Fundamental Report Avenue Supermarts Ltd

Avenue Supermarts Limited (DMart) is a National supermarket company  specialises in value-retailing. With an emphasis on the product categories for general merchandise and apparel, non-foods (FMCG), and foods, we provide a wide range of goods. The company sells its goods in a number of areas, including groceries and basics, dairy and frozen, fruits and vegetables, home and personal care, bed and bath, crockery, footwear, toys and games, children’s clothing, fashion for men and women, and everyday necessities. The company continues to be committed to its strategy, which is founded on the Everyday Low Cost/Everyday Low Price (EDLC/EDLP) approach and involves providing customers with high-quality items at an affordable price. The store offers give consumers a unique shopping experience, including a wide selection of affordable everyday goods presented in a contemporary setting. In 2002, the company opened its first store in Mumbai, Maharashtra. As of September 30, 2023, the company operated 336 stores in the states of Maharashtra, Gujarat, Daman, Andhra Pradesh, Karnataka, Telangana, Tamil Nadu, Madhya Pradesh, Rajasthan, NCR, Chhattisgarh, and Punjab with a total retail business area of 13.9 million square feet.

 

Recommendation	PRICE RANGE	Target Price	Time Horizon
Buy	Rs. 3871	Rs. 4600	12 Months

Industry Overview:

Post-COVID Recovery: The fiscal year 2022-23 was a pivotal one for the retail industry in India. After a couple of years of grappling with the impact of the COVID-19 pandemic, the industry finally saw a significant upturn. With the pandemic restrictions lifted and the economy opening up, activities resumed in full swing, leading to robust growth in the retail industry. The growth rate was a strong 15%, taking the total value of the industry to a staggering `84 trillion. This growth was primarily driven by a revival in consumption patterns and improved economic conditions. As the economy recovered, it boosted consumer sentiment, leading to an increase in discretionary spending.

 

Rise of Organized and E-Retail: The organized retail and e-retail sectors saw substantial growth during this period. Organized retail, which includes large-scale retail outlets and chains, grew by 20% to reach a total value of `9 trillion. This accounted for about 11% of the overall retail industry. E-retail, which includes online shopping platforms, grew at an even faster pace of 24%, reaching a total value of `3 trillion. This represents approximately 3.7% of the total retail industry. A key contributor to this growth was the food and grocery segment, which made up about 25% of the total organized retail industry in value terms.

 

Future Projections: Looking ahead, the retail industry is expected to maintain this momentum and continue its growth trajectory. The industry is projected to grow at a compounded annual growth rate (CAGR) of 10-11% between 2023 and 2028. This optimistic projection is based on the expectation of continued economic growth and low to moderate inflation rates. As such, the retail industry appears to be on a solid path toward sustained growth and expansion. The industry’s future looks bright, and it is expected to continue to contribute significantly to India’s economic growth.

Extract of Q2FY24 Earnings:

• In 2QFY24, Avenue Supermarts’ (DMART) consolidated/standalone revenue increased 18.7%/18.5 YoY. The revenue increase was mostly driven by 11% YoY store openings. However, revenue/sqft, which had been a laggard, saw a rebound and climbed 6% YoY to Rs8984 during the quarter.

• Consolidated EBITDA margin fell 40 bp YoY to 8% owing to mix-driven lower gross margin (reduced share of General Merchandise & Apparel (GM&A)) and higher opex.

• Consolidated PBT increased 13.9% YoY to INR8.5b (a 12% miss). Reported PAT fell 9% YoY, owing mostly to reduced taxes in Q2FY23 due to a tax reversal from the prior period.

• The shrinking difference between revenue per store and revenue per sq. ft. meant that the percentage of larger-format retailers increased, which remained highly positive. Furthermore, significant store expansions (72% during FY20-23), good cost savings, and a recovery in discretionary demand with the start of the holiday season are expected to boost growth.

• Employee costs/other expenditures increased 19.1%/17.9% YoY to INR2.2b/INR6.2b in 2QFY24.

• The GM&A segment’s revenue share decreased to 23.21% in 1HFY24 from 24.75% in 1HFY23, demonstrating a persistent decline in this area.

• Bill cuts at 147m increased 36% YoY, while the average bill value decreased 13% year on year to INR1,625.

• LTL sales increased by 8.6%, the highest figure in the previous eight quarters, except Q1FY23 due to the COVID base. The average sales per store climbed by 6.5%, compared to a 4.5% growth in the previous three quarters. Inventory turns increased from 6.7% to 7%.

