Avenue Supermarts Ltd

Recommendation SUBSCRIBE BACKGROUND

Price Band Rs 290-299 Company Overview
Bidding Date 8 – 10 March Avenue Supermarts Ltd (ASL) is emerging as a national supermarket
Book Running Lead Kotak, Axis, Edelweiss, HDFC chain (D-Mart), with a focus on value-retailing. According to Technopak,
Manager Bank, ICICI Sec. ASL was one of the largest and most profitable F&G retailers in India in
Registrar Link Intime FY16. As of Dec 16, it has 117 stores with Retail Business Area of 3.57
mn sq.ft. The company plans to deepen its store network in southern
Sector Retail
and western India and gradually expand its network in other parts of
Minimum Retail Application – Details At Cut off Price India pursuant to its cluster-focused expansion strategy. It operates
predominantly on an ownership model rather than on a rental model. It
Number of Shares 50
opens new stores using a cluster approach on the basis of adjacencies
Application Money 14950 and focusing on an efficient supply chain, targeting densely-populated
Discount to retail NIL residential areas with a majority of lower-middle, middle and aspiring
upper-middle class consumers.
Payment Mode ASBA
Consolidated Objects of the Issue
FY15 FY16
Financials (Rs Cr) The whole issue of Rs 1870 cr (at upper price) is fresh issue which would
NCD ISSUE Note

Total Income 6439 8588

be utilized to repay the debt (Rs 1080cr), capex (Rs 366 cr) and for
corporate purposes.
EBITDA 459 664
Investment Rationale
PAT 212 319
 Value retailing to a well defined target customer base
Valuations Lower Band Upper Band  Most profitable Retail Chain
Market Cap (Rs cr) 18099 18660  Cluster based Ownership Model
 Lean Cost Structure
EPS (FY16) 5.1 5.1
Valuation and Recommendation
BV/share (FY16) 24.4 24.4
ASL’s revenue has grown at 40.4% CAGR between FY12-16 while EBIDTA
P/BV 11.9 12.3 grew at a CAGR of 48.1%. PAT grew faster at 51.9% during the same
P/E 56.8 58.5 period. We believe Avenue Supermarts is a long term story and should
be viewed from 2-3 years point of view. It is one of the most efficiently
Post Issue Shareholding Pattern operated companies which is evident from its highest ROE in the
industry. We expect ASL to continue its growth momentum as the retail
Promoters 82.2% opportunity in India is very big and modern trade players like ASL have
Public 17.8% ample scope to grow. We believe ASL would command premium
Offer structure for different categories valuations and would remain a market leader post listing. We like the
business model of the company given its lean cost, customer centric
QIB (Including Mutual Fund) 50%
focus and cluster based ownership model. At upper price band of Rs
Non-Institutional 15% 299, the stocks looks attractive and recommend investors to subscribe
Retail 35% the issue for listing as well as long term gains.
Post Issue Equity (Rs cr) 62.41 Financial Snapshot FY13 FY14 FY15 FY16 9MFY17
Issue Size (Rs cr) 1814-1870 Revenues 3341 4686 6439 8588 8784
%growth 37% 33%
Face Value (Rs) 10
Runjhun Jain EBIDTA 215.0 341.8 459.0 663.5 769.7
Assitant Vice President (+91 22 3926 8177) % margins 6% 7.3% 7.1% 7.7% 8.8%
runjhun.jain@nirmalbang.com
PAT 93.9 161.4 211.7 318.8 387.5
Sunil Jain % margins 3% 3.4% 3.3% 3.7% 4.4%
Head Of Retail Research (+91 22 3926 8195)
EV/EBIDTA @ Rs299 29.6 19.3
sunil.jain@nirmalbang.com
P/E @ Rs299 58.5 36.1
P/BV @ Rs299 12.3 9.8

