20.0% 20.5% 20.3%
60%
1000
800
4.0% 40%
600
52.8% 53.1% 53.3% 51.6% 51.3% 52.4%
400 2.0% 20%
200
0 0.0% 0%
FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY15 FY16 FY17 FY18 FY19 FY20

Source: Company, Phillip Capital India Research

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 AVENUE SUPERMARTS INITIATING COVERAGE

Competitor analysis: DMart continues to be a leader

in grocery retailing across parameters

Store count across players #2 player in the grocery business by revenue (Rs mn)
1200 400000

1000 350000
300000
800
250000
600 200000
400 150000
100000
200
50000
0
0

Source: Company, MCA, Phillip Capital India Research

DMart has the best operating margins in industry Gross margin (%) for DMart is below industry average
25000 EBIDTA (Rsmn) Margin (%, rhs) 12 30

20000 8 25

15000 4 20

10000 0 15

5000 -4 10

5
0 -8
0
-5000 -12

Source: Company, MCA, Phillip Capital India Research

DMart: Lowest rent as % of revenue due to an ownership DMart: One of the lowest employee costs as % of revenue
model 10
12 9
8
10 7
6
8
5
6 4
3
4 2
1
2
0
0

Source: Company, MCA, Phillip Capital India Research

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 AVENUE SUPERMARTS INITIATING COVERAGE

DMart: Lowest opex as % of revenue across retailers A&P spends across players as % of revenues
25 6

20
4
15

10
2
5

0 0

Source: Company, MCA, Phillip Capital India Research

Inventory days for DMart lower than cash & carry players DMart has the lowest payable days across players
100 120

80 100

80
60
60
40
40
20 20

0 0

Source: Company, MCA, Phillip Capital India Research

Cash-conversion cycle (days) across players DMart: Only retailer to have positive CFO
30 CFO Capex
20000
20
10 15000
0
-10 10000
-20
5000
-30
-40 0
-50
-60 -5000

Source: Company, MCA, PhillipCapital India Research

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Financial analysis
Revenue CAGR of 34% over FY22-24
 We see revenue CAGR of 34% over FY22-24 to Rs 553bn, higher than 19% CAGR
over FY17-21.
 Revenue growth would be led by c.16% SSSG growth in FY24 and remaining by
store addition as it expands to 360 stores by FY24.

EBIDTA CAGR of 44% over FY22-24

 We are building 15.4% gross margins for FY24, mere 60/30bps margin expansion
compared to FY20/21. Gross margins will expand as the discounting reduces in
the grocery vertical, and with higher contribution from general merchandise
division, which has higher gross margins. Hence, operating margins would
increase to 8.9% in FY24 from 8.6% in FY20 on operating leverage. Hence, EBIDTA
CAGR would be 44% over FY22-24 to touch Rs 49bn in FY24 compared to Rs 21bn
in FY20. PAT CAGR should be 45% over FY22-24 to touch Rs 32bn.

Revenue CAGR of 34% over FY22-24 EBIDTA CAGR of 44% over FY22-24

600 Revenue (Rsbn) % growth (rhs) 50 EBIDTA (Rsbn) Margins% (rhs)

60 10
9
500 40 50
9
400 30 40 8
8
300 20 30
7
200 10 20 7
6
100 0 10
6
0 -10 0 5
FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Gross margins to inch back to 15%+ from FY21 PAT CAGR of 45% over FY22-24
15.8 PAT (Rsmn) % growth (rhs)
35 70
15.6
60
30
15.4 50
15.2 25 40

20 30
15.0
20
14.8 15 10

14.6 10 0
-10
14.4 5
-20
14.2 0 -30
FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Source: Company, Phillip Capital India Research

To become FCF positive from FY24

 We have modelled 18 days of cash-conversion cycle, factoring inventory days of
24 and 7 creditor days. These cash-conversion days would be marginally better
compared to 18-20 days in FY15-20, mainly due to lower inventory days because
of operating efficiencies.

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 AVENUE SUPERMARTS INITIATING COVERAGE

 DMart would continue to remain debt-free after its Rs 42bn fund raising in FY20;
we expect free-cash generation only from FY24, while cumulative operating cash
flow will be Rs 68bn over FY22-24.
 We have modelled cumulative capex of Rs 79bn over three years, as the
company would go for aggressive store openings and renovations over the next
three years.
 Return ratios should improve significantly from lows of FY20. RoIC will be at
historic highs of 17% in FY24 while RoE/RoCE should be at 16% each due to high
cash on books.

