Avenue Supermarts – REDUCE

Earnings downgrade

15 October 2018 Institutional Equities

Margin miss offsets sales beat Result update
• Avenue Supermarts’ (DMart) 2Q sales growth (39% vs 27% in 1Q) CMP Rs1412 Price performance (%)
came in sharply above estimate, with sales per store up 17% (vs 7% 1M 3M 1Y
12-mth TP (Rs) 1120 (-21%)
growth in 1Q). We believe 2Q SSS growth was healthy at ~20%, a Absolute (Rs) (7.3) (11.1) 11.3
sharp pick up from 1Q levels (c10-11%), aided by DMart’s continued Market cap (US$ m) 11,969
Absolute (US$) (9.1) (17.2) (1.6)
efforts to cut prices across categories. Enterprise value(US$m) 11,944 Rel. to Sensex 0.6 (6.1) 3.3
• We believe DMart’s pricing aggression increased in 2Q as gross margin
saw a steep 180bps contraction to 14.3% (vs 20bps expansion in 1Q). Bloomberg DMART IN Cagr (%) 3 yrs 5 yrs
This led to 110bps Ebitda margin contraction to 8%, resulting in below Sector Retail EPS 53.5 52.3
estimate Ebitda growth (23%). PAT growth (18%) was further
impacted by slightly higher than expected interest costs. Shareholding pattern (%) Stock performance
• The company added 3 stores (along estimates), taking up the retail Promoter 81.2 52Wk High/Low (Rs) 1682/1060
area to 5.1m sq ft across 160stores. Flattish working capital (22days FII 5.5 Shares o/s (m) 624
of sales) and ~Rs5.6bn capex in 1H resulted in DMart turning from DII 3.0 Daily volume (US$ m) 11
Rs0.2bn net cash in FY18 to ~Rs2.8bn net debt in 1HFY19. Others 10.3 Dividend yield FY19ii (%) 0.0
• We believe DMart’s pricing aggression is driven by enhanced Free float (%) 18.8
competitive pressures and is likely to sustain going forward.
Accordingly, we cut our FY19/20/21 EPS by 5% each to factor in 2Q
miss and continued margin pressures. Maintain REDUCE (TP: Rs1120).

Financial summary (Rs m)

Y/e 31 Mar, Consolidated 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19ii FY18 FY19ii FY20ii
Gross margin 15.1 14.2 15.5 16.1 16.4 14.9 15.6 14.3 14.7
Change (bps) NA 1 (34) 96 131 70 16 (180) (169)
Rev per store (Rs m) 292 251 274 262 296 257 292 307 334
% growth NA 16.8 14.0 5.1 1.4 2.6 6.8 17.4 13.0
Revenues (Rs m) 33,394 31,106 35,981 35,083 40,948 38,100 45,594 48,725 54,123 150,332 201,664 259,037
% change NA 40.6 35.7 26.3 22.6 22.5 26.7 38.9 32.2 26.4 34.1 28.4
Ebitda (Rs m) 2,883 2,077 3,032 3,179 4,217 2,945 4,227 3,896 4,729 13,528 16,737 21,831
Ebitda Margins (%) 8.6 6.7 8.4 9.1 10.3 7.7 9.3 8.0 8.7 9.0 8.3 8.4
Interest expense (Rs m) (310) (308) (243) (109) (110) (132) (100) (101) (100) (595) (404) (539)
Effective tax rate (%) 35.2 36.2 34.8 34.8 34.6 33.1 35.2 35.3 35.0 33.5 35.2 35.1
Reported PAT (Rs m) 1,519 967 1,748 1,910 2,518 1,671 2,506 2,257 2,793 8,063 9,691 12,539
Pre-exceptional PAT (Rs m) 1,519 967 1,748 1,910 2,518 1,671 2,506 2,257 2,793 7,677 9,691 12,539
% change NA 47.4 47.6 65.2 65.8 72.9 43.4 18.2 10.9 60.4 26.2 29.4
Source: Company, IIFL Research. Priced as on 12 October 2018

Avi Mehta | avi.mehta@iiflcap.com Percy Panthaki | percy.panthaki@iiflcap.com Kunal Shah | kunal.shah@iiflcap.com

91 22 4646 4650 91 22 4646 4662 91 22 4646 4674
 Institutional Equities Avenue Supermarts – REDUCE

