Avenue Supermarts Limited

Independent Equity Research

Investment Note

21st December, 2019

Equentis Wealth Advisory Services (P) Ltd

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 AVENUE SUPERMARTS LIMITED (DMART)
Disclaimer: This note has been prepared for the first time in December 2019 and is refreshed as and
when deemed necessary. We would be tracking our recommended companies on regular basis. Any
event update on the company or update in 15-18 months or 5-year target prices would be conveyed to
clients accordingly.

I. BACKGROUND & BUSINESS

 Incorporation &Parentage –Avenue Supermarts Limited (DMART) (Mcap Rs.1,198bn, $16.8bn
@Rs.71.39/USD, FY19 consolidated revenues Rs. 200bn, EBITDA Rs. 16.3bn and reported PAT Rs. 9bn) is one
of the India’s largest Food & Grocery retailer and operates 189 stores in 11 States and 1 Union Territory of India as
of 30th September, 2019. It was conceived by Mr. Radhakishan Damani in the year 2000 operating as a single store
in Maharashtra.

 Revenue Streams – The key product categories of DMART can be classified into i) Foods ii) Non-Foods (FMCG)
and General Merchandise & Apparel. Food segment consists of Dairy, staples, groceries, snacks, frozen products,
processed foods, beverages & confectionery and fruits & vegetables. Non-Foods (FMCG) segment consists of
home care products, personal care products, toiletries and over the counter products. General Merchandise &
Apparel segment consist of bed & bath, toys & games, crockery, plastic goods, garments, footwear, utensils and
home appliances. As per FY19 Annual Report, Foods, Non-Foods (FMCG) and General Merchandise and Apparel
segment contributed 51.25%, 20.46% and 28.29% respectively to total revenues.

 Subsidiary Companies– DMART has five subsidiaries which are described below:
FY19 FY19
DMART
Entity Type Rev PAT Comment
Stake
(Rs. Mn.) (Rs. Mn.)
Packing and selling of grocery products,
Align Retail Trades Pvt. Ltd. Subsidiary 100% 9,201 101
spices, dry fruits etc.
Avenue Food Plaza Pvt. Ltd. Subsidiary 100% 236 57 Operating food stalls at DMART stores.
Online grocery retail under the brand
Avenue E-Commerce Ltd. Subsidiary 99.75% 1,436 (508)
name “DMART Ready”
Nahar Seth & Jogani
Subsidiary 90% 7.5 4.7 Development of land and construction
Developers Pvt. Ltd.
Reflect Wholesale and Retail Wholesale and retail of goods and
Subsidiary 100% - -
Pvt. Ltd.** products.
Source: DMART FY19 Annual Report.
** Reflect Wholesale and Retail Pvt Ltd. was incorporated on 28th May, 2018. It is yet to commence operations.

 Ownership Profile –The promoters collectively own 80.21% stake in DMART as on 30th September, 2019. Out of
this 80.21% stake that promoters collectively hold, 37.41% is held by Radhakishan Damani. Axis Long Term
Equity Fund with 2.55% holding is one of the marquee investor in DMART. Ignatius Navil Noronha who is
currently the Managing Director and CEO of Avenue Supermarts Ltd holds 2.16% in DMART. No part of
promoter stake was ever pledged. Apart from this, the stock is held by nearly all AMCs in India (Source: ACE
Equity) but the holding falls below the threshold, hence does not feature on BSE website.

 Management Effectiveness- DMART was started by Mr. Radhakishan Damani who was already established as
one of the successful and well known value investors in Indian Equity markets. He was anxious to start a business
beyond investing which would enable him to test his hypothesis about the Indian consumer. After a couple of years
of introspection and research, he decided to start a grocery retail chain, focusing primarily on the value segment.
DMART was conceived by him in the year 2000. DMART is now run by a professional management consisting of
Mr. Ramesh Damani as its Chairman, Mr. Ignatius Navil Noronha as its MD and CEO, Mr. Niladri Deb as CFO.
Mr. Ignatius Navil Noronha has been associated with DMART for 15 years now.

Name Designation Associated since Previous associations

Mr. Ramesh Damani Chairman Incorporation Ace investor
Mr. Ignatius Navil Noronha MD and CEO 2004 Hindustan Unilever (2000-2004), Avenue Supermarts (2004-Present)
Mr. Niladri Deb CFO 2018 Kraft Heinz (2006-2015), ITC (1999-2006), Usha (1995-1999)
Ms. Ashu Gupta Company Secretary NA NA
Source: Media Sources
 Financial Performance – A Glimpse – Over FY14-19, DMART has seen its consolidated revenue, EBITDA and
reported PAT grow at 34% CaGR, 37% CaGR and 41% CaGR respectively. During this period, the average ROE
stood at 19.5%, while ROCE has improved from 21% to 26%. D/E ratio has improved from 0.55xs to 0.08xs. Stock
price has appreciated at 27% CaGR since its listing in March, 2017. Despite being in the organized retail business,
DMART maintains an extremely lean working capital cycle, ranging between 2% and 5% of sales.
 II. INVESTMENT THESIS
Recommendation – BUY Internal Rating Score – 3.81 out of 5
15-18M Review Price – Rs. 2,382 – 2,552 Upside: 24% - 33%
5yr Review Price - Rs. 4,011 – 4,297 Upside: 2.1xs – 2.2xs
ISIN INE192R01011

1. The Indian retail sector: Statistics and Demand drivers

India’s retail sector is one of the largest and fastest growing retail industries anywhere in the world. It is backed by a
combination of rising income levels, growing propensity to spend, rising proportion of nuclear families, demographic
dividend and growing aspirations, among other factors. The retail industry has grown at 10% CAGR over CY2013 –
CY2018 and is expected to grow faster; at 13% CAGR over CY2018 – CY2021E, as per CARE Ratings. The faster growth
will be led by entry of newer players with deep pockets in organized segment, growing e-commerce, changing buying
patterns and a level playing field created post GST implementation.

Chart: Size of Indian Retail Industry ($ Bn.)

1,400

1,200 1,150
1,075

1,000 900
792
800 710
641
600
600 534
490

400

200

-
2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Company Data, Equentis Research, CARE Rating Data

Of the total retail market size of $792bn in CY2018, 88% is unorganized, 9% is organized while 3% comprises of E-tailing.
Within the organized retail segment, food and grocery is the largest sub-segment, comprising of 65% of the total.

Unorganized retail dominates the scene in India ….within organized, food and grocery is largest at 65%

Source: Company Data, Equentis Research, CARE Rating Data

The organized retail industry in India has strong legs to growth owing to the following factors:
Sr. No. Growth driver
1 Demographic dividend of India
2 Rapid urbanization
Growing income levels and per capita
3
expenditure
4 Growing use of cards and credit availability
5 Changing buying preference
6 Emergence of nuclear families
Comment
Proportion of working age population (age 15 - 64 years) is as high as 67% in
India (2018)
Median age of population in India is 28 years against 38 in USA and China, 48
in Germany and Japan and world average of 31.
Proportion of urban population in India has grown from 26% in CY1991 to
34% in CY2018
Higher population in urban areas implies greater "ticket-size" of spending,
propensity to spend on "higher-value, more affluent" items and growing
"wants" more than growing "needs".
India's consumption boom has been led by a 10% CAGR growth in per capita
GDP over FY15 - FY19 (from Rs. 98,405 to Rs. 1,42,719)
Per capita final consumption expenditure has also grown at a similar rate (10%
CAGR) from Rs. 1,00,439 in FY15 to Rs. 1,44,429 in FY19
Over FY15-FY19, credit and debit card transactions have grown at 30% and
16% CAGR respectively, resulting in ease of spending.
Retailers, credit card companies and digital wallet companies have been
offering various discounts, schemes, cash backs and other plans to lure
customers towards themselves and urge them to spend more.
Indians' spending on discretionary items has grown from 32% of total spending
in FY14 to 36% in FY18.
Spending on clothing and footwear has remained more or less constant at 12%
of total while that on food and non-alcoholic beverages declined from 56% in
FY14 to 51% in FY18
Avg no of persons per household has declined from 5.6 in FY81 to 4.9 in FY11.
This has led to greater propensity towards buying luxury items and necessities.

Proportion of working women has grown from 26% in FY81 to 31% in FY11,
resulting in greater number of "double-income" earning households.
7 Growing proportion of working women
Also, lack of time for working women necessitates availability of all items of
purchase, especially food and grocery "under-one-roof".
Source: Equentis Research, data inputs taken from CARE Ratings report on retail sector dated August, 2019

According to a report by Deloitte and Retail Association of India, share of organized retail is expected to grow from 9% in
CY2017 to 18% in CY2021. Organized retail will grow at five times the rate of unorganized (traditional) retail owing to the
factors mentioned above. E-commerce will grow even faster owing to a low base.

