KEY DATA Ace of the pack still; time to evolve€¦ · 25/09/2020 · -Big Bazaar -Hypercity DMart Spencer's Hyper Star Bazaar More Megastore Cash & Carry Reliance Market Best Price

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KEY DATA

Rating HOLD Sector relative Overweight Price (INR) 2,049 12 month price target (INR) 2,157 Market cap (INR bn/USD bn) 1,327/18.1 Free float/Foreign ownership (%) 2,026.6/620.7

What’s Changed Target Price

Rating/Risk Rating ⚊

INVESTMENT METRICS

Ace of the pack still; time to evolve

Avenue SuperMarts (DMart) has aced the offline retail segment via its execution prowess, a rarity in food & grocery (F&G) retailing. Organized F&G has clocked stupendous growth and remains the biggest migration play in retail. In fact, Reliance Retail’s takeover of Future Retail has further consolidated the industry, entrenching these two strong players deeper. Our bottom-up analysis reveals DMart has

potential to open ~400 stores more (FY20: 214; FY20–22E target: 60).

In online retail, DMart has been conservative hitherto and has a lot of catch-up to do with peers. In light of the hastened online migration and JioMart’s aggression, a compelling/aggressive strategy is imperative for DMart’s future growth. Maintain ‘HOLD’.

FINANCIALS (INR mn)

Year to March FY20A FY21E FY22E FY23E

Revenue 2,48,702 2,26,625 3,23,563 3,95,184

EBITDA 21,283 16,226 27,746 34,282

Adjusted profit 13,010 10,425 18,209 22,595

Diluted EPS (INR) 20.1 16.1 28.1 34.9

EPS growth (%) 38.9 (19.9) 74.7 24.1

RoAE (%) 15.6 9.0 14.0 15.0

P/E (x) 110.7 138.1 79.1 63.7

EV/EBITDA (x) 67.6 87.9 51.5 41.5

Dividend yield (%) 0 0 0 0

PRICE PERFORMANCE

F&G retailing still lucrative, demands execution; DMart aces

F&G remains the biggest value migration play in retail (merely 4% organised share).

Despite the humungous opportunity, most players have failed on execution, given

wafer-thin margins. DMart is among the few to have profitably mastered the game

via its locations and ELDP/EDLC focus, which have created a virtuous network loop.

The Reliance Retail-Future Group deal has consolidated the market further, making

it better for incumbents. What would have been worrisome is if a company with an

unproven execution record were up against Reliance plus Future Retail. DMart’s

execution has been proficient, which makes it highly probable that it would also

partake of the benefits of this opportunity with Reliance.

E-commerce scale-up imperative for DMart; JioMart now aggressive

F&G will continue to be dominated by offline/brick & mortar (B&M) in the near

future (13% of organised F&G by FY25E). However, given the pace of e-commerce

growth, it is not too long before it becomes sizeable. We believe time is ripe for

players to get the model right before scaling it up. While DMart has cracked B&M

retailing, it has treaded cautiously in online retailing. A comparison with other

providers shows DMart Ready must ramp-up in many categories, if it has to replicate

its offline success online. Besides, with JioMart scaling up fast, it is imperative for

DMart to get its online model in place.

Explore:

Outlook and valuation: All priced in; maintain ‘HOLD’

We remain positive on DMart given the long-term structural play, lean cost

structure, strong liquidity support and a superior execution record. In addition, its

innovation and agility to respond to change (DOW, reduction in discounting, etc)

gives it an advantage over other retailers. However, owing to lofty valuations, we

maintain ‘HOLD/SP’ with a TP of INR2,157 (50x FY22E EV/EBITDA). The stock is

trading at 51.5 FY22E EV/EBITDA. Upside risks to our thesis stem from faster-than-

expected store expansion and increasing traction in DMart Ready. Downside risk

remains from higher aggression from competitors and waning of DMART’s EDLP

moat.