Figure 1: DMart 2QFY19: Below estimate as lower than expected gross margin offset Figure 2: Growth in sales per store picked up sharply, given DMart’s strategy to reduce
sales beat prices across categories…
Standalone (Rs m) 2QFY18 2QFY19 YoY
Reported revenue 35,083 48,725 38.9%
Operating Costs (31,904) (44,829) 40.5%
EBITDA 3,179 3,896 22.6%
Ebitda (% net prod sales) 9.1 8.0 -106bps
Depreciation (351) (444) 26.3%
Interest (109) (101) -7.8%
Other Income 212 139 -34.7%
PBT 2,930 3,491 19.1%
Provision for Tax (1,020) (1,233) 20.9%
Tax Rate (%) 34.8 35.3 52bps
Net Profit 1,910 2,257 18.2%
Net Profit Margin (%) 5.4 4.6 -81bps Source: Company, IIFL Research
EPS 3.06 3.62 18.2%
Costs (Rs m) 2QFY18 2QFY19 YoY Figure 3: …driving sales growth to the highest levels in the last 6 quarters
RM consumed + cost of consignment sales 29,422 41,742 41.9%
% of total net sales 83.9 85.7 180bps
Employees cost 697 842 20.8%
% of total net sales 2.0 1.7 -26bps
Other expenditure 1,784 2,245 25.8%
% of total net sales 5.1 4.6 -48bps
Source: Company, IIFL Research

Source: Company, IIFL Research

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 Institutional Equities Avenue Supermarts – REDUCE

Figure 4: Enhanced aggression in price reduction strategy from 1Q levels drove a sharp Figure 6: Retail area increased marginally QoQ to 5.1 m sqft…
moderation in gross margin

Source: Company, IIFL Research

Source: Company, IIFL Research

Figure 5: This in turn led to a 110bps contraction in Ebitda margins and, hence, a miss
on Ebitda growth Figure 7: ...aided by addition of 3 stores

Source: Company, IIFL Research Source: Company, IIFL Research

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 Institutional Equities Avenue Supermarts – REDUCE

Figure 8: Net debt levels increased from 4Q levels on the back of higher capex Valuation summary (Rs m)
Standalone balance sheet 2QFY18 4QFY18 2QFY19 Y/e 31 Mar, Consolidated FY17A FY18A FY19ii FY20ii FY21ii
Net worth 42,137 46,427 51,290 Revenues (Rs m) 118,977 150,332 201,664 259,037 329,651
Total borrowings 5,557 5,845 7,069 Ebitda margins (%) 8.2 9.0 8.3 8.4 8.6
Deferred tax liabilities 542 463 606 Pre-exceptional PAT (Rs m) 4,788 7,677 9,691 12,539 16,210
Reported PAT (Rs m) 4,788 8,063 9,691 12,539 16,210
Total 48,235 52,735 58,966
Pre-exceptional EPS (Rs) 8.5 12.3 15.5 20.1 26.0
Growth (%) 48.7 45.1 26.2 29.4 29.3
Fixed assets 29,865 34,032 38,743 IIFL vs consensus (%) (8.1) (9.8) (7.6)
Non-current investments 443 1,295 1,546 PER (x) 166.5 114.8 90.9 70.3 54.4
Inventories 12,578 11,470 14,465 ROE (%) 17.9 18.0 18.8 20.0 21.0
Debtors 447 334 723 Net debt/equity (x) (0.1) 0.0 0.0 0.1 0.1
L&A 1,159 1,265 1,072 EV/Ebitda (x) 80.8 65.0 52.7 40.5 31.5
Other assets 2,001 1,647 2,855 Price/book (x) 20.7 18.9 15.6 12.8 10.3
Source: Company data, IIFL Research
Trade payables 4,012 3,159 4,525
Other liabilities 633 231 218
Cash 6,387 6,082 4,305
Total 48,235 52,735 58,966
Balance sheet details 2QFY18 4QFY18 2QFY19
Inventory days 34 28 30
Receivable days 1 1 2
Payable days 11 8 10
Working capital 24 21 22
Half yearly Capex 3,535 5,026 5,558
Net debt (830) (237) 2,765
Net D/E (0.0) (0.0) 0.1
Source: Company, IIFL Research

Figure 9: We cut our FY19/20/21 EPS estimate by 5% each

EPS Current Old Change
FY19 15.5 16.3 -5%
FY20 20.1 21.1 -5%
FY21 26.0 27.3 -5%
Source: Company, IIFL Research