CY2017 CY2021E CAGR

Segment
$ Bn. % of total $ Bn. % of total Growth (%)
Unorganized (traditional) 700 88% 900 75% 6%
Organized 72 9% 216 18% 32%
E-Commerce 24 3% 84 7% 37%
TOTAL 795 100% 1,200 100% 11%
Source: Deloitte, Retail Association of India

Food and grocery has the lowest contribution from E-commerce given that there are several logistical issues. The food and
grocery category has only 2% - 3% share of E-commerce.

Category Approx Share (%)

Electronics & Accessories 40% - 45%
Apparel & Lifestyle 25% - 30%
Home & Living 5% - 7%
Food & Grocery 2% - 3%
Others 20% - 30%
Source: Equentis Research, data inputs taken from CARE Ratings report on retail sector dated August, 2019
2. Has India found its very own Walmart in DMART?
About Walmart in brief:
DMART’s hugely successful business model which combines strong growth, high profitability and strong balance sheet has
led many to compare its business model with the global retail giant “Walmart”. Walmart was among the first to initiate the
daily discounting model (called as “Everyday Low Cost, Everyday Low Price” in DMART parlance). Its founder Mr. Sam
Walton founded the company in 1962 and currently Walmart operates more than 11,300 stores in 27 countries. It had
mammoth revenues of $514bn in FY19 (Walmart reports 1st February – 31st January as its financial year). According to
Fortune Global 500 list (2019), Walmart is the largest company in the world by revenues.

“Walmart is the world's largest company by revenue, with US$514.405 billion, according to the Fortune Global 500 list in
2019. It is also the largest private employer in the world with 2.2 million employees. It is a publicly traded family-owned
business, as the company is controlled by the Walton family. Sam Walton's heirs own over 50 percent of Walmart through
their holding company Walton Enterprises and through their individual holdings. Walmart was the largest U.S. grocery
retailer in 2019, and 65 percent of Walmart's US$510.329 billion sales came from U.S. operations. Walmart was listed on the
New York Stock Exchange in 1972. By 1988, it was the most profitable retailer in the U.S. and it had become the largest in
terms of revenue by October 1989. The company originally was geographically limited to the South and lower Midwest, but
it had stores from coast to coast by the early 1990s. Sam's Club opened in New Jersey in November 1989 and the first
California outlet opened in Lancaster, California in July 1990. A Walmart in York, Pennsylvania opened in October 1990, the
first main store in the Northeast.”
-- Wikipedia

There are many similarities between the models of Walmart and DMART which are listed below:

a) Lowest price every day, not just limited to festivals or discount season.
b) Efficient supplier management and inventory cost control.
c) Suppliers are paid within the shortest period (compared to peers), hence it is able to extract discounts from
suppliers in lieu of the short cycle. This helps to keep procurement cost low and offer discounts on end-products.
d) Owns real estate for most its stores thereby saving on lease cost. Both Walmart and DMART own nearly 85% of
their total stores (US stores in case of Walmart).
e) Both companies prefer to stock goods at their stores which belong to the “daily necessities” category. While food
occupies 51% of DMART’s total revenues, grocery contributes 56% to Walmart’s revenues. This helps to keep
footfalls high and sales of the remaining items (non-food FMCG and general merchandise and apparel in case of
DMART and General Merchandise, Health and wellness in case of Walmart) can piggyback on those of essential
items.
f) Late entry into private labels – Walmart launched its private label, a dog food brand called Ol’ Roy in 1983, more
than 20 years after incorporation of the company. DMART, too has not gone very aggressive on private label
launches and has hinted that it may start looking at the same shortly.
A look at revenue and store opening of Walmart and DMART

Similar to DMART’s stellar top-line growth (37% CAGR over FY12-19), Walmart too exhibited extremely high growth
rates in the first three decades of its operations. In fact revenue grew at a staggering 38% CAGR between 1968 and 1995.
Thereafter, high base started affecting its revenues and the growth rate tapered down. For the entire 52 years of its
operations, revenue growth still remains an impressive 23% CAGR. On the same lines, we believe that DMART can
comfortably grow at more than 20% revenue CAGR for at least the next decade.

Chart: Walmart has reported revenue growth rate of 23% CAGR over 1968 - 2019
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019
-10%

yoy

Source: Walmart Inc reports, Equentis Research. Note that Walmart’s accounting year (Financial year) is between 1st February and 31st January

Chart: Growth rate (CAGR) has dropped in each of the succeeding decades as base grew larger
60%

50%
50%

40% 37%

30%
23%

20%
13%

10%
3%

0%
1968 - 1977 1978 - 1987 1988 - 1997 1998 - 2007 2008 - 2019
Source: Walmart Inc reports, Equentis Research. Note that Walmart’s accounting year (Financial year) is between 1 st February and 31st January.
In terms of store addition (in the USA), Walmart has maintained a 4% CAGR growth rate over the past two decades. The
rate of store addition was fastest in the first five years, but dropped drastically thereafter. In contrast, DMART has
maintained a robust 18% CAGR store count growth over FY12-19 and we project 11% CAGR rate over FY20E – 25E.

Chart: Store count for Walmart (in the USA) has grown at 4% CAGR over past two decades
6,000 30%
25%
5,000
20%
15%
4,000
10%
3,000 5%
0%
2,000
-5%
-10%
1,000
-15%
- -20%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
No. of Walmart stores in USA yoy

…………….however, a closer look reveals that store count addition has largely been front ended

14%
12%
12%

10%

8%

6%
4%
4%
2%
2%
0.4% 0.3%
0%
1997 - 2001 2002 - 2006 2007 - 2011 2012 - 2016 2017 - 2019

In contrast, DMART’s store count addition is far more robust and will continue over the medium term
400 25%
350
20%
300
250 15%
200
150 10%
100
5%
50
- 0%
FY2020E

FY2021E

FY2022E

FY2023E

FY2024E

FY2025E
FY2012

FY2013

FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

DMART store count yoy

DMART store addition over two time periods
20.0% 18.1%
18.0%
16.0%
14.0%
12.0% 11.2%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
FY12-19 FY20E-25E

Source: Company Data, Equentis Research

DMART is still in the early “boom” stage of profit growth

In terms of operating margins, DMART is still in the “goldilocks” zone, wherein its margins have been expanding owing to
its EDLC / EDLP strategy. We expect the margin expansion to continue, albeit at a slower pace, going ahead. DMART
generates revenue of Rs. 35,647 per sq. ft., which is far higher compared to peers. This coupled with the fact that it saves on
rental costs (due to store ownership model) and having majority of its employees on contractual basis (80% of total
workforce) has helped the company expand EBITDA margin by 191 bps over FY12-19, despite being in a highly
competitive and price-conscious sector. If we compare margin profile of Walmart and DMART, we notice that DMART is
still in the zone wherein it can expand its operating margins to reach maximum efficiency and stabilization thereafter. Till
then, the stock will continue to enjoy premium valuations that it is currently enjoying.

Chart: Walmart’s margins are currently in declining phase, DMART is very much in the “goldilocks” zone
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2020E
2021E
2022E
2023E
2024E
2025E
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019

Walmart EBITDAM DMart EBITDAM

Source: Walmart Inc reports, Equentis Research. Note that Walmart’s accounting year (Financial year) is between 1 st February and 31st January
3. DMART has kept its focus strictly on product mix – food drives footfalls and revenues:
Over the period FY12 – FY19, DMART has seen a strong 27% CAGR in bills cut in its stores, a metric it uses instead of
footfalls. This strength in footfalls is due to the assortment at its stores. DMART has always kept its focus on food as its
largest revenue contributor. This drives footfalls for the company since food is a “necessity” rather than a discretionary item.
Sales of other items piggyback on food items, driving overall sales for the company. This strategy has yielded excellent
results for DMART with sales growing 37% CAGR over FY12-19. DMART has stayed away from keeping fresh food
(fruits and vegetables) since it consumes a lot of shelf space but has low shelf life and is employee intensive. It also does not
sell large appliances since these require a lot of sales effort, consume lot of shelf space and stretch the working capital cycle.

Chart: Revenue mix according to type of product – food will always remain biggest contributor
120.0%

100.0%
26.0% 25.8% 25.2% 25.9% 26.4% 26.8% 28.4% 28.3%
80.0%

21.0% 21.2% 21.5% 21.2% 20.6% 19.9% 20.0% 20.5%

60.0%

40.0%

53.0% 52.9% 53.3% 52.8% 53.1% 53.3% 51.6% 51.3%

20.0%

0.0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Food Non-Food General Merchandise and Apparel

Source: Company Data, Equentis Research

Chart: Bills Cut per store and overall

1,200 200

977
180
1,000
865

160
828

172
770
755

140
712
695

800
134 120
582

600 100
109
80
400 85
60
67
53 40
200
43
32 20
- -
FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019

Bills Cut per store ('000) Overall Biills Cut (Mn.) - RHS

Source: Company Data, Equentis Research

4. Cluster-based store addition with ownership model helps manage inventory and save rental cost
DMART follows a unique model of owning almost all its stores against leasing which is followed by competitors. Nearly
85% of all DMART stores are owned by the company while the rest operate on very long term lease contracts (>10 years).
The ownership model results in a very asset-heavy balance sheet; however, it helps the company save on lease cost which
ranges from 5% - 14% of sales for peers. Secondly, it saves the company from frequent store churning due to lease expiry
and the hassle of lease renegotiation with owners.

