Issue date Basis of allotment Refund/Unblocking st … · Research report written by - Akash Jain, MBA (Financial Markets), Vice – President Research ----- Objects of the issue

Research report written by - Akash Jain, MBA (Financial Markets), Vice – President Research ---------------------------

Avenue Supermarts Ltd. (ASL): “DMart” – Brand to reckon with; Robust play in Retail– “SUBSCRIBE” 6th Mar. 2017

Incorporated in 2000 by the legendary stock market stalwart –

Shri. Radhakishan Damani, today “Avenue Supermarts Limited (ASL) is an

Emerging National Supermarket Chain, with a focus on value-retailing.

According to Technopak, in Fiscal 2016 the company was one of the largest

and the most profitable F&G retailer in India. ASL offers a wide range of

products with a focus on the Foods, Non-Foods (FMCG) and General

Merchandise & Apparel product categories. The company opened their 1st

store in Mumbai, Maharashtra in 2002. As of January 31, 2017, they had

118 stores with Retail Business Area of 0.36 crore sq. ft, located across

various cities in India. As of January 31, 2017, they had 22 Distribution

Centres and 6 Packing Centres in Maharashtra, Gujarat, Telangana and

Karnataka.

ASL stores operate under “D-MART” brand in their markets of operation,

which is registered as a trademark under various classes of products. As of

January 31, 2017, ASL had 118 stores with Retail Business Area of 3.59

million sq.ft, located across 45 cities in Maharashtra (59), Gujarat (27),

Telangana (13), Karnataka (7), Andhra Pradesh (4), Madhya Pradesh (3),

Chhattisgarh (1) and NCR (1), Daman (1) and Rajasthan (2). ASL operates

predominantly on an Ownership Model (including long-term lease

arrangements, where lease period is more than 30 years and the building

are owned by the company) rather than on a rental model. In a new store,

management typically expects 5 percent of EBITDA margin which takes

atleast 2 years to reach this target. The Company boasts of not closing a

single store till date which instills our confidence in the Company’s

business model. It also became the first retailer to cross the billion dollar

market profitably.

In addition, the Company has recently introduced D-Mart Ready wherein

prospective customers can order online and collect products from nearby

location with same price as in other D-Mart stores. At present, this is been

practiced in few stores on a trial basis. The basis of the introduction of this

concept is to compete with existing ecommerce players and test its

capability in uncharted territory. The Company does not intend to heavily

invest in D-Mart ready model and is ready to shut down D-Mart ready if it

turns out to be unprofitable.

Over the period FY12-16, the Company’s topline witnessed a CAGR of

40 percent CAGR and bottomline registered a CAGR of 52 percent.

Investment Rationale and Recommendation

At the upper end of the price band of Rs. 299, the IPO is valued at 36x at

9MFY17 annualized EPS and 59x at FY16 post issue EPS which is at a

discount to its peers and we believe it is fairly priced considering its

profitable growth prospects and better return ratios as compared to its

peers.

With due consideration to factors like a) focus on value retailing to well

defined customer base, b) ownership model for retail stores, c) steady foot

expansion via cluster based expansion approach, d) optimal product

assortment and strong supplier network, e) efficient store operations and

stringent inventory management, f) higher operating efficiency and lean

cost structures; g) strong track record of growth and profitability;

h) positive operating cashflow in last 5 years, i) no closure of store till

date; j) professionally managed organization with entrepreneurial mindset

and approach, we recommend investors to “SUBSCRIBE” the issue.

Issue date March 8 – 10, 2017

Basis of allotment Mar. 16, 2017

Refund/Unblocking

of ASBA account Mar. 17, 2017

Credit of equity

shares in depository

account Mar. 20, 2017

Listing date Mar. 21, 2017

Type of issue

Fresh Issue: Rs. 14.46 bn

Offer for sale: Rs. 4.24bn equity by

promoter group

Face Value Rs. 10

Price Band Rs. 295 – Rs. 299 per share

Lot size 50 equity Shares & multiple of

50 equity shares thereafter

Equity shares post

issue

624.08 mn equity shares at upper

end of price band

Issue structure

QIB: 50%

Retail: 35%

Non – Institutional: 15%

Post issue market

cap Rs. 186.6 bn at upper price band

Book Running Lead

Managers

Kotak, Axis Capital, Kotak

Mahindra Capital, Edelweiss

Financial, HDFC Bank, ICICI

Securities, Inga Capital, JM

Financial, Motilal Oswal

Investment Advisors, SBI Capital

Markets

Registrar to the issue Link Intime India Pvt. Ltd.