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Company Overview
Avenue Supermarts Ltd (ASL) is emerging as a national supermarket chain (D-Mart), with a focus on
value-retailing. According to Technopak, ASL was one of the largest and most profitable F&G retailer
in India in FY16. It offers a wide range of products with a focus on the Foods, Non-Foods (FMCG) and
General Merchandise & Apparel product categories.
As of Dec 16, it has 117 stores with Retail Business Area of 3.57 million sq.ft, located in Maharashtra
(59), Gujarat (27), Telangana (13), Karnataka (7), Andhra Pradesh (4), Madhya Pradesh (3),
Chhattisgarh (1), Daman (1), Rajasthan (2) and NCR (1).
The company plans to deepen its store network in southern and western India and gradually expand
its network in other parts of India pursuant to its cluster-focused expansion strategy.
Segments FY14 FY15 FY16 1HFY17
Foods 2497 3403 4557 4638
growth 36.3% 33.9%
% to revenues 53.3% 52.8% 53.1% 52.8%
Non Foods 1007 1366 1767 1719
growth 35.7% 29.3%
% to revenues 21.5% 21.2% 20.6% 19.6%
NCD ISSUE Note

General Merchanise & Apparel 1182 1670 2264 2427

growth 41.3% 35.5%
% to revenues 25.2% 25.9% 26.4% 27.6%
Total 4686 6439 8588 8784
growth 37.4% 33.4%

Karnataka,AP, 1.0%
6.1%
Telangana,
MP, 0.9% 10.2%

Gujarat,
18.8%
Maharashtra,
62.6%
Chattisgarh,
0.4%

Source: RHP, Nirmal Bang Retail Research

ASL operates and manages all its stores. It operates predominantly on an ownership model
(including long-term lease arrangements, where lease period is more than 30 years and the building
is owned by the company) rather than on a rental model. It opens new stores using a cluster
approach on the basis of adjacencies and focusing on an efficient supply chain, targeting densely-
populated residential areas with a majority of lower-middle, middle and aspiring upper-middle class
consumers.
It operates distribution centres and packing centres which form the backbone of the supply chain to
support the retail store network. As of January 31, 2017, ASL had 22 distribution centres and six
packing centres in Maharashtra, Gujarat, Telangana and Karnataka.

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Investment Rationale

Value retailing to a well defined target customer base

ASL’s business model is based on the concept of offering value retailing to customers using the EDLC
(Every Day Low Cost)/EDLP (Every Day Low Price) strategy. The EDLC/EDLP strategy 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. Their customer acquisition and retention strategy is targeted at lower-
middle, middle and aspiring upper-middle income consumers. The company believes that getting
value for money is the most compelling factor in daily shopping decision-making for these income
groups. The majority of the products stocked by it 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 EDLC/EDLP strategy requires the company
to minimize the costs of procurement, supply and operation to achieve low prices for the customers
on a daily basis. These measures have helped the company in being recognized as a one-stop retail
store chain for daily needs at value for money prices.
NCD ISSUE Note

Most profitable Retail Chain

According to Technopak, Avenue Supermarts Ltd was one of the the largest and the most profitable
F&G retailer in India in FY16. The total store count has grown from 1 in FY02 to 118 as on 31, Jan
2017. The company has generated strong cash flows from operations for the last five Fiscals and the
9MFY17. Though the free cash flow is negative due to initial high cost of acquiring the property.
However, the company saves on rental cost which gives it a competitive edge in being a lowest cost
retail player.
Its liquidity position enables it to consistently pay the suppliers on or before the due date, allowing
them to benefit from supplier discounts.
The company has in-depth understanding of local needs hence respond quickly to changing
consumer preferences. Its advanced IT systems enables it to identify and quickly react to changes in
customer preferences by adjusting the products available, brands carried, stock levels and pricing in
each of the stores and effectively monitor and manage the performance of each of the stores.
Together with the supply chain management systems and its internal controls to minimize product
shortage and the occurrence of out-of-stock situations and pilferage, ASL is able to operate
efficiently and productively. Its Inventory Turnover Ratio remains above 14 which is quite impressive
in the segment.
ASL’s revenue has grown at a CAGR of 40.28% from Rs 2,222.4 cr in FY12 to Rs 8,606.1 cr in FY16 and
net profit has grown at a CAGR of 51.56% from Rs 60.4 cr in FY12 to Rs 318.8 cr in FY16. For 9MFY17
its net profit was Rs 387.5 cr, higher than full year profit of FY16.
The company has not closed even a single store till date.