-30

5

40

75

110

145

Sales Growth(%)

EPS Growth(%)

RoE(%)

PE(x)

Retail DMART IN Equity

25,000

28,400

31,800

35,200

38,600

42,000

1,700

1,870

2,040

2,210

2,380

2,550

Sep-19 Dec-19 Mar-20 Jun-20

DMART IN Equity Sensex

India Equity Research Retail September 23, 2020

AVENUE SUPERMARTS COMPANY UPDATE

Nihal Mahesh Jham Abneesh Roy Prateek Barsagade +91 (22) 6623 3352 +91 (22) 6620 3141 +91 (22) 4063 5407 [email protected] [email protected] [email protected]

Corporate access

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Edelweiss Securities Limited

2 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson FirstCall, Reuters and Factset

Financial Statements

Income Statement (INR mn) Year to March FY20A FY21E FY22E FY23E

Total operating income 2,48,702 2,26,625 3,23,563 3,95,184

Gross profit 37,673 33,087 49,182 60,068

Employee costs 4,561 4,759 5,759 7,034

Other expenses 6,064 6,345 8,413 10,275

EBITDA 21,283 16,226 27,746 34,282

Depreciation 3,744 3,709 4,176 5,053

Less: Interest expense 691 507 522 538

Add: Other income 600 1,926 1,297 1,515

Profit before tax 17,448 13,937 24,344 30,207

Prov for tax 4,438 3,512 6,135 7,612

Less: Other adj 0 0 0 0

Reported profit 13,010 10,425 18,209 22,595

Less: Excp.item (net) 0 0 0 0

Adjusted profit 13,010 10,425 18,209 22,595

Diluted shares o/s 648 648 648 648

Adjusted diluted EPS 20.1 16.1 28.1 34.9

DPS (INR) 0 0 0 0

Tax rate (%) 25.4 25.2 25.2 25.2

Important Ratios (%) Year to March FY20A FY21E FY22E FY23E

Store count 214.0 224.0 269.0 309.0

Store addition 38.0 10.0 45.0 40.0

Retail space (mn sq ft) 7.8 8.3 10.3 12.1

EBITDA margin (%) 8.6 7.2 8.6 8.7

Net profit margin (%) 5.2 4.6 5.6 5.7

Revenue growth (% YoY) 24.3 (8.9) 42.8 22.1

EBITDA growth (% YoY) 30.3 (23.8) 71.0 23.6

Adj. profit growth (%) 44.2 (19.9) 74.7 24.1

Assumptions (%) Year to March FY20A FY21E FY22E FY23E

GDP (YoY %) 4.8 (6.0) 7.0 0

Repo rate (%) 4.4 3.5 3.5 0

USD/INR (average) 70.7 75.0 73.0 0

SSSG (%) 10.9 (11.0) 27.0 9.0

COGS (%) 84.9 85.4 84.8 84.8

Staff costs (%) 1.8 2.1 1.8 1.8

Other expense (%) 30.8 33.0 30.0 30.0

EBITDA margin (%) 4.7 5.3 4.8 4.7

Inventory days 8.6 7.2 8.6 8.7

Valuation Metrics Year to March FY20A FY21E FY22E FY23E

Diluted P/E (x) 110.7 138.1 79.1 63.7

Price/BV (x) 13.0 11.9 10.3 8.9

EV/EBITDA (x) 67.6 87.9 51.5 41.5

Dividend yield (%) 0 0 0 0

Source: Company and Edelweiss estimates

Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E

Share capital 6,478 6,478 6,478 6,478

Reserves 1,04,320 1,14,744 1,32,954 1,55,548

Shareholders funds 1,10,797 1,21,222 1,39,431 1,62,026

Minority interest 5 5 5 5

Borrowings 37 37 37 37

Trade payables 4,335 4,242 5,412 6,427

Other liabs & prov 3,357 3,357 3,357 3,357

Total liabilities 1,20,762 1,31,204 1,50,701 1,74,432

Net block 58,698 59,704 76,871 91,087

Intangible assets 783 783 783 783

Capital WIP 3,644 4,000 4,800 5,000

Total fixed assets 63,124 64,486 82,454 96,869

Non current inv 0 0 0 0

Cash/cash equivalent 1,079 13,791 12,139 18,168

Sundry debtors 196 310 443 487

Loans & advances 1,091 1,200 1,200 1,200

Other assets 21,112 17,706 22,760 27,752

Total assets 1,20,762 1,31,204 1,50,701 1,74,432

Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E

Reported profit 17,448 10,425 18,209 22,595

Add: Depreciation 3,744 3,709 4,176 5,053

Interest (net of tax) 691 2,433 1,818 2,053

Others (395) 0 0 0

Less: Changes in WC (3,762) 3,703 (1,900) (1,899)