Y/e 31 Mar (Rs. mn) 9MFY17 FY16 FY15

Revenue 87,840 85,881 64,394

EBITDA 7,889 6,815 4,772

OPM (%) 8.98 7.94 7.41

PAT 3,875 3,188 2,117

PAT (%) 4.41 3.71 3.29

Equity Capital 5615.43 5615.43 5615.43

Post issue EPS (Rs.)* 8.27* 5.1 3.39

Networth (Rs. mn) 19,054 15,180 11,992

Total debt 12,421 10,382 7,575

Debt/equity (x) 0.65 0.68 0.63

P/E (x) at Rs. 299 36 59 91

RoE (%) 20.34 21.00 17.65

Source: RHP, Ajcon Research, * Annualised EPS


Objects of the issue

a) Offer for sale by selling shareholders – RK Damani and family members

b) Repayment or prepayment of a portion of loans and redemption or earlier redemption of NCDs availed by the

Company - Rs. 10.80 bn.)

The company has entered into various financing arrangements with banks, financial institutions and other entities. The

borrowing arrangements entered into by the company include borrowings in the form of terms loans, borrowings through

issue of NCDs, issue of commercial papers and fund based and non-fund based working capital facilities. As on August 31,

2016, the amount outstanding under the borrowing arrangements entered into by the company was Rs.15 bn on a

standalone basis. The company intends to utilize Rs.10.80bn of the Net Proceeds towards repayment or prepayment of term

loans availed by the company and redemption or earlier redemption of NCDs availed by the Company.

c) Construction and purchase of fit outs for new stores (Rs. 3. 66 bn.)

As of January 31, 2017, the company had 118 stores located across 45 cities in Maharashtra (59), Gujarat (27), Telangana

(13), Karnataka (7), Andhra Pradesh (4), Madhya Pradesh (3), Chhattisgarh (1) and NCR (1), Daman (1) and Rajasthan (2).

Their store count has grown from 75 to 110 in terms of number of stores over last 3 Fiscals. The company intend to further

enhance their position in the retail supermarket business in Maharashtra and Gujarat by increasing their market

penetration and expanding their store network in these states. They also intend to strengthen their store network in Andhra

Pradesh, Telangana, Madhya Pradesh, Karnataka, Chhattisgarh, Tamil Nadu and northern India.

As a part of their strategy, the company propose to utilise Rs.1.88 bn out of the Net Proceeds towards purchase of fit outs for

the new stores with an aggregate built-up area of 2,100,000 sq. ft. and utilise Rs.1.78 bn to undertake construction of new

stores with an aggregate built-up area of 900,000 sq. ft. to be undertaken in Fiscals 2018, 2019 and 2020.

The company typically set up new stores in 3 formats being:

a) Greenfield stores where the land is purchased by the company and construct the store and apply fit outs;

b) Buyout stores where the company purchase the land with ready building and apply fit outs.

c) Occupy the property on leasehold basis or rental basis.

d) General corporate purposes.

Company and Promoters’ background

Avenue Supermarts Ltd (“ASL”) was incorporated as a Private Limited Company on May 12, 2000, at Mumbai, Maharashtra as a

private limited company. Subsequently, the name of the company was changed to Avenue Supermarts Limited due to conversion

from a private company to a public company on February 1, 2011.

Ramesh S. Damani is the Chairman and an Independent Director of the company. He has over 18 years of experience in

Securities Market.