Cluster-based approach implies that DMART expands in geographies that are (relatively) closer to existing stores. DMART
started its operations at Thane, near Mumbai in Maharashtra. Currently, almost 60% of all its stores are located in
Maharashtra and Gujarat. After establishing presence in Western India, DMART has also started ramping up presence in
South India. It plans to enter North India, where presence is currently limited, in its next phase of growth. The cluster-based
expansion helps DMART to gain dominance in a given region and understand customer preferences and tastes. This helps it
to augment supply chain, thereby reducing the cycle and resulting in faster store profitability.

Table: Cluster-based store addition over the years

State / UT FY2003 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019
Maharashtra 1 34 40 46 50 58 60 62 70
Gujarat - 14 14 17 22 26 29 30 34
Telangana - 4 5 7 9 13 14 19 21
Karnataka - 3 3 5 5 6 11 12 16
Andhra Pradesh - - - - 1 3 6 10 11
Madhya Pradesh
- - - - 2 4 5 9 9
& Chhatisgarh
NCR - - - - - - 1 1 1
Daman - - - - - - 1 1 1
Rajasthan - - - - - - 3 5 5
Tamil Nadu - - - - - - 1 3 4
Punjab - - - - - - - 3 4
TOTAL 1 55 62 75 89 110 131 155 176
Source: Company Annual Reports, Investor Presentations, RHP

Chart: DMART’s rental cost (as % of sales) is a fraction of that for peers (FY19 data)
16.0%
13.7%
14.0%
12.0%
12.0%

10.0%

8.0% 7.3%

6.0% 5.1%
4.7%
4.0%

2.0%
0.4%
0.0%
Avenue Supermarts Vmart Spencer's Retail Future Retail Trent Aditya Birla Fashion &
Retail
Source: Company Data, ACE Equity, Equentis Research

The DMART management has mentioned that going ahead, they may look at leasing stores as well. However, given their
specific building requirements, DMART’s stores are not situated within malls. Hence, the company has a separate real estate
acquisition team which constantly scouts for new stores at appropriate locations. Also, it enters into only long term lease
contracts with owners to suit its requirements.
5. EDLC / EDLP model at the core of DMART’s profitability:
DMART’s highly-acclaimed and time-tested practice of Everyday low Cost (EDLC) / Everyday Low Price (EDLP) has
differentiated its business model from that of competitors, thereby creating a moat for the company. DMART procures at the
lowest possible price from its vendors (suppliers) by paying off its creditors in a short time (8-10 days) and squeezing
discounts from them for the early payment. In addition, DMART stocks only the fastest selling SKUs of a given product to
ensure that inventory churn is fast and the company is not saddled with stock of low-moving SKUs.

Chart: Payable days and inventory days lowest among peers (FY19 data)
140
127
120

100
81 84 81
80
62
60 54 53
46
40 39
40 29

20 8
-
Avenue Supermarts Trent Vmart Spencer's Retail Future Retail Aditya Birla Fashion &
Retail

Payable Days Inventory Days

Source: Company Data, ACE Equity, Equentis Research

The management has stated that store sizes going ahead will be larger than previous. In fact, new stores will have area of
50,000 sq. ft. This will help the company stock more products in a single store, accommodate larger weekend crowds
(which become unmanageable at times), allocate more space to general merchandise and apparel which enjoy better gross
margins compared to food products. Consequently, we expect average store size to grow from 33.5k sq. ft. in FY19 to 41.3k
sq. ft. in FY25E. The better product mix in a larger store will also increase revenue per sq. ft.

Chart: Larger store size will enable better assortment, boosting revenue per sq. ft.
41,714

44,217

45,000 46,870 50,000

39,353
37,125

45,000
35,647

40,000
35,024
32,719
31,120

35,000 40,000
28,136
26,388

35,000
30,000
23,419

30,000
25,000
25,000
20,000
20,000
15,000
15,000
10,000 10,000
28,533

29,888

30,273

30,992

31,613

33,523

35,323

37,118

38,521

39,649

40,575

41,349

5,000 5,000
- -
FY2020E

FY2021E

FY2022E

FY2023E

FY2024E

FY2025E
FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

Average Area per store (sq. ft.) - LHS Revenue per sq. ft. (Rs.) - RHS

Source: Company Data, ACE Equity, Equentis Research

In addition, DMART has gone very slow on private labels till now and has stocked majorly branded FMCG products in its
stores. According to the company, creating a brand is a very long term process requiring huge R&D investment, years of
market research and huge A&P budget. The large FMCG companies in India have already done all this for decades together
 to create the brands we see today. As a retailer, DMART does not consider it to be its core function to “create” new brands.
It would rather prefer to “sell” existing brands to customers at the lowest price in the most profitable manner. Secondly,
there are certain categories such as detergents, shampoos, etc. which do not enjoy extra-ordinary margins. Hence, to create a
new brand in this category and enjoy higher margins than incumbent brands is a tall ask. Currently, DMART does have
some self-branded products in grocery, plastics, utensils, etc. However, the management believes that these are white label
products that are more a function of its efficient procurement skills.

6. ROCE will trend higher from current levels, settle close to 28% mark:
Based on the various initiatives mentioned above such as growing store network, store ownership model, low cost of
procurement, lean working capital cycle, strong balance sheet metrics and huge customer footfalls, we feel that the company
will see improvement in ROCE by more than 200bps over the next five years. However, given the nature of DMART’s
business, the long term trend in ROCE will be upward and not linear. Food, groceries and other daily necessities enjoy
limited product margins and hence operating margin expansion will hinge on better procurement, high volumes and higher
revenue per sq. f.t.

Chart: Working capital days (FY19 data)

40 31
36
35

30
25
25

20 17
15

10

-
Avenue Supermarts Trent Vmart Future Retail
Source: Company Data, Equentis Research

Chart: ROCE to trend higher

30.0%
29.0%

29.0%
28.6%

28.3%

28.0%
27.7%

27.6%
27.0%
25.7%

26.0%
25.5%

25.0%
24.5%

23.9%

24.0%
23.0%
22.4%

22.0%
21.5%

21.0%
20.6%

20.0%
FY2020E

FY2021E

FY2022E

FY2023E

FY2024E

FY2025E
FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

Source: Company Data, Equentis Research

7. Stake sale remains an overhang, though we aren’t too worried:
As on 30th September, 2019, promoters own 80.21% stake in Avenue Supermarts, none of which is pledged. Since this is
higher than the 75% threshold allowed as per SEBI rules, promoters will have to bring down their stake to 75% levels before
31st March, 2020. At CMP, this excess 5.21% stake is valued at Rs. 62.41bn. The company has not yet made any formal
announcement on the size of the sale or route. DMART may take either the OFS (Offer For Sale) route or a combination of
OFS and QIP (Qualified Institutional Placement) routes in order to bring promoter stake to permissible levels.

If DMART goes in for OFS, it will not bring any proceeds into the company. However, if it goes for a combination of OFS
and QIP, it will lead to significant inflow into the company thereby providing it with more arsenal for future expansion. We
feel that the company could opt for the latter. We do not feel that absorption of this excess liquidity will lead to significant
downside in stock price, since institutional investors would be more than happy to lap up any extra shares. On the other
hand, if the stake sale results in stock price decline, it would be a good opportunity for investors to increase their position in
this stock.