Sales EBITDA Margins% PAT Margins ROE

Future Retail 16987 532 3.1% 330 1.9% 16.3%
V-Mart 953 72 7.6% 33 3.4% 13.8%
Trent 2932 236 8.0% 162 5.5% 11.0%
Shopper Stops 5272 200 3.8% 6 0.1% 0.8%
D-mart* 11712 937 8.0% 482 4.1% 31.7%
* annualised

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No of Stores
SSSG (%) (FY16) FY13 FY14 FY15 FY16
Dmart 110 31.6 26.1 22.4 21.5
Future Retail 738 9.8 10.3 6.5 8.8
Shopper Stop 77 7.3 10.5 5.3 9.0
Vmart 123 14.0 12.0 6.5 -1.1
Trent 141 7.0 9.0 11.0 8.0

Average Sales per Sq Ft of Key Players

FY12 FY16
Hypermarts
Reliance Mart 5,000-6,000 8,500-9,500
Star Bazaar 6,500-7,500 11,000-13,000
Big Bazaar 5,500-6,500 9,500-10,500
NCD ISSUE Note

Spencer Hypermart 6,000-7,000 16,000-17,000

More Megastore 4,500-5,500 8,500-9,500
Hypercity 5,000-6,000 7,000-8,000

Supermarkets
Dmart 12,000-12,500 28,000-30,000
Reliance Fresh 9,000-10,000 17,500-18,500
Food Bazaar 7,500-8,500 15,000-15,500
Spencer Supermart 7,000-8,000 17,500-18,500
More 5,000-6,000 8,000-9,000
EasyDay 7,500-8,500 15,000-16,000

Regional Players 8,500-9,500 17,000-17,500

Lean Cost Structure

ASL follows a centralized purchase policy for which its procurement team conducts detailed research
on an ongoing basis to locate the best product sources, in relation to both quality and price. The
company has an extensive network of suppliers and it endeavors to source products from regions
where they are widely available or manufactured to minimize the procurement costs. Further, ASL
endeavors to pay its suppliers on time and are often able to procure discounts for such prompt
payment which it passes on to customers. It usually takes 2 years for a new store to achieve 5%
EBITDA. Also, as the company follows ownership model, it saves on the rental cost (between 5-9% of
sales).
Also ASL is very efficient in managing its inventory. Its inventory turnover is highest in the industry.
Inventory Future Shopper
Turnover Dmart Retail Stop Vmart Trent
FY15 11.9 8.2 8.5 3.9 6.9
FY16 12.8 2.1 7.7 4.0 6.7

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Cluster based Ownership Model
The business has grown rapidly in recent years, primarily through expansion of the store network
from one store in 2002 to 118 stores as of January 31, 2017 across nine states and one union
territory in India, concentrated in western and southern India.
FY12 FY13 FY14 FY15 FY16 9MFY17
New Stores Opened 10 7 13 14 21 7
Cumulative no of stores 55 62 75 89 110 117
Retail Biz Area ( in mn sq ft) 1.55 1.76 2.14 2.66 3.33 3.57
Sales per sq ft. (in Rs) 15324 20116 23419 26388 28136 25161*
Average Store Size (in sq ft) 28182 28387 28533 29888 30273 30513
*not annualized

The company follows a cluster-based approach. It strengthens its existing presence in certain regions
by opening new stores within a radius of a few kilometers of the existing stores and distribution
centers. This has ensured the creation of a cluster of stores within a region in which has developed a
better understanding of local needs and preferences and enabled the company to tailor the offering.
Such clusters have also led to increased penetration and presence in under-served markets, higher
NCD ISSUE Note

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.
The management believes in owning the real estate on which the stores are built or long-term lease
arrangements which helps in controlling fixed costs per store. Other than the rental savings, which is
partially offset by higher capital and capital servicing costs, ownership (including long-term leases) of
the stores provides significant long-term competitive advantage.