To turn FCF positive from FY24 Cash-conversion cycle to remain stable

FCF OCF Debtor Days Inventory Days
35000
Creditor Days Cash Conversion Cycle (rhs)
30000 35 24
25000 30 22
20000
25 20
15000
20 18
10000
15 16
5000
10 14
0

-5000 5 12

-10000 0 10
FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Source: Company, Phillip Capital India Research

Remains debt free despite high capex, net D/E (x) Return ratios to inch up significantly
0.2 RoCE RoE RoIC
18%
0.1 17%
0.1 16%
0.0 15%

-0.1 14%
13%
-0.1
12%
-0.2
11%
-0.2
10%
-0.3 9%
-0.3 8%
FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Source: Company, Phillip Capital India Research

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 AVENUE SUPERMARTS INITIATING COVERAGE

Valuations
 Avenue Supermarts is one of the strongest groceries retailers in India due to
market-share gains, one of the best sales/sq. ft., lowest cost of retailing, product
assortment, highest operating margins across organised retailers, coupled with
one of the lowest inventory days.
 Opening stores through the leased route (vs. only ownership model earlier) will
help the company to expand its footprint faster vs. competition. Starting DMart
Ready in key cities will help it to overcome the e-commerce threat in its core
markets.
 Relentless focus on efficiency and offering best value to customers. It has able to
drive strong customer loyalty. We initiate coverage on Avenue Supermarts with a
BUY rating and DCF-based target price of Rs 3,320, implying 49x September 2023
EV/EBIDTA.

DCF Valuation assumptions (Rs mn)

WACC 10.4%
PV of FCF 578811
Terminal Growth rate % 6.0%
Terminal value 8,731,955
PV of Terminal Value 1,549,662
Total value of firm 2,128,474
add: investments/associates 2873
less net debt (cash) -20,528
Total Equity Value 2,151,875
Number of shares outstanding (m) 648
Value per share (Rs) 3,320
Source: Company, Phillip Capital India Research

Key Risks
Under investment in e-commerce
There has been a significant shift in consumer behaviour post Covid-19 – towards
online commerce. Underinvestment in online grocery would hurt DMart’s market
share. Online would hurt DMart’s margins, as typically online accounts for lower
sales of general merchandise, which has high margins.

Competitive intensity could increase discounting

Sustenance of Every Day Lower Price is critical for the success of the company.
However, with increasing competition, the company could be forced to increase
discounting to maintain its loyal customers and its competitive advantage. This
would impact margins that are already wafer-thin.

Delay in FCF generation

DMart owns a majority of the stores, as it buys real estate. With strong store-
opening capex, FCF generation over next couple of years could remain subdued, and
could get delayed even more if leased store openings are low.

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Company profile
 Avenue Supermarts Limited is a Mumbai-based company, which owns and
operates D-Mart stores.
 D-Mart is a national supermarket chain that offers customers a range of home
and personal products under one roof.
 Offers a wide range of products under foods, non-foods (FMCG), general
merchandise and apparel categories; grocery and staples, dairy and frozen, fruits
and vegetables, home and personal care, bed and bath, crockery, footwear, toys
and games, kids’ apparel, apparel for men and women and daily essentials.
 Opened its first store in Mumbai, Maharashtra in 2002.
 As of 31 December, 2020, it had 221 operating stores with a retail business area
of 8.17mn sq. ft. across Maharashtra, Gujarat, Daman, Andhra Pradesh,
Karnataka, Telangana, Tamil Nadu, Madhya Pradesh, Rajasthan, NCR,
Chhattisgarh and Punjab.
 Offers customers good-quality products at great value, based on the Everyday
Low Cost/Everyday Low Price (EDLC/EDLP) principle.

Key store opening timelines

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 AVENUE SUPERMARTS INITIATING COVERAGE