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 Institutional Equities
Company snapshot Avenue Supermarts – REDUCE

Background: Avenue Supermart Ltd (D-Mart) is an emerging supermarket chain with a presence in 50+ cities across India. It’s major presence is
in the states of Maharashtra, Gujarat, Telangana and Karnataka. D-mart opened its first store in 2002 and it has 160 stores with a retail business
area of 5.1mn sq ft. D-Mart operates most of its stores in densely located areas and focuses on customers in the lower and middle class segment of
the society. D-Mart provides lower prices for its products across various categories and sub-categories which is appealing to the price sensitive
section of the society. In order to minimize operational costs, the company follows an ownership model (including long term lease contracts where
lease period is 30+ years) rather than a rental model.

Management Assortment Mix (FY18)

Non Ebitda Margin (%)
Name Designation
Foods 10.0 9.0
Ramesh Damani Chairman (FMCG), 8.2
7.7
20.0% 8.0 7.2 7.0
Ignatius Navil Noronha CEO and MD
Niladri Deb CFO 6.0

4.0
Foods,
51.6%
2.0
GMA,
28.4% 0.0
FY14 FY15 FY16 FY17 FY18

Assumptions PE chart EV/Ebitda

Y/e 31 Mar, Consolidated FY17A FY18A FY19ii FY20ii FY21ii
SSS growth 21.2 14.2 22.0 17.0 17.0 12m fwd PE Avg +/- 1SD 12m fwd EV/EBITDA Avg +/- 1SD
Number of stores 131.0 155.0 181.0 209.0 241.0 96.0
Capex per store 301.3 370.9 426.5 490.5 564.0 (x) (x)
88.0 52.0
Tax rate 35.3 34.5 35.2 35.1 35.0
Source: Company data, IIFL Research 80.0 45.0
72.0
38.0
64.0
31.0
56.0

48.0 24.0
Mar-17 Jul-17 Nov-17 Feb-18 Jun-18 Oct-18 Mar-17 Jul-17 Nov-17 Feb-18 Jun-18 Oct-18

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 Institutional Equities Avenue Supermarts – REDUCE