Operating cash flow 12,801 16,757 16,169 20,189

Less: Capex 17,122 4,356 21,050 18,200

Free cash flow (4,320) 12,401 (4,881) 1,989

Key Ratios Year to March FY20A FY21E FY22E FY23E

RoE (%) 15.6 9.0 14.0 15.0

RoCE (%) 21.2 12.4 19.1 20.4

Inventory days 31 35 27 27

Receivable days 1 0 0 0

Payable days 8 8 6 6

Working cap (% sales) 0 0 0 0

Gross debt/equity (x) 0 0 0 0

Net debt/equity (x) 0 (0.1) (0.1) (0.1)

Interest coverage (x) 25.4 24.7 45.2 54.4

Valuation Drivers Year to March FY20A FY21E FY22E FY23E

EPS growth (%) 38.9 (19.9) 74.7 24.1

RoE (%) 15.6 9.0 14.0 15.0

EBITDA growth (%) 30.3 (23.8) 71.0 23.6

Payout ratio (%) 0 0 0 0


AVENUE SUPERMARTS

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F&G retailing: Still lucrative; eventually

about execution

Following Reliance Retail’s acquisition of Future Retail, a question has again arisen:

what would be its impact on DMart? What remains unchanged though is the

opportunity in India’s F&G retailing. We believe the opportunity is big enough to

accommodate two well-funded players. The joker in the pack is the terms of trade

from FMCG players: can they undermine DMart’s Everyday Low Price (EDLP) moat?

Opportunity size unchanged; now a two strong player market

Organised F&G retailing has a market share of merely 4%, which is the lowest among

consumption categories. The organised F&G segment has clocked highest growth (reflected

in companies’ growth too) and is expected to remain the highest growing too. F&G category

remains the biggest value migration play in retail.

Organised F&G Retail’s growth trajectory to continue

Source: Company, Technopak, Edelweiss Research

F&G: Superior growth prospects in consumption basket

Source: Company, Technopak, Edelweiss Research

0

1,200

2,400

3,600

4,800

6,000

FY16 FY19 FY25E

(IN

R b

n)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Food &Grocery

Home &Living

Footwear Pharmacy Apparel Consumerdurable

Total Organized

(%)

FY16-19 FY19-25E

For FMCG companies, organized

channel (modern trade plus e-

commerce) makes up ~15% of market.

Organised retail is only ~4% of market

as a much higher portion of

vegetables and pulses is unorganised.

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Growing well, but organized F&G penetration lags other categories

Source: Company, Technopak , Edelweiss Research

Note penetration for FY19 for categories ex-F&G

F&G retailing is operations-heavy and scale/throughput are critical for success given wafer-

thin margins. The factors that have driven throughput in the past can be summed up as a

combination of: i) right locations and formats; ii) competitive pricing led by quick working

capital release for vendors and ii) an extremely lean cost structure. Thus, despite the

opportunity, most players have failed on execution.

Many competitors, multiple formats

Formats Reliance Future

Retail

Avenue

Supermarket Spencer Trent

Samara &

Amazon Amazon Flipkart

Convenience

stores

Reliance

Smart

Point

-Easy Day

-Nilgiris

Spencer's

Neighborhood

Supermarkets Reliance

Fresh Food Bazaar Nature's Basket Star Market More

Hypermarkets Reliance

Smart

-Big Bazaar

-Hypercity DMart

Spencer's

Hyper Star Bazaar

More

Megastore

Cash & Carry Reliance

Market Best Price

B2B marketplace JioMart Flipkart

Wholesale

E-commerce JioMart Tathastu DMart Ready Spencers.in My247market Via Amazon.in

-Amazon

Pantry

-Amazon

Fresh

Flipkart

Supermarket

Source: Company, Edelweiss Research

0

5

10

15

20

25

30

35

F&GFY16

F&GFY19

F&GFY22E

F&GFY25E

Jewelry &Watches

Consumerdurable

Apparel Footwear Pharmacy Home &Living

Others

(%)

Organized penetration - FY19 (%)


AVENUE SUPERMARTS


Despite multiple players, market concentrated

Note: Hypercity was acquired by Future Retail.