Table: How DMART’s promoter shareholding has evolved over the years

Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19
Promoter stake 82.20% 82.20% 82.20% 82.20% 82.20% 81.20% 81.20% 81.20% 81.20% 81.20% 80.21%
Source: ACE Equity

Table: Value of DMART’s 5.21% promoter stake at CMP

Particulars Value
CMP (Rs.) 1,919
No. of shares outstanding (Mn.) 624
Mcap (Rs. Bn.) 1,198
Value of 100% stake (Rs. Bn.) 1,198
Value of 5.21% stake (Rs. Bn.) 62
Value in Rs. Mn. 62,406
Basis the above growth opportunity and DMART’s strong positioning; over FY20E-25E our key estimates on
consolidated basis are as follows –
1. Turnover increase by 2.7xs.
2. EBITDA increase by 2.9xs.
3. PAT increase by 3.1xs.
4. Cumulative CAPEX Rs. 76bn.
5. Cumulative Free cash flows from operations of Rs. 103bn.
6. Avg. Cash & Liquid Investments portfolio of Rs. 6.1bn.
7. Average Gearing 0.07xs.
8. Average Working Capital at 6% of sales.
9. Avg. RoCE of 28% with increasing bias

 Key assumptions for Base Case Forecasts over FY20E-25E

Particulars (Rs. Mn.) 3yr CaGR (FY16-19) 5yr CaGR (FY14-19) 5yr CaGR (FY20E-25E)
Revenue 32% 34% 22%
EBITDA 35% 37% 24%
Normalized PAT 41% 41% 25%
Avg. Operating Income/Gross block (xs) 4.2 4.0 4.0
Avg. D/E (xs) 0.14 0.35 0.07
Avg. Working Cap. Intensity (%) 3.6% 3.8% 5.9%
Avg. ROCE (%) 24% 24% 28%
Avg. ROE (%) 18% 20% 22%
Cum. FCFF (10,213) (11,605) 23,378

Avenue Supermarts FY19 FY20E FY21E FY22E FY23E FY24E FY25E CAGR FY20E-25E
Normalized EPS (Rs.) 14.5 21.2 28.2 36.3 44.3 54.4 65.4 25.2%
YoY (%) 11.9% 46.9% 32.8% 28.6% 22.2% 22.6% 20.4%
P/E 132.7 90.3 68.0 52.9 43.3 35.3 29.3
1. Topline –

We expect DMART to post consolidated revenue growth of 22% CAGR over FY20E – 25E, led by 11% CAGR
growth in store count and 9% CAGR growth in revenue per store. DMART has taken a rational and cautious
approach while expanding its stores and has not gone all out with expansion. In fact, the company took eight years
to reach to ten stores. It has added an average of 20 stores per year over past five years. In H1FY20, it added 13
stores and is expected to add total of 25 stores in FY20E. From FY21E onwards, we expect an average of 28 stores
to be added each year. The revenue per store metric has grown at 13% CAGR over past five years. Going ahead,
the metric will grow at 9% CAGR. After growing at a brisk pace historically, growth in revenue per store will
stabilize for older stores. This will be offset by higher revenues from new stores with larger area (50,000 sq. ft. per
store) compared to previous stores (average of 33,532 per sq. ft. per store).

The second way we have arrived at revenue growth is in term of area. While total retail area will grow at 15%
CAGR, revenue per sq. ft. will grow at 6% CAGR. Total area is a function of number of stores and area per store.
Revenue per sq. ft. will be led by productivity gains and the ability of the company to sell more goods per unit area.

Chart: Revenue growth is a function of store expansion and revenue per store……………….
400 2,500
341
350 313
285 2,000
300 257
250 229
201 1,500
200 176
155
131 1,000
150 110
89
100 75
500
1,137

1,237

1,378

1,516

1,654

1,794

1,938
50
625

724

787

974

970

- -
FY2020E

FY2021E

FY2022E

FY2023E

FY2024E

FY2025E
FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

Revenue per store (Rs. Mn.) - RHS Store Count (Nos.) - LHS

Source: Company Data, Equentis Research

………….and also total retail area and revenue per unit area
16.0 14.1 50
11.3 12.7
14.0 45
9.9
5.9 7.1 8.5 40
12.0 4.9
2.7 3.3 4.1 35
10.0 2.1 30
8.0 25
6.0 20
15
4.0
10
2.0 5
23

26

28

31

33

36

35

37

39

42

44

47

- -
FY2020E

FY2021E

FY2022E

FY2023E

FY2024E

FY2025E
FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

Revenue per Sq. Ft. (Rs. '000) - RHS Area (Mn. Sq. Ft.) - LHS

Source: Company Data, Equentis Research

2. Gross margin performance –
Over FY12 to FY19, DMART has seen its gross margin range between 14% and 16%, with the exception of FY17.
Given the business that the company operates in, there is not much scope for aggressive gross margin expansion. It
will depend on efficient procurement at optimum prices. The management has indicated that gross margin will be
close to 15% over the near term. Hence, we expect a very gradual increase in this metric and an expansion of only
80bps between FY20E and FY25E. Consequently, gross profit will grow at 23% CAGR in absolute terms over
FY20E-25E, marginally faster than revenue growth over the period (22% CAGR).

Chart: Gross profit to grow slightly faster than top-line, given highly competitive nature of sector
120 25%
21%
100
20%
16% 16% 15% 15% 16% 16% 16% 16%
80 15% 15% 15%
61 15%
60 74 106
49 89
38 10%
40 30
27 24
14 5%
20 10
7
- 0%

FY2020E

FY2021E

FY2022E

FY2023E

FY2024E

FY2025E
FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

Gross Profit (Rs. Bn.) - LHS Gross Margin (%) - RHS

Source: Company Data, Equentis Research

3. Operating performance –

DMART fares much better on operating performance compared to peers owing to initiatives such as in-house
power generation (partial) and lower employee costs. As per its latest Annual Report (FY19), DMART has started
using solar energy to reduce its energy cost. It has installed solar panels in 46 of total 176 stores. Secondly, it
employs most of its staff on contractual basis, which keeps total employee cost significantly lower than
competition. In FY19, it had 80% of its employees on contractual basis and only 20% on permanent payrolls.
Going ahead, we expect employee costs (as % of sales) to stabilize at the 2% mark.

Chart: Strict control on operating costs will lead to gradual improvement in margins
70 9.0% 9.1% 9.1% 9.2% 9.3% 10.0%
8.8%
8.5%
8.2% 9.0%
60 7.7% 7.7%
7.3% 7.1% 8.0%
50 7.0%

40 6.0%
5.0%
30 61
4.0%
52
20 43 3.0%
35
28 2.0%
10 21
14 16 1.0%
3 5 7 10
- 0.0%
FY2020E

FY2021E

FY2022E

FY2023E

FY2024E

FY2025E
FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

EBITDA (Rs. Bn.) - LHS EBITDA Margin (%) - RHS

Source: Company Data, Equentis Research

4. Debt and Interest, Capex and Depreciation –

DMART has traditionally been extremely conservative in terms of raising debt and has relied more on internal
accruals to fund its store expansion needs. Of the Rs. 18.70bn raised at time of its IPO, it used Rs. 10.80bn (58% of
the proceeds) to repay / prepay NCDs and term loans. Consequently, total debt on books reduced from Rs. 10.5bn
in FY16 to Rs. 4.3bn in FY19. In FY20, total debt will spike to Rs. 10.4bn. This is because, in addition to the long
term borrowing, lease liability of Rs. 2.1bn will get created and added to its debt, owing to implementation of IND-
AS 116. Hence, the addition in debt in absolute terms. Going ahead, we expect the company to remain conservative
in debt raising. Consequently, D-E ratio will average less than 0.1x over the next five years.

Chart: Interest and Debt

12.0 1,400
1,220
10.0 1,200
962
913 1,000
8.0
724 756 765
686 705 800
645
6.0 557 595
472 600
4.0
400
2.0 200
10.5

11.2

10.4
5.2

7.7

2.5

4.3

7.1

6.6

6.1

5.6

5.1
- -
FY2020E

FY2021E

FY2022E

FY2023E

FY2024E

FY2025E
FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

Debt (Rs. Bn.) - LHS Interest Expenses (Rs. Mn.) - RHS

Source: Company Data, Equentis Research

DMART will have to continuously invest in store expansion in order to improve its presence and tap the huge
consumption opportunity. Since the company prefers to buy its assets rather than lease them, it will have to keep
expanding gross block at a brisk rate and incur considerable depreciation charges on the same. However, owning
the assets shields the company from rent yield rise and frequent store churn, both of which are expensive
propositions.

Chart: Capex and Depreciation

20 8.0
18 6.7
6.1 7.0
16
5.4 6.0
14 4.8
12 5.0
3.7
10 3.2 4.0
8 3.0
2.1
6 1.6
1.3 2.0
4 0.8 1.0
0.6 1.0
2
3 4 3 7 10 14 15 15 19 15 12 12
- -
FY2020E

FY2021E

FY2022E

FY2023E

FY2024E

FY2025E
FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

Capex (Rs. Bn.) - LHS Depreciation(Rs. Mn.) - RHS

Source: Company Data, Equentis Research

5. Tax Rates –

DMART has historically paid tax at a high rate of 35% (average over FY14-19). Hence, it will greatly benefit from
the reduction in corporate tax rate as announced by the Finance Ministry.

Chart: Tax rate to dip from FY20E onwards

36.5%
38.0%

35.3%
34.9%

34.5%
34.5%
34.1%
36.0%

34.0%
32.0%
30.0%

28.0%

25.2%

25.2%

25.2%

25.2%

25.2%

25.2%
26.0%

24.0%

22.0%
20.0%

FY2020E

FY2021E

FY2022E

FY2023E

FY2024E

FY2025E
FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

Source: Company Data, Equentis Research

6. Share count –

We have assumed a constant share count of 624mn for all years up to FY25E. There could be change in share count
post March, 2020, when the promoter reduces stake as per SEBI guidelines. However, the nature of this stake
dilution (OFS, fresh issue, etc.) is not yet clear. Hence, we have assumed current share count.