Ignatius Navil Noronha is the Managing Director of the company. He has over 20 years of experience in the Consumer Goods

Industry. He has been involved in the formation and execution of the overall strategy encompassing the entire spectrum of the

business. His key responsibilities included building the team from its formative days and grooming them, instituting appropriate

processes and technology and acquiring and setting up of the stores in new territories. His key focus has been to articulate and

deliver the unique positioning of the brand name “Dmart”

Ramakant Baheti is the Chief Financial Officer and an Executive Director of the company. He has 19 years of experience in

Finance. Presently, his functions in the company include formulation and execution of finance and legal strategy including

finance control, financial planning and accounting, identification and finalisation of store locations and property due diligence

Elvin Machado is an Executive Director of the company. He has over 28 years of experience in the Sales and Marketing. He is

responsible for Real Estate acquisitions made by the company. Presently, his functions in the company include business

development involving property acquisition, due diligence, coordination and liasoning with government agencies and local

bodies

Manjri Chandak is a Non-Executive Director of the company. She has over 7 years of experience in the Retail Industry.

Chandrashekhar B. Bhave is an Independent Director of the company. He has over 20 years of experience in the State and

Central Administrative Services and Securities Regulation. He has served as the Chairman of SEBI during the years 2008 to 2011.

Research report written by - Akash Jain, MBA (F ---------------------------

Other Key Management Personnel

Udaya Bhaskar Yarlagadda is the Chief Operating Officer

and business development. Presently, his functions include managing and leading store operations, merchandising, private

labels, marketing and store maintenance.

Narayanan Bhaskaran is the Chief Operating Officer

He has over 22 years of experience in corporate secretarial functions, operations and human resource management. Presently,

he is managing supply chain management, corporate legal functions and staples business.

Dheeraj Kampani is the Vice President -Buying and Merchandising of the company. He has over 15 years of experience in sales

and retail store management. Presently, he heads the buyin

Hitesh Shah is the Associate Vice President -

and retail store management. Presently, his functions include day to day operation

Ashu Gupta is the company secretary of the company. She has over 10 years of experience in corporate, legal and secretarial

functions. She has joined the company on July 3, 2007.

Industry overview – Retail forms around 30 percent of India’s GDP

, MBA (Financial Markets), Vice – President Research

is the Chief Operating Officer - Retail, of the company. He has over 18 years of experience in sales


is the Chief Operating Officer -Supply Chain Management and Production of the company.


supply chain management, corporate legal functions and staples business.

Buying and Merchandising of the company. He has over 15 years of experience in sales

and retail store management. Presently, he heads the buying and merchandising function of the company.

- Operations of the company. He has over 21 years of experience in sales, marketing

and retail store management. Presently, his functions include day to day operational management of the stores and compliances.

is the company secretary of the company. She has over 10 years of experience in corporate, legal and secretarial

functions. She has joined the company on July 3, 2007.

forms around 30 percent of India’s GDP

Retail, of the company. He has over 18 years of experience in sales


Supply Chain Management and Production of the company.


Buying and Merchandising of the company. He has over 15 years of experience in sales

g and merchandising function of the company.

Operations of the company. He has over 21 years of experience in sales, marketing

al management of the stores and compliances.

is the company secretary of the company. She has over 10 years of experience in corporate, legal and secretarial


State where D-Mart is present account for ~48% of retail spend


Mart is present account for ~48% of retail spend


Competitive Strengths

Value retailing to a well defined target consumer base

The business model is based on the concept of offering value retailing to their customers using the Every Day Low Cost/ Every Day

Low Price (“EDLC/EDLP”) strategy which is based on offering low prices on an everyday basis by achieving low procurement and

operations cost rather than as special promotion limited to certain products or to a particular day, week or any other specific period

in the year. The EDLC/EDLP strategy requires the company to minimise the costs of procurement, supply and operation to achieve

low prices for their customers on a daily basis.

The majority of the products stocked by the company are essential products forming part of basic rather than discretionary

spending, due to which the business is not materially affected by seasonality or temporarily depressed macro-economic conditions.

The company typically follows their pricing strategy for all their products, relying on the strong supplier network, efficient supply

chain management for procurement and careful product assortment.

