IPO Review Rating matrix Rating : Unrated Issue Details Issue Opens 8-Mar-17 Issue Closes 1-Mar-17 Issue Size ( Crore) 187 Fresh Issue 187 Offer for Sale Price Band ( ) 295-299 No of Shares on Offer (crore) 6.25-6.34 QIB (%) 5% Non-Institutional (%) 15% Retail (%) 35% Minimum lot size (No. of shares) 5 Objects of issue Amount a) Repayment or prepayment of portion of loans & redemption of NCD's availed 18 crore b) Construction & purchase of fit outs for new stores 366.6 crore c) General corporate purposes 423 crore Shareholding Pattern Pre-Issue Post-Issue Promoter & promoter group 91.3% 82.2-82.1% Public 8.7% 17.8% - 17.9% Financial Summary - EPS Crore FY14 FY15 FY16 9MFY17 Total Revenue 4,686.5 6,439.4 8,588.2 8,784. EBITDA 341.8 458.9 663.6 769.7 EBITDA Margin (%) 7.3 7.1 7.7 8.8 PAT 161.4 212.4 32.7 393. EPS 3. 3.9 5.7 7. Valuation Summary (at upper price band: 299) (x) FY13 FY14 FY15 FY16 P/E 175.9 11.4 77.3 52.3 EV/EBITDA 91.4 57.5 42.8 29.6 Research Analyst Bharat Chhoda bharat.chhodal@icicisecurities.com Ankit Panchmatia ankit.panchmatia@icicisecurities.com Cheragh Sidhwa cheragh.sidhwa@icicisecurities.com March 3, 217 Avenue Supermarts (ASL) operates stores under D-Mart brand, which is an emerging national supermarket chain, with a core focus on valueretailing. ASL offers a wide range of products with focus on food (53% of revenues), FMCG (2% of revenues) and general merchandise & apparel (28% of revenues) product categories. With a network of 118 stores across 45 cities, ASL manages a retail space of 3.6 mn sq ft. The cluster based approach for opening new stores enables ASL to efficiently manage procurement, inventory and logistics costs. ASL believes in operating on an ownership model wherein it focuses on development of stores with area ranging from 1 square feet (sq ft) to 6 sq ft. Adopting the low cost model and passing on the benefits to consumers, ASL focuses on profitable growth, maintaining gross margins at 15%. D- Mart targets densely-populated residential areas with a majority of lowermiddle, middle and aspiring upper-middle class consumers. Investment Rationale Value retailing to well defined target consumer base ASL s business model is based on the concept of offering value retailing to its customers using the every day low cost/every day low price strategy (EDLC/EDLP). The strategy involves offering low prices to consumers on a daily basis excelled by low procurement and tight operational cost. Approximately 75% of total revenues are derived from low margin food and non-food FMCG goods. Cost optimisation is constantly driven by optimal product assortment in each of its stores. Adopting the low pricing strategy facilitates customer stickiness for ASL. Operates on ownership model ASL predominantly operates on an ownership model rather than on a rental model resulting in minimising rental costs. It generally enters into a long term lease arrangements, where the lease period is usually more than 3 years and the building is owned by the company. ASL believes owing real estate for majority of the stores helps in controlling fixed cost per store and helps it to execute its EDLC/EDLP strategy more effectively. Efficient operating cycle ASL has a wide network of vendors and suppliers across the country. The company s sustained efforts to improve its strong supplier network, has led to an efficient supply and sale cycle. The stores are supported by an appropriate combination of supplies from its distribution centres located within a specified distance. ASL has 22 delivery centres and six packing centres, which streamline and consolidate administrative and logistics functions. ASL leverages its deep knowledge of clusters and regions, which it operates in, to customise its product assortment keeping in mind local demands and preferences. Key risks and concerns Unable to continue to offer daily low prices Unable to identify suitable location for expansion purpose Inability to maintain optimum level of inventory in stores Inability to promptly identify changing consumer preference Higher concentration of operations in Maharashtra & Gujarat Priced at FY16 PE multiple of 52.3x on higher band Avenue Supermarts Ltd Price band 295-299 At the IPO price band of 295-299, the stock is available at a multiple of 51.6-52.3x FY16 EPS.