7. PAT CaGR –

Based on our assumptions of revenue, operating performance, debt and capex, we expect Normalized consolidated
PAT to grow at 25% CAGR over FY20E-25E.

Chart: Normalized PAT to grow at 25% CAGR over FY20E-25E

45 7.0%
6.0% 6.2%
5.8% 5.9%
40 5.6% 6.0%
5.4% 5.3%
35
4.5% 5.0%
30
3.7% 3.8%
25 3.4% 3.3% 4.0%
20 3.0%
15
2.0%
10
5 1.0%
2 2 3 5 8 9 13 18 23 28 34 41
- 0.0%
FY2020E

FY2021E

FY2022E

FY2023E

FY2024E

FY2025E
FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

Normalized PAT (Rs. Bn.) - LHS PAT Margin (%) - RHS

Source: Company Data, Equentis Research

 8. Dividend Pay-out –

DMART has not paid any dividend since incorporation, in order to conserve capital for expansion of business.
Going ahead, we do not expect any change in this policy. In case DMART starts paying dividend in future, it will
be viewed favorably by investors.

9. Return ratios –

We expect a stable trend for ROCE and ROE given that there is little scope for improvement in DMART’s metrics
such as profitability (best-in-class) and working capital cycle (among the leanest in the industry).

Chart: ROCE and ROE

35.0%
29.0% 28.6% 28.3%
30.0% 27.7% 27.6%
25.7% 25.5%
24.5% 23.9%
25.0% 21.5% 22.4%
20.6%
20.0% 23.5% 22.6% 23.1% 22.5%
21.2% 22.0% 21.3%
19.6% 18.9%
15.0% 18.5% 17.9% 17.6%
10.0%

5.0%

0.0%
FY2020E

FY2021E

FY2022E

FY2023E

FY2024E

FY2025E
FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

ROCE (%) ROE (%)

Source: Company Data, Equentis Research

10. Contingent liabilities –

Contingent liabilities are miniscule as % of total balance sheet size and can be ignored.

Chart: Contingent liabilities are insignificant compared to total balance sheet size
60 0.60%
50
48
0.49%

50 45 0.50%
43
40
40 38 37 0.40%

30 0.30%
0.25%

0.20%

0.18%

20 0.20%
4
0.09%

10 0.10%
0.07%

0.07%
0.03%

- 0.00%
FY2012

FY2013

FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

Contingent Liabilities (Rs. Mn.) as % of balance sheet size

Source: Company Data, Equentis Research

  Over the next 15-18 months, we expect the stock has the potential of delivering 24% - 33%
returns–

Particulars FY18 FY19 FY20E FY21E FY22E FY23E FY24E FY25E

EBITDA (Rs. Mn.) 13,528 16,333 21,154 27,918 35,411 42,723 51,594 61,268
yoy (%) 37.9% 20.7% 29.5% 32.0% 26.8% 20.7% 20.8% 18.8%
Enterprise Value (Rs. Mn.) 1,204,677
EV / EBITDA (xs) at CMP of Rs. 1,919 56.9 43.1 34.0 28.2 23.3 19.7
Source: Company Data, Equentis Research

EV FY22E (Rs. Mn.) Intrinsic

EV/EBITDA FY22E Shares Upside
Add: Less: Equity Value
(xs) EBITDA (Rs. Mn.) o/s (Mn.) (%)
Cash Debt Value (Rs./share)
39.00 35,411 1,381,013 6,109 6,628 1,380,495 624 2,212 15%
42.00 35,411 1,487,245 6,109 6,628 1,486,726 624 2,382 24%
45.00 35,411 1,593,477 6,109 6,628 1,592,958 624 2,552 33%
48.00 35,411 1,699,708 6,109 6,628 1,699,190 624 2,723 42%
51.00 35,411 1,805,940 6,109 6,628 1,805,422 624 2,893 51%
2,382 24%
Intrinsic Range over 15 - 18M (Rs.)
2,552 33%

The stock of DMART has traded at an average EV/EBITDA multiple range between 40xs and 45xs since listing. This
(seemingly expensive) valuation is backed by its best-in-class financial metrics and superior execution capabilities of its
management. DMART has created a differentiated business model and carved out a profitable growth story for itself in a
sector where competition is high and scope for further profitable growth in limited. However, the addressable market size in
India offers humungous growth opportunity for several players at a time. The idea is to do so in the most efficient manner
and keep doing it year after year. This is what DMART has managed to do; better than others, who have been in the
business for far longer than DMART. Hence, investors have lapped shares of this company even at expansive valuations.
We attach multiple of 42xs – 45xs to DMART’s FY22E EBITDA to arrive at intrinsic value range of Rs. 2,382 – Rs.
2,552, implying potential upside of 24% - 33%. We have a BUY rating on the stock.

DMART One Year Forward Chart

3,500

3,000

2,500

Price
2,000 52x
65x
1,500 80x
90x
1,000
100x

500

0
Dec-17

Mar-18

Sep-18

Dec-18

Mar-19

Sep-19

Dec-19
Jun-18

Jun-19

Source: ACE Equity, Equentis Research

  Peer Comparison
Sales EBITDA EBITDA Margin (%) EV/EBITDA (xs) PAT RoCE (%) PE (xs)
CMP Mcap ( CAGR CAGR CAGR
Company
(Rs.) Rs. Mn.) (FY19-21E) (FY19-21E) FY19 FY20E FY21E FY19 FY20E FY21E (FY19-21E) FY19 FY20E FY21E FY19 FY20E FY21E
(%) (%) (%)
Avenue
1,919 1,197,805 25.6% 30.7% 8.2% 8.5% 8.8% 73.5 56.9 43.1 39.7% 25.7% 25.5% 27.7% 132.7 90.3 68.0
Supermarts
Trent Ltd 528 187,805 25.8% 81.6% 8.7% 16.9% 18.0% 88.1 35.7 26.7 81.7% 8.6% 11.9% 11.4% 195.7 101.5 59.3
Future Retail Ltd. 330 165,933 9.7% 53.1% 5.1% 9.0% 10.0% 21.3 10.9 9.1 -1.4% 17.7% 17.5% 14.5% 22.7 19.6 23.4
V-Mart 1,652 29,985 20.7% 28.7% 9.3% 10.2% 10.5% 23.5 17.9 14.2 18.4% 23.8% 20.2% 20.1% 42.0 41.4 30.0

The current high valuation of DMART is neither unique nor surprising. As seen in the charts below, Walmart and Carrefour also commanded stratospheric valuations during their
boom time since investors put their faith in the long term growth stories of these companies. As we have discussed in earlier sections, DMART is currently in its high growth phase
and hence commands very high valuations. If we see the stage of growth for DMART and compare it with that of Walmart and Carrefour, we find that the company can continue
growing at more than 20% CAGR for at least the next decade. In present times, Walmart and Carrefour are behind their high growth phase and hence their EV/EBITDA multiples
have settled at much lower levels.

A look at DMART’ global peers

Chart: Evolution of EV/EBITDA -- Walmart Chart: Evolution of EV/EBITDA -- Carrefour

Source: Equentis Research, www.ycharts.com

  Over the next 5 years, we expect the stock price to become 2.1xs – 2.2xs its current level

Attach EV / EBITDA Multiple (xs) FY25E (Rs. Mn.)

FY20E EBITDA EBITDA FY25E EBITDA No. of shares Intrinsic Value Upside
(Rs. Mn.) CaGR (%) (Rs. Mn.) Add: Less: Equity o/s (Mn.) (Rs. / share) (xs)
39 42 45 48 51
Cash Debt Value
21,154 18% 48,396 1,887,454 2,032,643 2,177,832 2,323,020 2,468,209 21,721 5,128
21,154 20% 52,639 2,052,923 2,210,840 2,368,757 2,526,674 2,684,591 21,721 5,128
21,154 22% 57,174 2,229,798 2,401,321 2,572,844 2,744,367 2,915,889 21,721 5,128 2,503,016 624 4,011 2.1
21,154 24% 62,017 2,418,660 2,604,710 2,790,761 2,976,812 3,162,863 21,721 5,128 2,681,802 624 4,297 2.2
21,154 26% 67,182 2,620,107 2,821,654 3,023,201 3,224,747 3,426,294 21,721 5,128
21,154 28% 72,686 2,834,759 3,052,818 3,270,876 3,488,935 3,706,993 21,721 5,128

Average 5yr target price 4,011 2.1

(Rs.) and upside (xs) 4,297 2.2

Disclaimer - Our 5yr. Target prices are rolling estimates. These factor in changes in accounting period, estimates v/s actual performance and changes in current valuation multiples periodically.
Accordingly, our target prices in latest reports may be different from the ones published at the time of Initiating coverage.