Only three players managed to scale up

Source: Company, Edelweiss Research, For More – revenues for FY19

DMart is one of the few to have profitably mastered the game, from choosing the right

locations to creating its network loop. The key contributors in our view:

Operational efficiency plus better terms of trade from FMCG companies given the

lower payable days

Passing the price benefit to consumers and insisting on having the cheapest basket

Leveraging price to attract footfall (took share from unorganized players)

Highest revenue per square foot as result of smart mix of SKUs and products

Higher efficiencies in terms of all cost line items.

The key point we make here is that DMart is able to achieve its EDLP moat only because it has

thoroughly imbued the concept of EDLC as well. And, with EDLC in place, the company has

allowed every store to drop prices or match them, or even offer lower prices than local

competition, if needed.

0

20

40

60

80

100

FY12 FY16 FY19

(%)

Future Group Reliance D'Mart Spencer's More Hypercity* Star Others

0

80

160

240

320

400

Reliance AvenueSupermarkets

Future Group More Spencer Trent

(IN

R b

n)

AVENUE SUPERMARTS



Profitability: DMart’s best in the game

Reliance DMart More Spencer Star Bazaar

Revenue (INR bn) 346 249 43 26 12

Revenue/Sq.ft 45,424 36,307 20,268 15,975 24,625

Gross Margin (%) NA 15.1 19.7 21.2 19.3

Others expenses (%) NA 6.6 20.3 18.1 25.4

EBITDA Margin (%) 7.8 8.6 -0.6 3.1 -6.1

RoCE (%) NA 20.8 -33.2 0.7 NA

Debt/EBITDA NA 0.0 NM 0.9 NA

Source: Company, MCA, Edelweiss Research

With organised F&G retailing moving from a three-player market to a duopoly, the industry

structure only gets better for incumbents. What would have been worrisome is if a company

with an unproven execution record were up against a combined entity such as Reliance plus

Future Retail. But DMart has scripted an enviable execution track record over the last two

decades and that implies it would make the most of the organised retailing opportunity

along with Reliance.

Reliance’s focus was anyways turning towards JioMart. The Future Retail acquisition will

possibly see Reliance focusing on first optimizing the store count and getting profitability back

rather than continuing expansion.

Can terms of trade offered by FMCG players change?

Following the Future Retail acquisition, Reliance will make up ~9% of FMCG companies’ top

line versus ~6% earlier. Hence, we do not expect FMCG companies’ bargaining power to be

impacted. Besides, critically for DMart, terms of trade should not be very different, given both

are relatively sizeable and important to these companies. However, we will keep close tabs

on terms of trade for these companies.

In terms of private labels, Reliance has a keener higher focus and is likely to introduce its own

brands. DMart however has a limited focus on private labels, mainly in categories such as

staples. Reliance, on the other hand, has a private label presence in staples as well as snacking.

Store expansion: Still a lot of potential in existing clusters

DMart has been conservative with expansion; it has been more a question of the company’s

prudence rather than opportunity. It was conservative in the earlier decade (55 stores over

FY02–12) when most other grocery retailers expanded aggressively, but expanded

significantly thereafter.

DMart follows a cluster-based store expansion strategy. It is evident from its store expansion

history that the states of Maharashtra, Gujarat, Telangana and AP constitute the core cluster.

Karnataka, MP and Chhattisgarh, TN and Rajasthan are upcoming clusters.

Cluster-based approach to expansion

Category State FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Maharashtra 34 40 46 50 58 60 62 70 76

Gujarat 14 14 17 22 26 29 30 34 37

Telengana & AP 4 5 7 10 16 21 29 32 41

Karnataka 3 3 5 5 6 10 12 16 20

MP & Chattisgarh 2 4 5 9 9 16

TN 1 3 4 10

Rajasthan 3 5 5 7

Punjab - 3 4 5

NCR 1 1 1 1

Daman 1 1 1 1

Total 55 62 75 89 110 131 155 176 214

Core

cluster

Upcoming

cluster

New

ventures


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DMart’s presence in Indian states by GDP and population


DMart has till now only managed to etch a sizeable presence in four Indian states, namely,

Maharashtra, Gujarat, AP and Telangana. Even in its core market of Maharashtra, only ~6%

of total market is currently organised, implying big room for expansion.