Key management team

NAME DESIGNATION PROFILE
Mr. Ignatius Navil MD & CEO  On the board since January 2006
Noronha  Degree in science from S.I.E.S. College, Mumbai; a post-graduate degree in marketing
management from NMIMS, Mumbai.
 Several years of experience in the consumer goods industry.
 Has worked with Hindustan Unilever Limited for eight years.
Mr. Ramakant Baheti Whole-time Director &  Chartered Accountant; degree in Commerce from Maharishi Dayanand Saraswati
Group CFO University, Ajmer.
 22 years of experience in finance.
Mr. Elvin Machado Whole-time Director  Economics graduate from St. Xavier’s College; M.A. from Mumbai University.
 In 1988, joined Hindustan Unilever as a Trainee Territory Sales.
 After 18 years with Unilever, joined Avenue Supermarts Limited in 2007 as General
Manager-Operations.
 Presently looking after operations for the newly established circles of Madhya Pradesh,
Chhattisgarh, Rajasthan, NCR, and Punjab.
Mr. Narayanan Bhaskaran Chief Operating Officer,  Joined as Vice President of HR in 2008
Retail – North and South  Currently the COO of Retail in North and South regions.
 Graduate B. Com. Degree from University of Madras; post-graduate degree from XLRI,
Jamshedpur.
Mr. Niladri Deb Chief Financial Officer  Chartered Accountant; graduate in B. Com. From St. Xaviers College; Management Program
at IIM, Ahmedabad.
 Worked at Usha International, ITC Ltd., and Kraft Heinz.
 Joined DMart in 2008
 Was Managing Director of Kraft Heinz Company in of the Indian business units before that.
Mr. Dheeraj Kampani Vice-president, Buying  MBA in Marketing from Nagpur University.
and Merchandising  He joined D-mart’s team in 2005, before which he worked at Spencers and Hindustan
Unilever Ltd.
Mr. Hitesh Shah Vice-president,  Associate Vice President of Operations, since 2014
Operations  Vice President of Operations in 2019.
Source: Company, Phillip Capital India Research

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 AVENUE SUPERMARTS INITIATING COVERAGE

Financials
Income Statement Cash Flow
Y/E Mar, Rs mn FY21E FY22E FY23E FY24E Y/E Mar, Rs mn FY21E FY22E FY23E FY24E
Net sales 2,37,702 3,08,275 4,37,573 5,52,939 Pre-tax profit 15,166 20,123 32,923 42,573
Growth, % -3.5 29.7 41.9 26.4 Depreciation 3,938 5,071 6,321 7,784
Other income 311 373 447 537 Chg in working capital -1,274 -2,290 -8,157 -7,546
Total income 2,38,013 3,08,648 4,38,020 5,53,476 Total tax paid -3,898 -5,232 -8,560 -11,069
Raw material expenses -2,02,047 -2,62,034 -3,71,062 -4,68,339 Other operating activities -1,668 -1,525 -1,055 -1,022
Employee expenses -5,012 -6,064 -7,399 -9,026 Cash flow from operating activities 12,263 16,147 21,472 30,721
Other Operating expenses -13,527 -16,881 -21,371 -26,775 Capital expenditure -18,110 -21,766 -26,860 -30,417
EBITDA 17,427 23,669 38,188 49,335 Chg in investments 4,500 7,000 1,000 0
Growth, % -17.9 35.8 61.3 29.2 Other investing activities 1,990 1,588 1,121 1,091
Margin, % 7.3 7.7 8.7 8.9 Cash flow from investing activities -11,620 -13,178 -24,739 -29,326
Depreciation -3,938 -5,071 -6,321 -7,784 Free cash flow (ex-Lease Liability)
EBIT 13,490 18,598 31,868 41,551 Equity raised/(repaid) 0 0 0 0
Growth, % -24.3 37.9 71.4 30.4 Debt raised/(repaid) -377 0 0 0
Margin, % 5.7 6.0 7.3 7.5 Dividend (incl. tax)
Interest paid -314 -63 -66 -69 Other financing activities -314 -63 -66 -69
Other Non-Operating Income 1,990 1,588 1,121 1,091 Cash flow from financing activities -691 -63 -66 -69
Non-recurring Items 0 0 0 0 Net chg in cash -48 2,906 -3,333 1,325
Pre-tax profit 15,166 20,123 32,923 42,573
Tax provided -3,898 -5,232 -8,560 -11,069 Valuation Ratios
Profit after tax 11,268 14,891 24,363 31,504 FY21E FY22E FY23E FY24E
Others (Minorities, Associates) Per Share data
Net Profit 11,268 14,891 24,363 31,504 EPS (INR) 17.4 23.0 37.6 48.6
Growth, % -16.5 32.1 63.6 29.3 Growth, % (16.5) 32.1 63.6 29.3
Net Profit (adjusted) 11,268 14,891 24,363 31,504 Book NAV/share (INR) 189.3 212.3 249.9 298.5
Unadj. shares (m) 647.8 647.8 647.8 647.8 FDEPS (INR) 17.4 23.0 37.6 48.6
CEPS (INR) 23.5 30.8 47.4 60.7
Balance Sheet CFPS (INR) 18.9 24.9 33.1 47.4
Y/E Mar, Rs mn FY21E FY22E FY23E FY24E DPS (INR) - - - -
Cash & bank 867 3,773 440 1,765 Return ratios
Debtors 652 846 1,200 1,516 Return on assets (%) 8.7 10.0 13.8 15.0
Inventory 19,563 22,832 32,401 40,942 Return on equity (%) 9.2 10.8 15.1 16.3
Loans & advances 6,400 7,360 8,464 9,734 Return on capital employed (%) 9.2 10.6 14.8 16.1
Other current assets 258 284 312 343 Turnover ratios
Total current assets 27,740 35,094 42,818 54,301 Asset turnover (x) 2.8 3.0 3.5 3.6
Investments 29,053 22,053 21,053 21,053 Sales/Total assets (x) 2.0 2.3 2.8 2.9
Gross fixed assets 82,995 1,04,061 1,29,921 1,59,138 Sales/Net FA (x) 3.5 3.6 4.1 4.3
Less: Depreciation -11,968 -17,040 -23,360 -31,145 Working capital/Sales (x) 0.2 0.2 0.1 0.1
Add: Capital WIP 4,119 4,819 5,819 7,019 Receivable days 0.9 0.9 0.9 0.9
Net fixed assets 75,146 91,841 1,12,379 1,35,012 Inventory days 29.6 25.1 23.0 24.2
Non-current assets 13 13 13 13 Payable days 6.9 6.6 6.6 7.0
Total assets 1,31,951 1,49,000 1,76,263 2,10,379 Working capital days 23.6 19.4 17.2 18.1
Liquidity ratios
Current liabilities 6,266 8,417 11,309 13,913 Current ratio (x) 7.8 5.8 4.8 4.7
Provisions 155 163 171 180 Quick ratio (x) 7.7 5.8 4.8 4.7
Total current liabilities 6,422 8,580 11,480 14,092 Interest cover (x) 43.0 296.3 483.6 600.5
Total Debt 2,424 2,424 2,424 2,424 Dividend cover (x) - - - -
Deferred Tax Liabilities 482 482 482 482 Total debt/Equity (%) 0.0 0.0 0.0 0.0
Total liabilities 9,328 11,486 14,386 16,998 Net debt/Equity (%) (0.2) (0.1) (0.1) (0.1)
Paid-up capital 6,478 6,478 6,478 6,478 Valuation
Reserves & surplus 1,16,146 1,31,037 1,55,399 1,86,903 PER (x) 166.1 125.7 76.8 59.4
Shareholders’ equity 1,22,624 1,37,514 1,61,877 1,93,381 PEG (x) - y-o-y growth 9.6 5.5 2.0 1.2
Total equity & liabilities 1,31,951 1,49,000 1,76,263 2,10,379 Price/Book (x) 15.3 13.6 11.6 9.7
Source: Company, PhillipCapital India Research Estimates Yield (%) - - - -
EV/Net sales (x) 7.8 6.0 4.2 3.4
EV/EBITDA (x) 106.0 78.2 48.6 37.6