Steady footprint expansion using a distinct store acquisition strategy and ownership model

The company’s business has grown rapidly in recent years, primarily through expansion of their store network from 1 store in 2002

to 118 stores as of January 31, 2017 across 9 states in India, concentrated in western and southern India.

ASL has expanded their footprint using a cluster-based approach. They have strengthened their existing presence in certain regions

by opening new stores within a radius of their existing stores and distribution centres. Such clusters have also led to increased

penetration and presence in under-served markets, higher cost efficiency due to economies of scale achieved in the supply chain and

inventory management, and greater and concentrated brand visibility due to focused implementation of marketing and advertising

initiatives.

ASL has posted consistent growth in their ROE despite owning the real estate underlying several of their stores. Owning the real

estate on which the stores are built or entering into long-term lease arrangements has helped ASL control their fixed costs per store.

Deep knowledge and understanding of optimal product assortment and strong supplier network

ASL sell a wide range of goods and merchandise across their product categories. ASL focus on using their deep knowledge of the

clusters and regions in which they operate to customise the product assortment in each store keeping in mind local demands and

preferences. ASL has an extensive network of suppliers and they endeavour to source their products from regions where they are

widely available or manufactured to minimise the procurement costs. ASL operate a standardised procurement system and procure

most of their products on a purchase-order basis ensuring procurement flexibility at competitive prices.

High operating efficiency and lean cost structures through stringent inventory management using IT systems

ASL has benefitted from their in-depth understanding of local needs and the ability to respond quickly to changing consumer

preferences. For this, ASL use tier IT systems for procurement, sales and inventory management which enables them to identify and

quickly react to changes in customer preferences by adjusting their products available, brands carried, stock levels and pricing in

each of their stores and effectively monitor and manage the same. The IT systems also support the cash management, in-store

systems, logistics systems, human resources and other administrative functions.

The Inventory Turnover Ratio was 11.56 (not annualised), 14.18, 14.03 and 14.32, respectively in the 9 months period ended

December 31, 2016 and in Fiscals 2016, 2015 and 2014, respectively.

Strong promoter background and an experienced and entrepreneurial management team

The company business is consumer-driven. The strong promoter background and an experienced senior management team have

helped them to offer high standards of customer service and a pleasant shopping experience at their stores. One of their

Promoters, Radhakishan S. Damani, brings to their company his vision and leadership which has been instrumental in their

success. The experienced management team and motivated and well-trained employees have enabled them to successfully establish

a customer-oriented corporate culture, providing a foundation to maintain and enhance their long-term competitiveness.

Key members of the senior management team including Ignatius Navil Noronha, the Managing Director (who has over 20 years of

experience in the FMCG sector) and Ramakant Baheti, the Chief Financial Officer and an Executive Director on the Board (who has

over 19 years of experience in the finance function) are dedicated to the sustainable growth of the business. The stable, senior

management team has helped them successfully implement the development and operating strategies and provide quality service to


their customers over the years. The company has followed transparent management policies and have implemented employee stock

option schemes over the years.

Strong track record of growth and profitability

According to Technopak, in Fiscal 2016, ASL is the largest and the most profitable F&G retailer in India. Their total store count has

grown from 75 in Fiscal 2014 to 110 in Fiscal 2016. ASL has expanded their store network from 1 store in 2002 to 118 stores as of

January 31, 2017.

Their total bill cuts, on a standalone basis, increased from 3.18 crore in Fiscal 2012 to 4.31 crore in Fiscal 2013, 5.34 crore in Fiscal

2014, 6.72 crore in Fiscal 2015, 8.47 crore in Fiscal 2016 and 8.01 crore in the 9 months period ended December 31, 2016,

respectively.

Key Business Strategies Strengthen the market position by expanding the store network

The company intends to further enhance their position in the retail supermarket business in Maharashtra and Gujarat by increasing

their market penetration and expanding the store network in these states. They also intend to strengthen the store network in

Andhra Pradesh, Telangana, Madhya Pradesh, Karnataka, Chhattisgarh and northern India. ASL has opened new stores each in NCR,

Daman and Rajasthan in Fiscal 2017. ASL propose to utilise a portion of the Net Proceeds for setting up new stores aggregating to a

built-up area of 2,100,000 sq. ft. over Fiscals 2018, 2019 and 2020.