Strong Promoter Background

ASL’s strong promoter background and an experienced senior management team have helped the
company to offer high standards of customer service. One of the Promoters, Radhakishan Damani, is
been instrumental in ASL’s success. The Board and senior management have a proven track record
and an in-depth understanding of the retail business in India and local consumer preferences. The
promoters hold 91.34% of the company pre issue which would come to ~82% post dilution.
Noteworthy point is that promoters are not offloading even a single share.
ASL’s CEO and MD, Ignatius Navil Noronha has over 20 years of experience in the consumer goods
industry. Prior to ASL, he was with Hindustan Unilever for eight years.

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Industry Prospects
Economic reforms during early 1990s catapulted Indian economy on a high growth path. The
country registered a real GDP growth of about 9.5% in the period 2006-2008 and averaged 8% from
2006-2011. India‘s GDP was 2.5% of world GDP in 2013 and it is expected to rise to 3.1% and 3.8% of
world GDP in 2016 and 2021 respectively. IMF has pegged India‘s real GDP growth between 7.5% -
7.7% for FY 16-20. IMF and other agencies have predicted India to be in the top three global
economies by 2050. India is a consumption-led economy with private consumption forming around
60% of the GDP.

Several factors will continue to drive the consumption and contribute to the economy including:
 Favorable demographics, dropping dependency ratio, rapidly rising education levels and steady
growth of urbanization
 Growing young & working population
 Increasing penetration of mobile technology and internet infrastructure
 Increasing aspirations and affordability
 Government‘s focus on skill development, job creation, infrastructure, manufacturing and
investments
NCD ISSUE Note

 Financial inclusion initiatives such as UDI led bank accounts and direct transfer of subsidies

Household Consumption at USD 1,262bn currently accounts for approximately 60% of the Indian
GDP. This is much higher than the share of household consumption in China (around 37%) and
comparable to that of the UK and US, approximately 65% and 68%, respectively.
Organized Brick & Mortar retail (which is largely concentrated in urban India) was 9% of total retail
(USD 55bn) in FY16 and this is expected to become 12% (USD 115bn) by FY20. It was 7% of total
retail in FY10.
The growth of general merchandise retail in India has involved multi-city as well as multi-format
growth by the large business conglomerates. This approach led to operating of multi-formats by the
same business house, such as Reliance, Future Group, Aditya Birla Group. Additionally, a few
regional retailers in some metros & mini metros have focused on key clusters and have established
successful operations in these cities.
Future group holds the largest market share with 13% owning to the group having multiple brands
followed by D‘Mart at 10% and Reliance at 8%. Together, these three retailers contribute to 31% of
the overall F&G segment

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Risks and Concerns
1. Retail chains have to compete not only with traditional local baniya shops but with other
retail chains as well. And addition of modern channels of trade like e-commerce making the
space much more competitive and challenging.
2. Due to above competition, traditional local baniya shops are losing business to modern
trade. Hence any restrictions/ban/regulations initiated by government can hurt big retail
chains.
3. Dmart’s management and promoters have been instrumental in its success. However, any
exits at its top level management can break the growth momentum of the company.
4. Due to ownership model it follows the company is not able to generate free cash flow
FY12 FY13 FY14 FY15 FY16 9MFY17
OCF 65 127 197 222 447 378
Capex 183 240 270 473 658 497
Balance -118 -113 -73 -251 -211 -119
5. Due to ongoing discount war (especially between e-commerce chains) can force the
company to offer additional discounts which can hurt its margins. Also the company is keen
on experimenting e-commerce way through its associate company, which can impact
NCD ISSUE Note

profitability of the company.

Valuation and Recommendation

ASL has grown at 40.4% CAGR between FY12-16 while EBIDTA grew at a CAGR of 48.1%. PAT grew
fatser at 51.9% during the same period.

We expect Avenue Supermarts Ltd to maintain healthy growth rate of ~30% going forward, with
healthy EBITDA margins on back of higher efficiencies. Though we believe the company would be
nearing the upper limit of EBITDA margins (the management has reiterated that this retail business
is a 15% gross margin business hence we believe the company can earn at max 10% EBITDA margins)
and higher PAT margins (on account of lower interest cost).