We attach multiple of 42xs – 45xs to DMART’s FY25E EBITDA range of Rs. 57bn – Rs. 62bn to arrive at intrinsic value range of Rs. 4,011 – Rs. 4,297, implying potential
upside of 2.1xs – 2.2xs. We have assumed EBITDA CAGR of 22% - 24%, in line with our actual projection of 24%.
 Recommendation
DMART has one of the most differentiated models among retail players in India. Owing to its unique “Everyday
Low Cost, Everyday Low Price” model, it has managed to keep procurement costs low and selling price among the
lowest in the industry. This has resulted in huge growth for the company’s top-line while maintaining a healthy
bottom-line in a highly competitive industry. Also, the fact that it owns nearly all of its real estate (stores) shields it
from rent expenses, rent escalation and store churn due to rent renegotiation. Given the huge retail opportunity in
India, we feel that DMART has strong legs to growth over the medium term. Hence, we have a BUY rating on the
stock.

 Near-term Catalysts
 Pick up in consumption post current slowdown.
 Emerging consumption patterns of Indians – growing preference for online purchase while keeping off-line
demand almost intact.

 Risks to the recommendation

 A prolonged slowdown in consumer buying in India
 Decline in rate of store expansion
 Price under-cutting by emerging (Reliance Retail) or existing (Future Group, Tata Group) players in India, leading
to depressed margins.
 Revenue concentration from key states of Maharashtra and Gujarat.
 Competition from e-commerce players.
INVESTOR EDUCATION SECTION
BEYOND NUMBERS – FROM THE FUND MANAGER’S DESK

In our quest to ensure that our clients stay course on the path of ‘Wealth Creation” and not get unduly guided by near-
term stock price swings (positive or negative), we have incorporated this section, through which we summarize the
essence of our investment thought process; which in real world is mostly driven beyond numbers.

While in our reports and analysis, forecasting of earnings and valuation framework, form integral part of the investment
process; however, every day and all over, we have seen that a stock could give the forecasted one- year return, in say a
few trading sessions and thereafter test one’s patience, or the converse, that a stock corrects significantly with
prolonged period of under-performance and then in a matter of say a quarter makes up for all this.

In a nutshell, if one’s investing decisions are routinely guided by stock price behavior, then one will surely end up in a
vicious cycle of making some gains and some losses, which mostly even out. This is certainly not the path for steady
long-term wealth creation.

This leads us to the next question, that – “What is really needed for long-term wealth creation”?

In our opinion, the answer simply is “CONVICTION”; with respect to the size of the business opportunity, the
capability of the management team and top leadership to successfully innovate, scale-up and keep building sustainable
competitive advantages, their philosophy of balancing growth and risks, level of transparency and overall approach
towards all stakeholders.

Hence, while investing, if one keeps in mind, all these points and remains steadfast, then, as long as the underlying
investment thesis is not broken, irrespective of certain periods of underperformance and outperformance; over the
medium to long-term, wealth creation through compounding will be the end-product.

OUR HUNCH ON PVR’s NEAR-TERM STOCK PULSE

 To put it in perspective, we have given the estimated 15-18M as well as 5-year target based on our assumptions
and financial projections covered in “Key assumptions for Base Case Forecasts over FY20E - 25E” section of
this report. However, the stock may take a beating in the near-term, if the following must happen, which cannot
be covered in the financial projections today, despite our best efforts.

Stock price Dampeners –

Negative Factors Probability Reasons
Prolonged GDP Given that consumer spending has declined over past few months in India, a prolonged slowdown may
Low
slowdown dent margins of players.
Predatory pricing by Entry of new players (online and offline) backed by huge conglomerates or PE funding with deep
Low
competitors pockets may result in high competitive intensity for some time, leading to margin erosion for all players.
Dearth of real estate in Real estate in larger cities of India is scarce and hence very expensive. Since DMART owns its stores,
Moderate
large cities any delay in finding suitable properties for opening stores will result in lost opportunity.

 The stock may show a huge upside in a much shorter period than expected, if the following were to happen;
which too can’t be covered in our financial projections at this stage.

Stock price Catalysts –

Positive Factors Probability Reasons
Faster than expected store If DMART’s store count grows faster than our expected rate, it will result in higher top-line growth for the
Low
expansion company.

Conclusion – We will be keenly tracking the company for any positive or negative developments and will also keep an eye
w.r.t. our investment thesis playing out. Any positive or negative surprises could lead to upgrading or downgrading stock
prices as necessary.
 ANNEXURE – I

 Credit Rating Outstanding

Date Instrument Type Rating Agency Rating Amount Rating Status
10-Oct-19 Commercial Paper CRISIL CRISIL A1+ Rs. 5bn Reaffirmed
10-Oct-19 Non-Convertible Debenture CRISIL CRISIL AA+ Rs. 3.2bn Reaffirmed
10-Oct-19 Working Capital facility CRISIL CRISIL AA+ Rs. 6.4bn Reaffirmed
10-Oct-19 Proposed Fund-Based Bank Limits CRISIL CRISIL AA+ Rs. 1.1bn Reaffirmed
10-Oct-19 Non-Convertible Debentures CRISIL CRISIL AA+ Rs. 2bn Assigned
Source: ACE Equity

Following is an excerpt from CRISIL’s Rating Report on Avenue Supermarts Ltd dated 15 th March, 2019:
Detailed Rationale
 CRISIL has assigned its 'CRISIL AA+/Stable' rating to the Rs.200 crores non-convertible debenture (NCD) of
Avenue Supermarts Limited (ASL); the ratings on the company's long-term bank facilities and debt programmes
have been reaffirmed at 'CRISIL AA+/Stable/CRISIL A1+'.
 The reaffirmation reflects expectation of sustained improvement in business profile supported by strong ramp up in
scale of operations, along with cluster focused store expansion and superior store productivity. Ramp up in
operations will be supported by higherretail area addition and healthy like-to-like growth of about 15% going
forward. As a result, CRISIL expects the company to maintain an annual revenue growth of 20-25%.
 Further, CRISIL expects the company to maintain its healthy operating profitability of around 8.5% backed by
faster breakeven of stores (6-12 months), superior per store revenue compared to peers, high inventory turnover as
well as maintenance of gross margin at around 15% despite growing competition.
 In the three months ended June30, 2019, the company posted revenue of Rs 5815 crore, a 28% growth over the
corresponding period in the previous fiscal. The earnings before interest, depreciation, taxes and amortisation
(EBIDTA) margin stood at 9.9% (comparable; excluding the impact of Ind-AS 116 on lease accounting) as against
9.3% in the corresponding period of the previous fiscal primarily due to higher gross margins and continued
operational efficiency. In fiscal 2019, revenue stood at Rs 20075 crore, a 33% year-on-year growth while EBIDTA
margin fell to 8.2% from 9.0% due to lower gross margins on account of higher discounting owing to heightened
competitive intensity. The capital expenditure (capex) stood at Rs 1447 crore in fiscal 2019 as the company added
21 stores (retail area addition of 1 million square feet'sq. ft.). Moreover, some of the capex incurred in fiscal 2019
was towards stores added in the first quarter of fiscal 2020 (8 stores added with retail area addition of 0.4 million
sq. ft.).
 CRISIL expects ASL's financial risk profile to remain robust characterised by strong cash accruals (estimated at
over Rs 1300 crore per annum), annual capex of Rs 1500 crore, strong debt protection metrics marked by interest
coverage of around 36 times and ratio of net cash accrual to debt of over 100% in fiscal 2019 as well as
comfortable return on capital employed ratio (RoCE) of over 26%.
 The ratings reflect ASL's strong position in the domestic organised F&G retail market and solid financial risk
profile, as reflected in sizeable net worth and strong debt protection metrics. These strengths are partially offset by
the company's moderate though improving geographic spread, and susceptibility of operating performance to
regulatory changes and competition.

Analytical Approach
 For arriving at its rating, CRISIL has combined the business and financial risk profiles of ASL and its wholly-
owned subsidiaries, Align Retail Trade Pvt Ltd (ARTPL), Avenue Food Plaza Pvt Ltd (AFPL), Avenue E-
commerce Ltd (AEL), Nahar Seth and Jogani Developers Pvt Ltd and Reflect Wholesale and Retail Pvt Ltd. The
subsidiaries are an integral part of ASL's operations. All the companies are referred to as ASL.