The total store count grew from 75 in Fiscal 2014 to 110 in Fiscal 2016 while the Retail Business Area grew from 2.14 million sq. ft.

to 3.33 million sq. ft. over this period. ASL will continue to adopt a methodical and approach in evaluating and selecting suitable

locations for the establishment of new stores, such as local population density, accessibility and proximity to their competitors.

Enhancing sales volumes by continuing to prioritise customer satisfaction

The company strategy is to provide their customers with a comprehensive range of products at value for money prices and maintain

optimal customer service standards. In order to maintain and enhance their competitive position, ASL will continue to offer their

products at everyday low prices achieved through their low procurement, supply, operational and other costs. ASL will continue to

focus on optimal product assortment in each cluster of their operation keeping in mind the local needs and preferences. ASL will

continue to introduce new products depending on customer needs at one or several of their stores.

ASL endeavour to provide a one stop shopping experience. All their stores are air conditioned and they aim to provide a pleasant

ambience and functional store layout. ASL has installed computerised billing points coupled with convenient payment options

including, credit and debit cards, which provide greater flexibility and convenience to their customers.

Continue improving the operating efficiency and supply chain management

The business model and pricing strategy require ASL to maintain high levels of operational efficiency on a consistent basis. Further,

the supply chain management is critical to their business. The supply chain management involves planning, merchandising, sourcing,

standardisation, vendor management, logistics, quality control, pilferage control,

replacement and replenishment.

ASL plan to further improve their operating efficiency and ensure efficient supply chain management by: continuing to refine the

store operating systems based on the performance of the stores and feedback from their customers and local management teams;

Investing further in the IT and data management systems to improve productivity and time savings thereby increasing the operating

efficiency; continuing to strengthen the relationships with their suppliers through co-operation and closer coordination; expanding

and upgrading the existing distribution centres to improve the efficiency of the inventory and supply management ; and continuing

to absorb best industry practices.

Owning the real estate for majority of their stores helps ASL control their fixed costs per store and helps them execute their

EDLC/EDLP strategy effectively and ASL will continue to follow this strategy.

ASL will continue to strive to improve their Fixed Asset Turnover which was 3.46 (not annualised), 3.95, 3.96 and 3.72 for the nine

months period ended December 31, 2016 and for Fiscals 2016, 2015 and 2014, respectively.


Cluster based approach for expansion

Operating and Financial Summary


ed approach for expansion









Disclaimer

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Subject to the restrictions mentioned in above paragraph, We and our affliates, officers, directors, employees and their

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Accordingly, neither Ajcon Global Services Ltd. nor Research Analysts have any material conflict of interest at the time of

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It is confirmed that Akash Jain – MBA (Financial Markets) or any other Research Analysts of this report has not received any

compensation from the company mentioned in the report in the preceding twelve months. Compensation of our Research

Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.


Ajcon Global Services Ltd. or its subsidiaries collectively or Directors including their relatives, Research Analysts, do not own

1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the

publication of the research report.

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do not serve as an officer, director or employee of the companies mentioned in the report.

Ajcon Global Services Ltd. may have issued other reports that are inconsistent with and reach different conclusion from the

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market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on Ajcon Global Services Ltd. by any Regulatory Authority

impacting Equity Research Analysis activities.

Analyst Certification

I, Akash Jain MBA (Financial Markets), research analyst, author and the names subscribed to this report, hereby certify that

all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. I also

certify that no part of compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view (s) in this report.

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For research related queries contact: Mr. Akash Jain – Vice President (Research) at [email protected], 022-67160431 (D) CIN: L74140MH1986PLC041941

SEBI registration Number: INH000001170 as per SEBI (Research Analysts) Regulations, 2014. Website: www.ajcononline.com

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Documents

Issue date Basis of allotment Refund/Unblocking st … · Research report written by - Akash Jain, MBA (Financial Markets), Vice – President Research ----- Objects of the issue