Even if we consider the current penetration in its core cluster (~1 store per 2mn of

population), DMart has the potential to open 350–400 stores in other geographies (ex-core

cluster) at present. The states it has a presence in only comprise ~50% of population/~65%

of GDP.

Key metrics by cluster

Population (mn) Stores Population/Store (Mn)

Core cluster 280 154 1.8

Upcoming cluster 341 53 6.4

New ventures 49 7 7.1

Not present 700 - -

Total 1,371 214


Core cluster

31%

Upcoming cluster

27%

New ventures

7%

Not present

35%

Core cluster

20%

Upcoming cluster

25%New

ventures4%

Not present

51%

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Online leg-up imperative as JioMart

preps up Despite the growth potential in online (40% CAGR FY19–25E), India’s F&G market will remain

offline/B&M-focused (Etail to reach 13% of organized F&G by FY25E). That said, omni

capabilities will be critical as, given its pace of growth, it is not too long before it becomes

sizeable. Hence, we argue the time is ripe to get the model right before scaling it up.

India to remain a predominantly B&M market


At present, DMart Ready is serving only Mumbai, although the company has plans to roll out

the service to other cities soon. During the lockdown, DMart had extended e-commerce

services to other cities, but those have been rolled back since.

DMart’s execution has been spectacular and best in class in B&M retailing, but the company

is still taking cautious steps in online retailing via DMart Ready. The channel doesn’t have a

history of profitability, a probable reason the company might be wary thereof. A comparison

with other online providers shows DMart will have to ramp up across many categories, if it

has to replicate its offline success online.

DMart yet to ramp up presence and service offerings

Platform Cities App Download

(mn)

Minimum

Order (INR)

Delivery fee

(INR) Delivery Timeline

Card

Tie-

ups

Membership Daily Order

('000)

Jiomart 200 5+ 0 0 2-3 Days Yes Yes 400

Amazon Pantry 300 NA 200 0-59 Next Day Yes Yes 100+

Big Basket 30 10+ None 0-50 Same Day + Express Yes Yes 250-300

Grofers 27 10+ None 0-49 Next Day Yes Yes 100+

Flipkart Supermart 26 NA 600 0-50 Next Day Yes Yes NA

DMart Ready 1 5+ 1000 49 2-5 days No No NA

Source: Company, Edelweiss Research, Google Playstore, Press articles

A comparison of prices and SKUs across platforms shows JioMart has a much sharper pricing

approach than others in staples, wherein it has a notable private label presence across most

categories. DMart remains cheapest in the discretionary segment, with high competition

from JioMart in the Personal and home care segment. SKUs at Amazon Pantry and Flipkart

Supermart are much fewer than DMart Ready and Big Basket; even JioMart has fewer options

than DMart Ready in the sampled categories.

0

1,200

2,400

3,600

4,800

6,000

FY19 FY25E

(IN

R b

n)

Organized F&G retailing

Etail Offline

CAGR: 40%


AVENUE SUPERMARTS


Comparison of pricing basket

Products SKU DMart

Ready JioMart

Big

Basket

Amazon

Pantry

Flipkart

Supermart Cheapest

Staples

Aashirvaad Atta - Whole Wheat 10 kg 375 375 386 388 389 DMart Ready

Rice (Kolam - Private Label) 5 kg 299 270 310 295 307 JioMart

Rice (India Gate - Rozaana Basmati) 5 kg 345 345 379 349 380 DMart Ready

Tur Dal (Basic - Private Label) 1 kg 112 116 118 112 119 DMart Ready

Moong Dal (Basic - Private Label) 1 kg 135 117 111 140 161 Big Basket

Fortune Sunlite Refined Sunflower Oil 1 L 121 119 125 119 118 Flipkart Supermart

Tata Salt 1 kg 18 18 17 18 20 Big Basket

Sugar (Basic - Private Label/Basic) 1 kg 48 45 45 46 52 JioMart

Sub Total 1,453 1,405 1,491 1,467 1,546 JioMart

Personal and home care

Santoor Sandal and Turmeric Soap (pack of 4) 150 gms/unit 39 39 42 40 NA DMart Ready