• DMART Ready (e-commerce) sales increased by 84% year on year to Rs22 billion in FY20-23. Despite the consistent rise, losses have remained flat year on year. DMART Ready’s sales have expanded 6x between FY20 and FY23, but bottom-line losses have increased 2x, demonstrating that the company’s e-commerce operations are continuously improving.

Quarterly Performance:

Particulars (In Rs. Cr.)	Q3FY23	Q2FY23	Q3FY22	QoQ%	YoY%	6MFY23	6MFY22	YoY%
Revenue from Operations	12,624.4	11,865.4	10,638.3	6.4%	18.7%	24,489.8	20,676.4	18.4%
Other Income	36.9	38.7	35.6	-4.7%	3.8%	75.7	64.7	16.9%
Total Income	12,661.3	11,904.2	10,673.9	6.4%	18.6%	24,565.5	20,741.1	18.4%
Purchase of Stock-in-Trade	11,318.9	10,209.8	9,871.8	10.9%	14.7%	21,528.7	18,332.4	17.4%
Changes in inventories	-547.0	-146.6	-842.6	–	–	-693.6	-905.6	–
Employee expenses	224.7	206.1	188.6	9.1%	19.1%	430.8	368.0	17.1%
Other Expenses	622.9	560.8	528.5	11.1%	17.9%	1,183.7	981.3	20.6%
EBITDA	1,004.9	1,035.3	892.0	-2.9%	12.7%	2,040.2	1,900.3	7.4%
EBITDA Margin (%)	8.0%	8.7%	8.4%	-70 bps	-40 bps	8.3%	9.2%	-90 bps
Finance Cost	15.6	14.6	17.7	7.0%	-11.8%	30.2	34.9	-13.6%
Depreciation & Amortization expenses	174.4	162.2	162.0	7.5%	7.7%	336.5	306.7	9.7%
Profit Before Tax (PBT)	851.9	897.3	748.0	-5.1%	13.9%	1,749.1	1,623.4	7.7%
Tax	227.8	238.6	62.2	-4.5%	266.0%	466.4	294.8	58.2%
Profit After Tax (PAT)	624.1	658.7	685.7	-5.3%	-9.0%	1,282.8	1,328.6	-3.5%
PAT Margin (%)	4.9%	5.6%	6.4%	-70 bps	-150 bps	5.2%	6.4%	-120 bps
EPS (in Rs.)	9.58	10.14	10.58	-5.5%	-9.5%	19.72	20.51	-3.85%

Profit and Loss Statement:  

Particulars (In Rs. Cr.)	FY21	FY22	FY23
Revenue from Operations	24,143.06	30,976.27	42,839.56
Other Income	196.21	117.49	129.34
Total Income	24,339.27	31,093.76	42,968.90
Cost of materials consumed	20,855.56	26,891.77	36,884.71
Changes in inventories	-300.88	-494.38	-500.82
Employee expenses	536.57	616.21	746.97
Other Expenses	1,308.76	1,464.17	2,071.67
EBITDA	1,939.3	2,616.0	3,766.4
EBITDA Margin (%)	8.0%	8.4%	8.8%
Finance Cost	41.65	53.79	67.41
Depreciation and amortization expenses	414.16	498.08	638.87
Profit Before Tax	1483.45	2064.12	3060.09
Tax	384.02	571.72	681.75
Profit After Tax	1099.43	1492.40	2378.34
PAT Margin (%)	4.6%	4.8%	5.6%
EPS (in Rs.)	16.97	23.04	36.72

Key Ratios:

Key Ratios	FY21	FY22	FY23
Debt to Equity	0.03	0.04	0.04
Current Ratio	3.28	3.05	3.04
ROCE (%)	12.71	15.74	20.14
ROE (%)	9.45	11.54	15.99
EBITDA Margin (%)	7.35	7.71	7.99
PAT Margin (%)	4.17	4.4	5.04
Valuation
P/E	158.65	160.3	86.31
P/B	15.02	18.61	13.37
EV/EBITDA	94.2	98.1	57.47
Market Cap/Sales	7.1	7.8	4.8

Balance Sheet:      