Financial summary
Income statement summary (Rs m) Balance sheet summary (Rs m)
Y/e 31 Mar, Consolidated FY17A FY18A FY19ii FY20ii FY21ii Y/e 31 Mar, Consolidated FY17A FY18A FY19ii FY20ii FY21ii
Revenues 118,977 150,332 201,664 259,037 329,651 Cash & cash equivalents 18,885 6,284 4,834 4,200 902
Ebitda 9,812 13,528 16,737 21,831 28,208 Inventories 9,479 11,634 15,359 19,695 24,960
Depreciation and amortisation (1,278) (1,590) (1,912) (2,449) (3,130) Receivables 210 335 453 584 745
Ebit 8,534 11,938 14,825 19,383 25,078 Other current assets 1,588 1,894 2,201 2,555 2,961
Non-operating income 286 693 526 470 470 Creditors 2,607 3,173 4,233 5,424 6,887
Financial expense (1,220) (595) (404) (539) (599) Other current liabilities 1,597 1,488 1,613 1,854 2,133
PBT 7,600 12,036 14,947 19,314 24,949 Net current assets 25,958 15,486 17,001 19,756 20,547
Exceptionals 0 385 0 0 0 Fixed assets 27,812 35,543 45,720 57,504 72,922
Reported PBT 7,600 12,421 14,947 19,314 24,949 Intangibles 0 783 783 783 783
Tax expense (2,683) (4,158) (5,255) (6,775) (8,739) Investments 215 0 0 0 0
PAT 4,917 8,263 9,692 12,539 16,210 Other long-term assets (593) (722) (722) (722) (722)
Minorities, Associates etc. (130) (201) 0 0 0 Total net assets 53,392 51,090 62,781 77,320 93,531
Attributable PAT 4,788 8,063 9,691 12,539 16,210 Borrowings 14,973 4,393 6,393 8,393 8,393
Other long-term liabilities 1 6 7 7 7
Ratio analysis Shareholders equity 38,418 46,691 56,382 68,921 85,131
Y/e 31 Mar, Consolidated FY17A FY18A FY19ii FY20ii FY21ii Total liabilities 53,392 51,090 62,781 77,320 93,531
Per share data (Rs)
Pre-exceptional EPS 8.5 12.3 15.5 20.1 26.0 Cash flow summary (Rs m)
DPS 0.0 0.0 0.0 0.0 0.0 Y/e 31 Mar, Consolidated FY17A FY18A FY19ii FY20ii FY21ii
BVPS 68.0 74.8 90.3 110.4 136.4 Ebit 8,534 11,938 14,825 19,383 25,078
Growth ratios (%) Tax paid (2,586) (4,027) (5,255) (6,775) (8,739)
Revenues 38.6 26.4 34.1 28.4 27.3 Depreciation and amortization 1,278 1,590 1,912 2,449 3,130
Ebitda 47.9 37.9 23.7 30.4 29.2 Net working capital change (2,697) (1,807) (2,964) (3,389) (4,090)
EPS 48.7 45.1 26.2 29.4 29.3 Other operating items 49 (395) 0 0 0
Profitability ratios (%) Operating cash flow before interest 4,578 7,300 8,517 11,668 15,379
Ebitda margin 8.2 9.0 8.3 8.4 8.6 Financial expense (1,203) (800) (404) (539) (599)
Ebit margin 7.2 7.9 7.4 7.5 7.6 Non-operating income 167 363 526 470 470
Tax rate 35.3 33.5 35.2 35.1 35.0 Operating cash flow after interest 3,542 6,863 8,639 11,599 15,250
Net profit margin 4.1 5.5 4.8 4.8 4.9 Capital expenditure (6,354) (9,087) (12,088) (14,233) (18,549)
Return ratios (%) Long-term investments (206) (415) 0 0 0
ROE 17.9 18.0 18.8 20.0 21.0 Others 77 (4,537) 0 0 0
ROCE 21.9 24.2 27.0 28.3 29.9 Free cash flow (2,941) (7,176) (3,450) (2,634) (3,299)
Solvency ratios (x) Equity raising 18,406 0 0 0 0
Net debt-equity (0.1) 0.0 0.0 0.1 0.1 Borrowings 3,050 (5,425) 2,000 2,000 0
Net debt to Ebitda (0.4) (0.1) 0.1 0.2 0.3 Dividend 0 0 0 0 0
Interest coverage 7.0 20.0 36.7 35.9 41.8 Net chg in cash and equivalents 18,515 (12,601) (1,450) (634) (3,299)
Source: Company data, IIFL Research Source: Company data, IIFL Research

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 Institutional Equities Avenue Supermarts – REDUCE

Disclosure : Published in 2018, © IIFL Securities Limited (Formerly ‘India Infoline Limited’) 2018

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 Institutional Equities Avenue Supermarts – REDUCE

A graph of daily closing prices of securities is available at http://www.nseindia.com/ChartApp/install/charts/mainpage.jsp, www.bseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes.
(Choose a company from the list on the browser and select the “three years” period in the price chart).

Name, Qualification and Certification of Research Analyst: Avi Mehta(PGDBM), Percy Panthaki(Chartered Accountant), Kunal Shah(PGPM)

IIFL Securities Limited (Formerly ‘India Infoline Limited’), CIN No.: U99999MH1996PLC132983, Corporate Office – IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 Tel: (91-22)
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Key to our recommendation structure

BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.

SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.

Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.

Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.

Distribution of Ratings: Out of 220 stocks rated in the IIFL coverage universe, 124 have BUY ratings, 7 have SELL ratings, 60 have ADD ratings and 27 have REDUCE ratings

Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as
comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there is
a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such
demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in certain
industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social conditions.
This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.

Date Close price Target price Rating

Avenue Supermarts Ltd: 3 year price and rating history
(Rs) (Rs)
(Rs) Price TP/Reco changed date 20 Mar 2017 0 480 BUY
2,000 08 May 2017 809 810 ADD
24 Jul 2017 914 960 ADD
1,500
27 Sep 2017 1116 940 REDUCE
1,000 16 Oct 2017 1230 1000 REDUCE
02 Jan 2018 1171 1050 REDUCE
500 29 Jan 2018 1159 1025 REDUCE
12 Apr 2018 1470 1200 REDUCE
0 15 Jun 2018 1569 1250 REDUCE
May-17

May-18
Mar-17

Mar-18
Jul-17

Nov-17

Jan-18

Jul-18
Sep-17

Sep-18

09 Jul 2018 1571 1330 REDUCE

31 Jul 2018 1593 1375 REDUCE
09 Oct 2018 1301 1150 REDUCE

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