Lux Soap (pack of 3) 150 gms/unit 30 29 36 36 NA JioMart

Dove Shampoo - Daily Shine 340 ml 195 180 218 200 218 JioMart

Parachute Coconut Oil 200 ml 72 73 78 85 75 DMart Ready

Colgate Active Salt Toothpaste 300 gm 127 124 124 119 138 Amazon Pantry

Tide Plus - Jasmine & Rose 2 kg 182 172 172 211 212 JioMart

Surf Excel Matic Top Load 4 kg 774 774 999 999 NA DMart Ready

Vim Dishwash Bar 200 gms/unit 14 13 13 13 20 Big Basket

Harpic Power Plus 1 L 148 153 139 151 160 Big Basket

Sub Total 1,580 1,557 1,821 1,853 823 Flipkart Supermart

Discretionary

Haldiram Aloo Bhujia 150 gms 31 33 35 35 35 DMart Ready

Cadbury Bournvita 1 kg 365 365 390 375 446 DMart Ready

Britannia Good Day Cashew Cookies 200 gms 30 30 40 NA 35 DMart Ready

Amul Cheese/Other brands 200 gms 113 113 122 NA 120 DMart Ready

Amul Butter 100 gms 45 44 43 NA 49 Big Basket

Gowardhan Classic Paneer 200 gms 77 75 97 NA 85 JioMart

Maggi/Kissan Tomato Ketchup 500 gms 90 92 100 100 105 DMart Ready

Maggi Masala Noodles 70 gms 11 11 11 11 11 Big Basket

Brooke Bond Red Label 250 gms 112 125 106 120 120 Big Basket

Nescafe Classic 50 gms 125 125 140 156 NA DMart Ready

Sub Total 999 1,013 1,083 797 1,006 Amazon Pantry

Total 4,032 3,975 4,395 4,117 3,374


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Jiomart: Significant improvement in user interface

Similar to B&M retailing, Reliance’s Jiomart remains the biggest potential disruptor online too.

To recall, Jiomart is the online extension of Reliance Retail’s grocery business. The company

plans to: i) supply grocery online; and ii) act as a distributor to retail shops (kirana) in the

longer run. Reliance has already started offering online delivery in more than 200 cities and

uses WhatsApp as a platform to order along with its recently launched app. JioMart’s peak

daily orders are already higher than peers.

Jiomart app interface - Ease of use comparable to other grocery apps

Source: Company

More importantly, Jiomart has seen a significant improvement in user experience over the

last two months; its interface is now comparable to other pure-play e-commerce players.

Summary of our interface checks

Key Positives Key Negatives

Pricing is decent Depth of products much lower than peers

Delivery was hassle free No non-vegetarian items

Packaging better than other ecommerce players No option to choose delivery slot

Quality of vegetables better than other ecommerce players

Complaint resolution is via WhatsApp, very quick, effective with a lot of analytics

Source: Edelweiss Research

Jiomart was among the top three

downloaded shopping apps in August

2020 after Flipkart and Amazon


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Potential Amazon-RIL tie-up: A bigger worry for vertical F&G retailers

DMart is a single category and offline-focused (currently) retailer. Amazon and Reliance, on

the other hand, have aspirations of capturing the entire retail basket. While Amazon is an

online retailer moving offline, Reliance has a similar grand aspiration the other way round, i.e.

from offline to online.

The likelihood of a these two coming together is low prima facie considering the independent

focus on hyper local/online via Amazon Pantry, Amazon Fresh and JioMart. Amazon’s

investments in More and Future Retail fit the bill as these offline retailers wanted to use

Amazon’s network to build online strength (similar to Shoppers Stop in apparel). With JioMart

being the focus for Reliance and now with Future Retail under its belt, synergies for Reliance

look limited.

Should a marriage of convenience take place between Reliance and Amazon that is bound to

accelerate the shift online, DMart will be under tremendous pressure to ramp up its online

capabilities.

DMart is a single category retailer

Source: Edelweiss Research

DMart’s e-commerce plans needs a leg-up

DMart’s conservative approach to online does protect profitability, and management’s intent

is clear on this. At its annual meet in August 2020, DMart reiterated: i) focus on brick & mortar;

ii) grocery e-commerce focus only in large towns. In our view, in the long run, considering the

opportunity size and how the market is evolving, DMart will have to find a balance to capture

the online potential. Too conservative an approach remains a bigger risk than the RIL-Future

Retail merger in our view.