Particulars (In Rs. Cr.)	FY21	FY22	FY23
Assets
Non-Current Assets
Property, plant and equipment	5938.50	7770.46	9725.61
Right of use assets	960.24	1388.65	1504.88
Capital work-in-progress	1019.59	1129.34	829.16
Goodwill	78.27	78.27	78.27
Intangible assets	22.22	13.61	23.18
Investment properties	9.57	9.03	8.54
Investments	–	0.01	0.01
Other non-current financial assets	1109.28	1262.70	108.55
Income tax assets (net)	1.63	2.28	17.50
Deferred tax assets (net)	0.92	1.66	1.77
Other Non-Current Assets	454.62	373.78	360.43
Total non-current assets	9595	12030	12658
Current Assets
Inventories	2248.28	2742.66	3243.48
Investments	2.95	5.93	202.19
Trade receivables	43.58	66.89	62.16
Cash and cash equivalents	191.50	95.12	207.15
Bank Balances	1254.08	203.46	1201.18
Other financial assets	167.91	127.46	316.77
Other current assets	152.83	201.33	215.46
Total current assets	4,061	3,443	5,448
Total Assets	13,656	15,473	18,106
Equity and Liabilities
Equity
Equity Share Capital	647.77	647.77	648.26
Other Equity	11535.94	13029.87	15,430.44
Total Equity	12,184	13,678	16,079
Liabilities
Non-Current Liabilities
Lease Liabilities	312.01	507.15	476.66
Provisions	2.45	4.87	6.41
Deferred Tax Liabilities (Net)	51.19	64.03	76.96
Other Non-Current Liabilities	0.44	0.41	0.47
Total Non-Current Liabilities	366	576	561
Current Liabilities
Lease Liability	80.70	139.79	166.32
Trade payables	578.13	589.20	753.79
Other current financial liabilities	269.78	282.92	289.46
Other current liabilities	112.66	58.37	121.18
Provisions	40.73	36.44	50.87
Current tax liabilities (net)	23.77	111.57	85.39
Total Current Liabilities	1,106	1,218	1,467
Total Liabilities	1,472	1,795	2,028
Total Equity and Liabilities	13,656	15,472	18,106

Cash Flow Statement:

Particulars (In Rs. Cr.)	FY21	FY22	FY23	6MFY22	6MFY23
Cash Flow from Operating Activities
Profit from Operations	1483	2064	3060	1623	1749
Depreciation & Amortizaion	414.2	498.1	638.9	306.7	336.5
Finance Cost	41.7	53.8	67.4	34.9	30.2
Increase/Decrease in Working Capital	-127.1	-582.5	-319.9	-688.2	-831.8
Others	-175.4	-100.9	-107.3	-57.2	-67.2
Taxes Paid	-261.6	-560.3	-708.9	-378.4	-309.7
Net Cash Flow from Operating Activities	1375	1372	2630	841	907
Cash Flow from Investing Activities
Fixed Assets Purchased	-2029.4	-2410.4	-2405.0	-975.1	-1430.3
Free Cash Flow	919.4	1120.9	91.9	227.0	519.9
Net Cash Flow from Investing Activities	-1110	-1289	-2313	-748	-910
Cash Flow from Financing Activities
Proceeds from of exercise of share options	0.0	0.0	14.6	0.0	74.1
Proceeds from share application money pending allotment	0.0	0.0	0.9	0.0	0.0
Proceeds from short term borrowings/ debentures	-37.7	0.0	0.0	0.0	0.0
Payment of lease liability	-98.2	-125.5	-153.3	-68.5	-81.3
Net Interest Paid	-43.6	-53.8	-67.4	-34.9	-30.2
Net Cash Flow from Financing Activities	-179.5	-179.2	-205.1	-103.4	-37.4
Net Cash Flow for the Year	85.6	-96.4	112.0	-10.4	-40.5

Outlook:

Avenue Supermarts Ltd (DMart) owns and operates India’s most profitable supermarket, DMart. It provides products like Food, Non-Food (FMCG), General Merchandise and apparel through 336 stores, and has managed to maintain its EBITDA margin despite weak SSSG (Same-store sales Growth), thanks to cost-control measures. The expectation is for SSSG to recover in FY24 due to easing inflation and increased store productivity. Despite global economic uncertainties and geopolitical tensions, the domestic economy remains strong due to urbanization, and favorable demographics. In India, the organized grocery retail business penetration is at 4-5%, leaving plenty of headroom for the company to expand. DMart’s strategy focuses on providing quality products at a great value, creating a unique shopping experience for customers. This approach, combined with local market knowledge and supply chain efficiencies, has led to steady growth. Additionally, DMart’s unique strategy of EDLC/EDLP (Everyday Low Cost/Everyday Low Price), coupled with a diverse product range, offers a one-stop shopping solution. The company’s focus on customer needs and competitive pricing has also played a significant role in its success. Despite the uncertain global economic climate, DMart’s future looks promising, thanks to its robust business model and India’s resilient economy. With this in mind, investors are advised to consider Avenue Supermarts as a favorable investment option, particularly for those with a long-term investment horizon. Hence, investors can buy the stock with a target of Rs.4600 for the horizon of 12 months.

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