Company Background Incorporated in May 12, 2, ASL is one of the leading supermarket chains, with core focus on value retailing. The company offers a wide range of products with focus on the foods, non-foods (FMCG) and general merchandise & apparel product categories. The business has grown rapidly in recent years from one D-Mart store in 22 to 118 stores as of September 15, 216 across nine states and one union territory in India, concentrated in western and southern India. The company opened its first store in Mumbai, Maharashtra in 22. As of January 31, 217, it had 118 stores with retail business area of 3.6 million sq ft, located across 45 cities in Maharashtra, Gujarat, Telangana, Karnataka, Andhra Pradesh, Madhya Pradesh, Chhattisgarh, NCR, Daman and Rajasthan. For FY16, Maharashtra contributed a majority of revenue from sales (62.57%) followed by Gujarat (18.83%), Telangana (1.15%), Karnataka (6.14%), Andhra Pradesh (1.3%), Madhya Pradesh (.85%) and Chhattisgarh (.43%). Exhibit 1: Dominant mainly in western & southern region ASL has expanded its footprint using a cluster-based approach. It has strengthened its existing presence in certain regions by opening new stores within a radius of a few kilometres of its existing stores and distribution centres. This has ensured the creation of a cluster of stores within a region resulting in a better understanding of local needs and preferences. Such clusters have also led to increased penetration and presence in under-served markets. Higher cost efficiency due to economies of scale are achieved in the supply chain, inventory management and concentrated brand visibility due to focused implementation of marketing and advertising initiatives. Page 2
Exhibit 2: Steady footprint expansion Parameter FY12 FY13 FY14 FY15 FY16 9MFY17 New stores opened in Fiscal 1 7 13 14 21 8 Cumulative no. of stores 55 62 75 89 11 118 Retail business area (mn sq ft) 1.6 1.8 2.1 2.7 3.3 3.6 Revenue/Sq ft ( ) 15,324 2,116 23,419 26,388 28,136 25,161 ASL primarily stocks products, which form part of basic spending rather than discretionary spending. The product range specifically caters to the demands of the lower-middle, middle and aspiring upper-middle income groups. It continuously strives to enhance the shopping experience of customers by providing a modern ambience with the feel of a large retail mall. It facilitates a one stop shop convenience along with competitive pricing due to the company s market knowledge, careful product assortment and supply chain efficiencies. Exhibit 3: Sales mix 12. % 1. 8. 6. 4. 2.. 26. 25.8 25.2 25.9 26.4 27.6 21. 21.2 21.5 21.2 2.6 19.6 53. 53. 53.3 52.8 53.1 52.8 Food FMCG General merchandise & apparel As of January 31, 217, the company had 22 distribution centres in four states and six packaging centres to support certain distribution centres. ASL s distribution centres have provided the following benefits: Streamline and consolidate certain administrative functions, logistics procedures and human resource requirements from the individual store level into the distribution centre level; Reduce cost and time by providing centralised procurement for certain products; Better inventory control with reduced stock shortages in stores due to use of stock replenishment systems; Better margins due to efficient supply chain management. Exhibit 4: Distribution centres S. No. State Number of distribution centres 1 Maharashtra 16 2 Gujarat 3 3 Telangana 2 4 Karnataka 1 Page 3
Industry overview Currently, the food and groceries (F&G) segment constitutes a majority share of retail market (67%). According to Technopak, F&G will continue to be the largest contributor in the retail market, going forward, with a share of 66% in 22. Apparel & accessories and consumer electronics are the other two key categories, which account for 8% and 6% of the total retail market, respectively. The total retail industry is expected to grow at a CAGR of 12% in FY16-2E. Exhibit 5: Total retail industry Categories 212 216 22E Total retail (USD Bn) 386 616 96 Food & Grocery 68% 67% 66% Apparels 8% 8% 8% Footwear 1% 1% 1% Jewellery & Watches 7% 8% 8% Pharmacy 3% 3% 3% Consumer electronics 5% 6% 7% Home & Living 4% 4% 4% Others 4% 3% 3% Source: DHRP, ICICIdirect.com Research While organised retail has been in India for more than two decades now, its contribution