Key Rating Drivers & Detailed Description

Strengths
 Strong market position in the organised retail market: ASL's market position is reinforced by steady
same-store growth and retail productivity, and short gestation for new stores. ASL operates 184 stores (as on
June 30, 2019) under the D-Mart brand, which reported high same-store sales growth (irrespective of their
vintage) of about 17.8% in fiscal 2019. Strong procurement abilities, lower priced products along with healthy
cost control results inrobust growth in footfalls. This leads to high inventory turnover and revenue per sq. ft. and
translates into industry leading retail store productivity. Aggregate revenue per square foot at Rs 35647 in fiscal
2019, is significantly higher than peers. The operating profitability of the company has seen improvement over
the years with EBIDTA margin increasing from 7.1% in fiscal 2015 to 9% in fiscal 2018. In fiscal 2019,
 operating margin moderated to 8.2% as the company reduced prices across categories. Currently, ASL's
operations are largely concentrated in West and South India. Expected large cluster focused store addition over
the next 3 years will benefit to diversify geographic reach of the company. CRISIL believes strong track record
of outpacing its peers in growth, its strong merchandising and compelling value proposition, benefit from
economies of scale will strengthen ASL's market share in organised F&G retail in India in the medium term.
Further, the company has also initiated to ramp up its online strategy and a platform to support future sales
channels. Improvement in geographic diversity along with sustenance of healthy operating performance will be
key rating drivers in the medium term.

 Solid financial risk profile: Financial risk profile is driven by sizeable networth (Rs 5588 crore as on March
31, 2019), and strong annual cash generation, despite continuing store addition. The company has been able to
maintain healthy operating metrics, while adding stores, and also prepaid sizeable debt through proceeds of its
initial public offering (IPO) totalling Rs1870 crore in fiscal 2017. This has translated into strong debt protection
metrics. CRISIL expects ASL's prudent expansion plan will entail a 20% per annumincrease in existing retail
space of around 6.3 million sq.ft. (as on June 30, 2019) by fiscal 2020. Strong cash generation of over Rs 1300
crore per annum is expected to fund the capex partly of Rs 1500 crore, resulting in low dependence on external
borrowings. Further, liquidity is expected to remain healthy. Moreover, in May 2019, the company has received
approval from the board of directors for qualified institutional placement (QIP) of 2.5 crore shares. Partial or full
QIP will result in further strengthening of financial risk profile and will support ASL to pursue large capex
without depending on external debt.

Weakness
 Moderate though improving geographical spread: ASL's operations are concentrated mainly in
Maharashtra (70 stores), Gujarat (34), Andhra Pradesh & Telangana (32), and Karnataka (16) as on March 31,
2019that means89% of stores are in West and South India. Geographical reach of ASL currently is lower than
peers, who mostly have pan-India presence. ASL plans to expand gradually in cluster fashion in North and
Central India in the medium term. Timely store expansion and replication of similar strong store performance in
newer geographies will remain key monitorable.
 Susceptibility of operating performance to regulatory changes and increasing competition:
Liberalisation of regulations such as foreign direct investment policy for food only retail (in 2016), and multi-
brand retail segment as and when it happens, will intensify competition in the domestic F&G sector, including
from large international players. Competitive intensity is also increasing from other large domestic F&G retailers
such as Reliance Retail Ltd (CRISIL AAA/Stable/CRISIL A1+) and Future Retail Ltd.
Also, competition is increasing due to greater focus of online retailers on the F&G segment. While ASL is a
small player at present in the online F&G space, earlier entrants such as BigBasket, Grofers, Amazon Pantry are
registering aggressive growth.

Liquidity: Strong
 Liquidity remains strong supported by large cash accruals, expected at Rs 1400-2300 crore over fiscals 2020 to
2022 should comfortably cover annual repayment obligations of Rs 200-300 crore. Working capital limit of Rs 690
crore was utilised negligibly at 10% over the eight months through September 2019. The company also has
commercial papers outstanding to the tune of around Rs 300-500 crore on an average. Liquidity is further aided by
cash and equivalents of Rs 75 crore as on September 2019. The company is expected to incur capex of around Rs
1500-1900 crore per annum over fiscal 2020 and 2022 towards store expansion, which is expected to be funded
primarily from internal accrual.

Outlook: Stable
 CRISIL believes that ASL's credit risk profile will continue to benefit on account of improving market position in
the organised retail segment, strong annual cash generation, and healthy financial flexibility.

Rating sensitivity factors

Upward factor
 Substantial improvement in geographical diversity and sales channel mix resulting in higher scale of operations
with operating profitability of 8.5-9.0% on a sustained period of time.
 Sustenance of strong capital structure,for instance gearing remaining below 0.20 times sustainably and adequate
liquidity.

Downward factor
 Significant weakening of operating margin due to large gestation losses from new stores, for instance, operating
margin consistently remaining below 7.5%.
 Larger-than-expected debt-funded capex increasing gearing to above 0.5 time.
 ANNEXURE - II

 Shareholding Pattern
The promoters collectively own 80.21% stake in Avenue Supermarts Ltd. as on 30th September, 2019. Out of this 80.21%
stake that promoters collectively hold, 37.41% is held by Radhakishan Damani. Axis Long Term Equity Fund with 2.55%
holding is one of the marquee investors in DMART. Ignatius Navil Noronha who is currently the Managing Director and
CEO of Avenue Supermarts Ltd holds 2.16% in DMART.

As on Date bps change

Particulars (%)
30-Sep-19 30-Sep-18 30-Jun-19 YoY QoQ
Promoter and Promoter Group Holding 80.21% 81.20% 81.20% -99 -99
-- Promoter Holding Pledged 0.00% 0.00% 0.00% 0 0
Total Institutional Shareholding 10.83% 8.49% 9.04% 234 179
-- FII Holding 6.03% 5.49% 5.47% 54 56
-- DII Holding 4.80% 3.01% 3.58% 179 122
Source: ACE Equity

Key Market Data

Close of 20th December, 2019
Bloomberg Code DMART:IN
Last Price, M. Cap, 52w H/L Rs. 1,919 (BSE), Rs.1198bn (USD 16.8bn @ Rs.71.39/USD), Rs. 2,011/ 1,226
Shares outstanding, Face Value 624mn of, Rs. 10/- each
Promoter holding
(as on September 2019)
Institutional holding
Kindly refer above
(as on September 2019)
Marquee Investors
(as on September 2019)

Avenue Supermarts Limited - Daily Price Chart for 3 years (BSE)

Close

1813

1613

1413
Price

1213

1013

813

613
Aug-17
Sep-17

Nov-17
Dec-17

Feb-18
Mar-18

Aug-18
Sep-18

Nov-18
Dec-18

Feb-19
Mar-19

Aug-19
Sep-19

Nov-19
Dec-19
Apr-17
May-17

Oct-17

Apr-18
May-18

Oct-18

Apr-19
May-19

Oct-19
Jun-17
Jul-17

Jan-18

Jun-18
Jul-18

Jan-19

Jun-19
Jul-19

Period

Source: ACE Equity

Key Financial Parameters for Investment Screening
FY14-19 FY20E-25E
Grading of
Sr. Aspect Required Grading of Historical Future
Actual Value future
No. (Consolidated) Criteria for Equentis 5x5 strategy Performance Value
(Historical) estimates
(Forecasted)
1 Top-line CAGR 20-30% CAGR 34% 22%
2 EBITDA CAGR 25-35% CAGR 37% 24%
3 PAT CAGR 30-40% CAGR 41% 25%
At least avg. 15% with increasing
4 ROCE
bias
24% 28%
Avg. around 1-1.5xs with declining
5 D/E Ratio
bias
0.35xs 0.07xs

6 Working Capital Intensity Avg. less than 25-30% of net sales 3.6% 6%

7 Dividend Payout Avg. 15-20% of Net profits Nil Nil

Note - Above – Blue, In-Line – Green, Below – Red

Note –
As seen in the table above, DMART falls short of our filters on two counts – Dividend Payout and PAT CAGR. DMART
has not paid any dividend since incorporation as a conscious strategy to conserve capital for store expansion and other core
operations. Hence, we do not see this as a concern. Secondly, with respect to PAT, the number falls short of our filter. This
is because DMART is present in the highly competitive category of retailing of food, grocery and household items, which
operates at wafer-thin margins. DMART already has best-in-class operating and profitability metrics, hence it is unrealistic
to assume that margin expansion will continue at the same pace going ahead. Having said this, sustenance of current
margins or slight margin expansion is what the street will look out for.
 ANNEXURE – III