We are comparing ASL Future Retail, V-Mart, Trent and Shopper Stops. We believe Avenue
Supermarts is a long term story and should be viewed from 2-3 years point of view. It is one of the
most efficient operated company which is evident form its highest in the industry ROE. We expect
ASL to continue its growth momentum as the ertail opportunity in India is very big and modern trade
players like ASL have ample scope to grow. We believe ASL would command premium valuations
and would remain a market leader post listing

FY17 Sales 5 Yrs CAGR EBITDA Margins% PAT EPS P/E EV/EBITDA ROE
Future Retail 16987 NA 532 3.1% 330 7.0 37.0 25.6 16.3%
V-Mart 953 30.2% 72 7.6% 33 18.2 39.2 18.3 13.8%
Trent 2932 7.8% 236 8.0% 162 4.9 49.6 35.0 11.0%
Shopper Stop 5272 13.0% 200 3.8% 4 0.5 NA 15.9 NA
D-mart# 11712 40.4% 937 8.0% 482 7.7 38.7 20.0 31.7%
Global Peer
Walmart* 48587 0.9% 3284 6.8% 1364 4.4 16.0 7.8 16.9%
Source: FY17, *FY17 Jan End, # Annualised, NB Retail Research

We like the business model of the company given its lean cost, customer centric focus and cluster
based ownership model. At upper price band of Rs 299, the stock looks attractive and hence
recommends investors to subscribe the issue for listing as well as long term gains.

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FINANCIALS

Profit & Loss (Rs cr) FY12 FY13 FY14 FY15 FY16 9MFY17
Gross Sales 2,209 3,341 4,686 6,439 8,588 8,784
Less: Excise Duty
Net Sales 2,209 3,341 4,686 6,439 8,588 8,784
growth % 51.3% 40.3% 37.4% 33.4% 36.4%

Stock Adjustment (73) (80) (102) (161) (132) (176)

Purchase of Stock-in-trade 1,957 2,938 4,087 5,648 7,440 7,592
GM% 14.7% 14.5% 15.0% 14.8% 14.9% 15.6%
Employee Cost 45 69 87 134 149 138
% to sales 2.1% 2.1% 1.9% 2.1% 1.7% 1.6%
Other Expenses 141 200 273 359 468 461
% to sales 6.4% 6.0% 5.8% 5.6% 5.5% 5.2%
NCD ISSUE Note

Total Expenditure 2,071 3,126 4,345 5,980 7,925 8,014

EBIDTA 138 215 342 459 663 770
margins % 6.2% 6.4% 7.3% 7.1% 7.7% 8.8%
Interest 26 43 56 72 91 91
Depreciation 37 46 57 82 98 92
Other Income 14 14 16 18 18 19
Profit Before Tax 88 141 245 323 492 606
Tax 26 40 77 106 162 205
Deferred Tax 2 7 6 4 10 8
PAT 60 94 161 212 321 393
margins % 2.7% 2.8% 3.4% 3.3% 3.7% 4.5%
MI - - - 0 0 8
EO (0) (0) 0 1 2 (2)
PAT 60 94 161 212 319 387
EPS Rs. (Post Issue)* 1.0 1.5 2.6 3.4 5.1 8.3

P/E - @ Rs 299 308.9 198.8 115.6 88.1 58.5 36.1

B.V Per share 12.7 12.7 15.3 19.2 24.4 30.5
P/BV - @ Rs 299 23.6 23.6 19.5 15.6 12.3 9.8
Debt/Equity (x) 0.5 0.5 0.5 0.6 0.7 0.7
EV/Sales 8.6 - 4.1 3.0 2.3 1.7
EV/EBIDTA 137.8 - 55.9 42.2 29.6 19.3
ROCE % 12.5% 17.3% 23.2% 23.0% 25.6% 32.6%
ROE % 8.8% 11.9% 16.9% 17.7% 21.1% 27.5%
*annualised