to total retail is still low at 9% (US$55 billion). Footwear has the highest share in terms of penetration achieved by organised retail at 4% whereas food and grocery is the least penetrated with 3% organised share. Exhibit 7: Organised penetration across key categories Exhibit 6: Modern retail expected to grow faster Categories 212 216 22E Total organised retail (USD Bn) 27 55 115 Food & Grocery 2% 3% 5% Apparels 2% 22% 33% Footwear 38% 4% 44% Jewellery & Watches 26% 27% 3% Pharmacy 8% 1% 12% Consumer electronics 23% 25% 32% Home & Living 8% 1% 12% Others 1% 12% 14% 1 8 USD bn 6 4 2 CAGR 2% 55 CAGR 11% 561 115 845 The share of F&G in organised retail has doubled from 1.5% in 212 to around 3% in 216 and is expected to be 5% by 22. The organised F&G market has grown at 33% CAGR to reach US$13 billion in 216 from US$4 billion in 212 and is expected to further grow at a CAGR of 26% to US$31 billion by 22. 216 22E Unorganized Organized Source: DHRP, ICICIdirect.com Research Page 4
Financial performance Avenue Supermarts clocked revenue growth at 4% CAGR in FY12-16 to 8588.2 crore whereas net profit grew at 52% CAGR to 32.7 crore in the same period. For the nine months ended December 31, 216, the company generated operating revenues of 8784 crore and net profit of 393 crore. The company has registered a like to like (LTL) sales growth of 26.1%, 22.4% and 21.5% for FY14, FY15 and FY16, respectively. Exhibit 8: Net sales growth - CAGR of 4% in FY12-16 ( crore) Exhibit 9: EBITDA growth - CAGR of 48% in FY12-16 ( crore) 1 9 8 7 6 5 4 3 2 1 228.5 334.9 4686.5 6439.4 8588.2 8784. crore 1 8 6 4 2 8.8 7.3 7.7 7.1 6.2 6.4 769.7 663.6 458.9 341.8 138. 215.1 1 8 6 4 2 % EBITDA EBITDA Margin Exhibit 1: Net profit - CAGR of 52% in FY12-16 ( crore) Exhibit 11: Consistent improvement in return ratios 45 4 35 3 25 2 15 1 5 6.1 93.8 161.4 212.4 32.7 393. % 25. 2. 15. 1. 5. - 22.4 19.5 19.8 21.6 14.1 21.1 2.6 11.1 16.9 17.7 11.9 8.8 RoE RoCE Exhibit 12: Like to like (LTL) sales growth Exhibit 13: Bill cuts growth - CAGR of 28% in FY12-16 % 35 3 25 2 15 1 5 31.6 26.1 22.4 2.3 21.5 FY12 FY13 FY14 FY15 FY16 Million 1 8 6 4 2 84.7 8.1 67.2 53.4 43.1 31.8 Bill cuts Page 5
Objects of issue The offer consists of a fresh issue with a total issue size of 187 crore with a price band of 295-299. The details of the proceeds of the fresh issue are summarised below: a) The company intends to utilise 18 crore of the net proceeds towards repayment or prepayment of term loans availed by the company and redemption of NCDs availed by the company. As on January 31, 217, the amount outstanding under the borrowing arrangements entered by the company was 1388.3 crore b) The company intends to utilise 187.9 crore out of the net proceeds towards purchase of fit out for new stores with an aggregate built-up area of 21 sq ft and utilise 178.6 crore to undertake construction of new stores with an aggregate built-up area of 9 sq ft to be undertaken in FY18, FY19 and FY2 Exhibit 14: Schedule of implementation and deployment of net proceeds Estimated Utilisation of net proceeds Particulars ( cr.) Total estimated costs Amount to be funded from the net proceeds FY18 FY19 FY2 Repayment or prepayment of a portion of loans & redemption of NCDs availed by the company 18 18 625 32 135 Construction & purchase of fit outs for new stores 366.6 366.6 79.9 143.3 143.3 General corporate purposes 423 423 - - - Exhibit 15: Schedule for deployment of net proceeds towards construction and purchase of fit outs for new stores Estimated Utilisation of net proceeds Particulars ( cr.) Total estimated costs Amount to be funded from the net proceeds FY18 FY19 FY2 Construction cost for stores 178.7 178.7 39.7 69.5 69.5 Purchase of fit outs for new stores 187.9 187.9 4.3 73.8 73.8 Total 366.6 366.6 79.9 143.3 143.3 Exhibit 16: Estimated area of stores proposed to be set up from net proceeds Estimated built-up are of stores (sq ft) Particulars Total estimated built-up area of store (sq ft) FY18 FY19 FY2 Construction of stores 9, 2, 35, 35, Purchase of fit outs for new stores 2,1, 45, 825, 825, Page 6