 Q2FY20 Performance Highlights - Standalone

Particulars (Rs. Mn.) Q2FY19 Q1FY20 Q2FY20 yoy qoq H1FY19 H1FY20 yoy FY19**
Net Sales 48,725 57,805 59,490 22.1% 2.9% 94,319 117,295 24.4% 200,045
Raw Material 41,742 48,494 50,528 21.0% 4.2% 80,216 99,023 23.4% 170,008
as % net sales (%) 85.7% 83.9% 84.9% (73) 104 85.0% 84.4% (63) 85.0%
Gross Profit 6,983 9,311 8,962 28.3% -3.8% 14,104 18,273 29.6% 30,037
Gross Profit Margin (%) 14.3% 16.1% 15.1% 73 (104) 15.0% 15.6% 63 15.0%
Operating & Manufacturing Expenses 2,245 2,409 2,764 23.1% 14.7% 4,369 5,173 18.4% 10,150
as % net sales (%) 4.6% 4.2% 4.6% 4 48 4.6% 4.4% (22) 5.1%
Employee Cost 842 942 1,044 24.0% 10.8% 1,612 1,987 23.3% 3,554
as % net sales (%) 1.7% 1.6% 1.8% 3 13 1.7% 1.7% (2) 1.8%
Total Expenditure 44,829 51,846 54,336 21.2% 4.8% 86,196 106,182 23.2% 183,712
EBITDA 3,896 5,959 5,154 32.3% -13.5% 8,123 11,113 36.8% 16,333
EBITDA Margin (%) 8.0% 10.3% 8.7% 67 (165) 8.6% 9.5% 86 8.2%
Depreciation 444 750 833 87.8% 11.1% 847 1,583 86.9% 2,125
Other Income 139 119 89 -36.1% -25.8% 281 208 -26.0% 484
Interest Expenses 101 168 175 74.0% 4.7% 201 343 70.6% 472
PBT 3,491 5,161 4,234 21.3% -18.0% 7,356 9,395 27.7% 14,219
PBT Margin (%) 7.2% 8.9% 7.1% (5) (181) 7.8% 8.0% 21 7.1%
Total Tax outgo 1,233 1,808 900 -27.1% -50.3% 2,593 2,708 4.4% 5,195
Effective tax rate (%) 35.3% 35.0% 21.2% (1,408) (1,379) 35.2% 28.8% (642) 36.5%
Normalized PAT 2,257 3,353 3,335 47.7% -0.6% 4,764 6,688 40.4% 9,025
PAT Margin (%) 4.6% 5.8% 5.6% 97 (20) 5.1% 5.7% 65 4.5%
Normalized EPS (Rs.) 3.6 5.4 5.3 47.7% -0.6% 7.6 10.7 40.4% 14.5
No. of shares O/S (Mn.) 624 624 624 624 624 624
Note: Please note that numbers for Q1FY20 and Q2FY20 are reported as per IND-AS 116 accounting standard. Hence, numbers are not
directly comparable.
** Numbers for quarters and Half year are standalone while for FY19 are consolidated.

Performance Review
 Revenue – Revenue growth for the quarter came in at 22% yoy. While this was not a bad number, it was still slower than
the average 31% yoy sales growth that DMART has reported over past ten quarters. It added 5 stores during the quarter
and 13 stores in H1FY20. Brisk rate of store opening weak consumption environment was a key takeaway of the quarter.

 EBITDA –DMART continued to impress on the gross margin front. It reported GPM of 15.1%, implying expansion of
73bps yoy. EBITDA was up 32% yoy while EBITDA margin expanded 67bps yoy to 8.7%. Margin was partly affected
by expenses related to new store opening.

 PAT –Against EBITDA growth of 32% yoy, DMART reported PAT growth of 48% yoy, helped lower tax rate.

31
 ANNEXURE – IV

Consolidated P&L Statement

Consolidated 3yr CaGR 5yr CaGR

(Rs. Mn.) FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E FY24E FY25E FY16-19 FY20E-23E FY14-19 FY20E-25E
Revenue 46,865 64,394 86,605 127,581 150,332 200,045 248,670 315,566 389,595 471,370 561,556 660,867 32% 24% 34% 22%
yoy 37.4% 34.5% 47.3% 17.8% 33.1% 24.3% 26.9% 23.5% 21.0% 19.1% 17.7%
EBITDA 3,418 4,590 6,636 9,811 13,528 16,333 21,154 27,918 35,411 42,723 51,594 61,268 35% 26% 37% 24%
yoy 34.3% 44.6% 47.8% 37.9% 20.7% 29.5% 32.0% 26.8% 20.7% 20.8% 18.8%
EBITDA Margins (%) 7.3% 7.1% 7.7% 7.7% 9.0% 8.2% 8.5% 8.8% 9.1% 9.1% 9.2% 9.3%
Normalized PAT 1,614 2,117 3,202 4,788 8,063 9,025 13,259 17,604 22,647 27,675 33,920 40,830 41% 28% 41% 25%
yoy 31.2% 51.3% 49.5% 68.4% 11.9% 46.9% 32.8% 28.6% 22.2% 22.6% 20.4%
PAT Margins (%) 3.4% 3.3% 3.7% 3.8% 5.4% 4.5% 5.3% 5.6% 5.8% 5.9% 6.0% 6.2%
Normalized EPS (Rs.) 2.6 3.4 5.1 7.7 12.9 14.5 21.2 28.2 36.3 44.3 54.4 65.4 41% 28% 41% 25%

Consolidated Balance Sheet

3yr CaGR 5yr CaGR
Consolidated (Rs. Mn.)
FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E FY24E FY25E FY16-19 FY20E-23E FY14-19 FY20E-25E
LIABILITIES
Share Capital 5,468 5,615 5,615 6,241 6,241 6,241 6,241 6,241 6,241 6,241 6,241 6,241
Reserves & Surplus 4,088 6,377 9,589 32,177 40,450 49,634 62,893 80,497 103,143 130,819 164,739 205,569
Net-Worth 9,556 11,992 15,204 38,418 46,691 55,875 69,133 86,738 109,384 137,059 170,980 211,809 54% 26% 42% 25%
Total Debt 5,240 7,737 10,534 11,213 2,548 4,317 10,375 7,123 6,623 6,123 5,623 5,123 -26% -16% -4% -13%
Minority Interest 0 1 1 1 6 6 5 5 5 5 5 5
Net Deff. Tax Liabs 265 305 399 505 451 631 598 598 598 598 598 598
TOTAL LIABILITIES 15,061 20,035 26,138 50,138 49,695 60,827 80,111 94,463 116,610 143,785 177,205 217,535 33% 22% 32% 22%
ASSETS
Net Block (incl.
12,605 16,262 21,752 27,033 35,307 47,591 62,233 74,496 89,977 101,107 110,927 122,117 30% 18% 30% 14%
Right-of-use asset)
Long Term L&A 426 804 1,091 885 1,290 1,457 1,701 1,993 2,344 2,764 3,269 3,875
Current Assets 4,336 5,950 7,528 10,902 13,438 18,470 22,959 29,136 35,971 53,788 74,579 100,126
Curr. Liabs & Provs. 3,015 3,514 4,878 8,055 6,787 9,228 11,471 14,556 17,971 21,743 25,903 30,485
Investments 155 152 293 531 845 346 1,185 1,185 1,185 1,185 1,185 1,185
Cash and Bank Balances 554 380 351 18,843 5,602 2,191 3,503 2,210 5,105 6,684 13,148 20,716
TOTAL ASSETS 15,061 20,035 26,138 50,138 49,695 60,827 80,111 94,463 116,610 143,785 177,205 217,535 33% 22% 32% 22%

32
Key Ratios - Consolidated
3yr Avg 5yr Avg
Consolidated
FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E FY24E FY25E FY17-19 FY20E-22E FY15-19 FY20E-24E
Debt/equity (xs) 0.5 0.6 0.7 0.3 0.1 0.1 0.2 0.1 0.1 0.0 0.0 0.0 0.1 0.1 0.4 0.1
Asset Turnover Ratio (xs) 3.4 3.5 4.0 4.6 4.0 4.0 3.7 3.8 3.8 4.0 4.4 4.7 4.2 3.8 4.0 4.0
Net working capital
2.8% 3.8% 3.1% 2.2% 4.4% 4.6% 4.6% 4.6% 4.6% 6.8% 8.7% 10.5% 3.8% 4.6% 3.6% 5.9%
/net sales (%)
ROCE (%) 20.6% 21.5% 24.5% 22.4% 23.9% 25.7% 25.5% 27.7% 29.0% 28.6% 28.3% 27.6% 24.0% 27.4% 23.6% 27.8%
ROE (%) 18.5% 19.6% 23.5% 17.9% 18.9% 17.6% 21.2% 22.6% 23.1% 22.5% 22.0% 21.3% 18.1% 22.3% 19.5% 22.3%
PE (xs) 90.3 68.0 52.9 43.3 35.3 29.3
EV/EBITDA (xs) 56.9 43.1 33.9 28.0 23.1 19.3

Consolidated Cash Flow

Consolidated 3yr Cumulative 5yr Cumulative

(Rs. Mn.) FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E FY24E FY25E FY17-19 FY20E-22E FY15-19 FY20E-24E
FCFF (757) (2,271) 878 (192) (4,717) (5,303) (1,459) 3,744 5,281 4,296 11,517 14,573 (10,213) 7,565 (11,605) 23,378
Operating Cash Flow 2,259 2,541 4,886 7,090 6,443 9,031 14,864 19,222 24,763 19,841 24,115 27,230 22,564 58,849 29,991 102,804

Source: Company Data, Equentis Research

33
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