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Balance sheet FY12 FY13 FY14 FY15 FY16 9MFY17
Equity & Liabilities
Share Capital 534 544 547 562 562 562
Reserves Total 148 245 409 638 959 1,344
Total Shareholders Funds 682 790 956 1,199 1,520 1,905

Minority Interest 0 0 0 0 0 0
Long term borrowing 264 371 457 714 908 1,228
Deferred Tax Liab 13 20 27 31 40 48
Other Long term Liab 11 13 12 16 16 1
Long term provisions 0 0 0 0 0 0
Total Non-current Liabilities 289 405 496 761 965 1,277

Short term borrowings 63 62 55 44 130 14

NCD ISSUE Note

Trade Payables 64 94 123 119 192 237

Other Current Liabilities 90 135 170 215 277 294
Short term provisions 3 6 9 18 16 40
Total Current Liabilities 220 298 356 395 615 585

Total Equity & Liabilities 1,191 1,492 1,808 2,355 3,100 3,768

Assets
Fixed Assets 864 1,043 1,260 1,626 2,175 2,535
- Tangible assets 777 922 1,168 1,524 2,089 2,323
- Intangible assets 2 3 4 4 4 7
- CWIP 85 118 89 98 82 206
Goodwill on consolidation -
Non current investments 14 16 15 15 27 42
Deferred Tax Assets
Long term Loans & Advances 36 53 43 80 107 107
Other non Current Assets 0 0 0 0 0 1
Tota Non-current Assets 913 1,111 1,318 1,721 2,310 2,685

Current Investments 9 0 0 1 2 17
Inventories 196 276 378 540 672 848
Trade receivables 6 13 10 7 8 41
Cash & Bank balance 48 62 55 38 35 49
Short term Loans & advances 18 29 45 48 72 127
Other current assets 1 0 0 0 0 1
Total Current Assets 278 381 489 634 790 1,082

Total Assets 1,191 1,492 1,808 2,355 3,100 3,768

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Cash Flow FY12 FY13 FY14 FY15 FY16 9MFY17

Net Profit before Tax 138 215 342 459 663 770
Depreciation 37 46 57 82 98 92
Interest Cost (26) (43) (56) (72) (91) (91)
Other Income 1 0 1 1 1 8
Misc Exp 1 11 12 5 8 3
Operating Profit 152 229 356 474 679 782
Changes in Working Capital -58 -65 -83 -152 -69 -219
Taxes Paid -29 -37 -75 -100 -164 -185
Cash flow from Operations 65 127 198 222 447 378

Purchase of Investments 54 7 1 3 -12 -31

NCD ISSUE Note

Purhase of assets -183 -239 -271 -477 -646 -466

Others 0 1 0 0 0 0
Cash flow from Investing -129 -231 -270 -474 -658 -497

Increase in Share Capital 36 14 5 33 0 0

NCD Issue 0 0 0 200 350 250
Loans raised/repaid 82 145 115 64 -61 -36
Others -24 -42 -54 -62 -81 -81
Cash flow from Financing 93 118 65 235 208 133

Net Inc/Dec in Cash 30 14 -7 -17 -3 14

Opening Balance 18 48 61 55 37 34
Closing Balance 48 61 55 38 34 48

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Disclaimer:
Nirmal Bang Securities Private Limited (hereinafter referred to as “NBSPL ”)is a registered Member of National Stock Exchange of India Limited,
Bombay Stock Exchange Limited and MCX stock Exchange Limited. We have been granted certificate of Registration as a Research Analyst with
SEBI . Registration no. is INH000001766 for the period 23.09.2015 to 22.09.2020 .NBSPL or its associates including its relatives/analyst do not
NCD ISSUE Note

hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst (in case any financial interest is held kindly
disclose)NBSPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months.
NBSPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making
activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true.
Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision .

Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.)

B-2, 301/302, Marathon Innova,

Opp. Peninsula Corporate Park
Off. Ganpatrao Kadam Marg
Lower Parel (W), Mumbai-400013
Board No. : 91 22 3926 8000/8001
Fax. : 022 3926 8010

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