In this research report, we will look into Avenue Supermarts Ltd Share, its business model, its future growth prospect and share target price for investors.
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Avenue Supermarts Ltd Share is also known as wealth maker for investors . It has given a return of 543% in just 5 Years to its investors.
Company Overview:
Avenue Supermarts Limited also known as DMart is an India-based company, which owns and operates DMart stores.
DMart is a supermarket chain that offers customers a range of home and personal products under one roof.
Each DMart store stocks home utility products, including food, toiletries, beauty products, garments, kitchenware, bed and bath linen, home appliances and others.
The Company offers its products under various categories, such as bed and bath, dairy and frozen foods, fruits and vegetables, crockery, toys and games, kids apparel, ladies garments, apparel for men, home and personal care, daily essentials, grocery and staples, and own DMart brands.
DMart has presence in locations across Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh, Karnataka, Telangana and Chhattisgarh with over 11 stores.
The Company has multiple stores in cities, such as Mumbai, Ahmedabad, Baroda, Bengaluru, Hyderabad, Pune and Surat.
Products:
The company has a wide range of products under three segments.
- Foods – This category includes staples, groceries, snacks & processed foods, dairy & frozen products, beverages and confectioner.
- Non-Foods (FMCG) – This category includes home care products, personal care and toiletries and other over the counter products.
- General Merchandise & Apparel – This category includes bed & bath products, toys & games, home appliances, crockery, utensils, plastic goods, garments and footwear.
Subsidiaries & Revenue Breakup:
The Company has 5 subsidiaries as on 31st March, 2021 namely
- Align Retail Trades Private Limited (ARTPL),
- Avenue Food Plaza Private Limited (AFPPL),
- Avenue E-Commerce Limited (AEL),
- Nahar Seth & Jogani Developers Private Limited (NSJDPL)
- Reflect Wholesale and Retail Private Limited (RWRPL)
Key Rationale:
Strong position in the organized retail segment:
Market position is reinforced by steady same-store growth (barring fiscal 2021), retail productivity, and short gestation for new stores.
ASL currently operates 246 stores (as on Sep’ 2021) under the DMart brand. Strong procurement abilities, low-priced products along with high-cost control will lead to greater footfall.
This results in high inventory turnover and revenue per square foot (sq ft) and translates into industry-leading retail store productivity.
Aggregate revenue per sq. ft at about Rs.27,306 in fiscal 2021 (Rs.32,879 in 2020) is higher than most retailers in the same segment. Though operating profitability has improved over the years, it weakened in fiscal 2021 due to the impact of Covid-19.
Currently, the operations of the company are largely concentrated in West and South India. Expected large cluster-focused store addition over the next three years will help diversify geographical reach.
Track record of outpacing peers in growth, strong merchandising and compelling value proposition, and benefits of economies of scale will strengthen the market share of ASL over the medium term.
Q3FY22:
Avenue Supermarts reported a revenue growth of 22% YoY to Rs.9217.8 crs (two-year CAGR: 16%).
The company, during the quarter, added 17 new stores (YTD: 29) taking the total store count to 263 outlets, spread across 10.3 million square feet.
The company’s store addition during the quarter was strong, in line with its target of opening 40 stores in FY22E. Square feet addition on a YoY basis increased by 26% YoY.
Subsequently, revenue/sq. ft was at Rs.8949 vs. Rs.9231 in Q3FY21.
The average size of the store added during the quarter was 51000 sq. ft vs. average store size of 39000 sq. ft. D-Mart ready (online) continues to perform well with revenue growth of 39% YoY to Rs.153 crs
Product offering strategy:
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 favorable 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 and predominantly cater to lower income classes and the mass market
Financial Performance:
Despite capital intensive strategy, the company has maintained high ROE and ROCE in comparison to the industry.
It has maintained healthy operating cash flows, asset turns and EBITDA Margins over the years making it a capital efficient business.
DMART has delivered strong growth with a CAGR of 30%/33% in Revenue/EBITDA respectively, over FY12-21
Industry Analysis:
Indian retail industry has emerged as one of the most dynamic and fast-paced industries due to the entry of several new players.
It accounts for over 10% of the country’s gross domestic product (GDP) and around eight% of the employment.
India is the world’s fifth-largest global destination in the retail space. Country ranked 73 in the United Nations Conference on Trade and Development’s Business-to-Consumer (B2C) E-commerce Index 2019.
It is the world’s fifth-largest global destination in the retail space and ranked 63 in World Bank’s Doing Business 2020. India is the world’s fifth-largest global destination in the retail space.
India’s retail industry is projected to grow at a slower pace of 9% over 2019-2030, from US$ 779 billion in 2019 to US$ 1,407 billion by 2026 and more than US$ 1.8 trillion by 2030.
The organized retail market in India is growing at a CAGR of 20-25% per year. The unorganized retail sector in India has a huge untapped potential for adopting digital mode of payments.
About 63% of the retailers are interested in using digital payments like mobile and card payments.
Growth Drivers:
Factors like young demographic composition, increasing personal disposable income, preference towards affordable luxury and rising middle class population are developing preferences for specific brands.
The Government of India has allowed ~51% FDI in multi-brand retail and 100% FDI in single-brand retail under the automatic route
Easy availability of credit and use of ‘plastic money’ have contributed to a strong and growing consumer culture in India.
Outlook:
Operating performance improved substantially year-on-year during the first-half of fiscal 2022 with strong recovery in same-store demand compared to pre-pandemic level, relaxation of constraints and new store additions.
Although sales were impacted in fiscal 2021 because of pandemic-related curbs and restrictions on sale of non-food products and lower footfalls, performance remained resilient with only marginal degrowth of 3% and healthy cash accrual.
Furthermore, healthy operating profitability of 7.5-9% should sustain over the medium term despite moderating in fiscal 2021 to 6.7% due to suboptimal fixed cost coverage and lower proportion of high-margin merchandise in total sales.
Overall profitability will be backed by faster breakeven of stores, superior per store revenue compared with peers, stable proportion of non-F&G sales, high inventory turnover as well as maintenance of the gross margin at around 15% despite increasing competitive intensity.
The management indicated that it continues to monitor the current situation, wherein the trend in sales and footfall will depend on any local pandemic related restriction on trade activities.
Valuation:
The recent resurgence of Covid-19 cases slows the recovery momentum which was aided by ongoing vaccinations and the ease in restrictions in previous quarters.
D-Mart has strong recovery potential given healthy balance sheet and strong operational efficiency. Additionally, strong store additions and higher sales value due to inflation will also support strong growth when the economy normalizes.
Hence, we recommend a BUY rating in the Avenue Supermarts Ltd Share with the target price (TP) of Rs.4720, 178x FY23E EPS.
Risks:
- E-Commerce Risk – There has been a significant shift in consumer behavior 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.
- Free Cashflow Risk – D-Mart 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.
- Competitive Risk – 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.
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