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 AVENUE SUPERMARTS INITIATING COVERAGE

Rating Methodology
We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one
year. We have different threshold for large market capitalisation stock and Mid/small market capitalisation
stock. The categorisation of stock based on market capitalisation is as per the SEBI requirement.

Large cap stocks

Rating Criteria Definition
BUY >= +10% Target price is equal to or more than 10% of current market price
NEUTRAL -10% > to < +10% Target price is less than +10% but more than -10%
SELL <= -10% Target price is less than or equal to -10%.

Mid cap and Small cap stocks

Rating Criteria Definition
BUY >= +15% Target price is equal to or more than 15% of current market price
NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%
SELL <= -15% Target price is less than or equal to -15%.

Disclosures and Disclaimers

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This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at
times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.
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 AVENUE SUPERMARTS INITIATING COVERAGE

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IMPORTANT DISCLOSURES FOR U.S. PERSONS

This research report is a product of PhillipCapital (India) Pvt. Ltd. which is the employer of the research analyst(s) who has prepared the research report.
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Compensation and Investment Banking Activities

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 AVENUE SUPERMARTS INITIATING COVERAGE

Rosenblatt Securities Inc. or any affiliate has not managed or co-managed a public offering of securities for the subject company in the past 12 months, nor
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Additional Disclosures
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ANKIT Digitally signed by ANKIT ANILKUMAR KEDIA

DN: c=IN, o=PHILLIPCAPITAL (INDIA) PRIVATE
LIMITED, ou=EQUITY RESEARCH,

ANILKUMA
2.5.4.20=0626bc44fa4f4d447b8a707b26b837
3e49e4706f6f412eaa27da43d244d5faa2,
postalCode=400013, st=Maharashtra,
serialNumber=2da49c659b9f8e0d88142ea5f

R KEDIA
a621f46f0de4b7c9d9410c42248cc4f70b2799
2, cn=ANKIT ANILKUMAR KEDIA
Date: 2021.04.30 14:11:01 +05'30'

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