DMart Ready: Key Financials

(INR mn) FY17 FY18 FY19 FY20

Revenue 12 441 1,436 3,540

EBITDA (161) (379) (404) (405)

PBT (261) (481) (508) (800)


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Company Description

DMart is an emerging national supermarket chain with focus on value retailing. The company

has been one of the largest and most profitable F&G retailers in India. It offers a wide range

of products with focus on foods, non-foods (FMCG) and general merchandise & apparel

product categories. In 2002, DMart opened its first store in Mumbai. As at June 2020, the

company had 216 stores with retail business area of ~7.9mn sq ft.

DMart operates and manages all its stores. The company operates predominantly on

ownership basis (including long-term lease arrangements, where lease period is of more than

30 years and the building is owned by DMart) instead of rental model. It opens stores using

cluster-based approach on the basis of adjacencies and focuses on efficient supply chain that

targets densely-populated residential areas with a majority of lower-middle, middle and

aspiring upper-middle class consumers. DMart’s distribution and packing centres form the

backbone of its supply chain that supports its retail store network.

Investment Theme

DMart’s core MOAT has translated not only into strong revenue growth, but also robust

profitability and return ratios. During FY12-17, DMart sustained consistent SSSG above the

20% print. However, that has come off since due to older stores maturing. The company’s

competitive prices are derived from right product assortment, lower payable days, right

location size and cluster-based store expansion, among others. Consequently, a strong SSSG

helped DMart expand gross/EBITDA margins from 14.5%/6.4% in FY13 to 15.0%/8.2% in FY19.

Key Risks

Sustenance of EDLP program and increased competition.

Purchase of real estate at favourable rates and hence the store expansion. This arrangement

entails huge initial cash outflow, which may involve taking higher debt. In the scenario where

new stores fail to pick up as anticipated, then incremental debt taken for same would need

to be serviced from cash flows of other stores, which could impact overall profitability of

business.

Revenue concentration in largely from Western India – Maharashtra and Gujarat.

Competition from e-commerce companies


AVENUE SUPERMARTS


Additional Data Management

CEO Ignatius Navil Noronha

CFO Niladri Deb

COO Udaya Bhaskar Yarlagadda

Group CFO Ramakant Baheti

Auditor S R B C & Co LLP

Holdings – Top 10* % Holding % Holding

Bright Star Inv 13.70 Vanguard Group 0.68

SBI MF 4.21 Blackrock 0.62

Axis AMC 2.76 GSAM 0.32

Capital Group 0.91 Robeco 0.27

ICICI Pru AMC 0.70 UTI AMC 0.27

*Latest public data

Recent Company Research Date Title Price Reco

13-Jul-20 Avenue Supermarts - Result Update Q1FY21; Result Update

2201 Hold

23-May-20 Avenue Supermarts - Result Update Q4FY20; Result Update

2300 Hold

12-Jan-20 Avenue Supermarts - Result Update Q3FY20; Result Update

1639 Reduce

Recent Sector Research Date Name of Co./Sector Title

24-Aug-20 Titan Company 'BRAVEHEART SERIES' Titan Company - Annu; Company Update

18-Aug-20 Titan Company 'BRAVEHEART SERIES' Titan Company - Jewe; Company Update

14-Aug-20 Shoppers Stop Shoppers Stop - Result Update Q1FY21 - L; Result Update

Rating Interpretation

Source: Bloomberg, Edelweiss research

Daily Volume

Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage

Buy Hold Reduce Total

Rating Distribution* 160 64 14 238

>50bn >10bn and <50bn <10bn Total

Market Cap (INR) 175 60 12 247

* stocks under review

Rating Rationale

Rating Expected absolute returns over 12 months

Buy: >15%

Hold: >15% and <-5%

Reduce: <-5%

TP1,290

TP2,300

TP1,274

TP1,300

TP1,639

1025

1330

1635

1940

2245

2550

Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20

(IN

R)

DMART IN Equity Buy Hold Reduce0

4

8

12

16

20

Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20

(Mn

)

AVENUE SUPERMARTS



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