Key risks and concerns Higher concentration of operations in Maharashtra & Gujarat For the nine months period ended December 31, 216, Maharashtra and Gujarat together contributed 76.9% of total revenue. Furthermore, as of January 31, 217, 19 out of 22 distribution centres are located in Maharashtra and Gujarat. Any adverse development that affects the performance of the stores or distribution centres in these two states could have a material adverse effect on the business, financial condition and results of operations. Unable to continue to offer daily low prices One of the key strengths has been ASL s ability to offer its customers value retailing, daily low prices and, consequently, greater daily savings. This has been possible in part due to its strong supplier, vendor relationships and the company s pricing strategies. However, there have been instances where the company has faced supply and pricing challenges. While ASL tries to reduce its margins in such instances, there are certain limitations to this approach as the company may not always be to offer the products, which reflect value for money. Unable to identify & obtain suitable locations for expansion purposes As the company expands its store network, it will be exposed to various challenges, including those relating to identification of potential markets and suitable locations for its new stores, obtaining land or leases for such stores, competition, different cultures and customer preferences, regulatory regimes, business practices and customs. As a new store location should satisfy various parameters to make an attractive commercial proposition, finalisation of location and property acquisition for new stores is an evolving process, which may not progress at the same pace as in the past or at the expected pace. Further, the ownership model requires greater capital for opening each store due to which the company may be unable to expand at historical rates. Inability to maintain optimal level of inventory in stores The company currently function on a low inventory level model. It typically maintains inventory levels that are sufficient for a few days of operation. An optimal level of inventory is important for business as it allows the company to respond to customer demand effectively and maintain a full range of products at its stores. However, if the supply of products is disrupted, it may be unable to procure an alternate source of supply of products in time to meet the demands of customers or it may be unable to procure products of equal quality or on equally competitive terms, if at all. Such disruption to supply would materially and adversely affect its business, profitability and reputation. Inability to promptly identify changing consumer preferences Customer preferences in the markets where the company operates are difficult to predict while changes in those preferences or the introduction of new products by competitors could put its products at a competitive disadvantage. While ASL primarily retails 'value for money' products, there is no certainty that such products would continue to be preferred by customers over more expensive substitutes. Page 7
Financial Summary Exhibit 17: Profit and Loss Statement (Year-end March) Net Sales 2,28.5 3,34.9 4,686.5 6,439.4 8,588.2 8,784. Total Raw Material Cost 1,884. 2,857.4 3,984.4 5,487.2 7,37.8 7,415.6 Employee Expenses 45.3 68.7 87.3 134.1 148.6 137.6 Other Expenses 141.2 199.7 273. 359.2 468.2 461.1 Total Operating Expenditure 2,7.5 3,125.8 4,344.7 5,98.5 7,924.6 8,14.3 EBITDA 138. 215.1 341.8 458.9 663.6 769.7 EBITDA Margin 6.2 6.4 7.3 7.1 7.7 8.8 Interest 26. 42.6 55.7 72.4 9.8 9.7 Depreciation 37.5 45.8 57. 81.5 98.4 91.9 Other Income 13.8 14.3 15.8 18.3 18. 19.2 PBT 88.3 141. 244.9 323.3 492.4 66.3 Total Tax 28.2 47.2 83.5 11.9 171.7 213.3 PAT 6.1 93.8 161.4 212.4 32.7 393. Exhibit 18: Balance Sheet (Year-end March) Equity Capital 533.5 544.1 546.8 561.5 561.5 561.5 Reserve and Surplus 148.2 245.5 48.8 637.7 958.9 1,343.9 Total Shareholders funds 681.7 789.6 955.6 1,199.2 1,52.4 1,95.4 Minority interest.3.3..1.1.1 Total Debt 327.6 433.6 511.5 757.5 1,38.2 1,242.1 Deferred Tax Liability 13. 2.1 26.5 3.5 39.9 47.6 Non Current Liabilties 11.3 13.4 12.5 16.2 16.4 1.4 Source of Funds 1,33.9 1,257. 1,56.1 2,3.5 2,615. 3,196.7 Net Block 779.1 924.7 1,171.7 1,528.1 2,93.5 2,329.6 Capital WIP 84.9 118.1 88.8 98.1 81.7 25.5 Net Fixed Assets 864. 1,42.8 1,26.5 1,626.2 2,175.2 2,535.1 Investments 22.7 15.9 15.5 15.3 29.4 59.2 Inventory 195.7 276.2 378.3 539.6 671.7 847.7 Cash 47.9 61.6 55.4 38. 35.1 49.4 Debtors 5.6 13.3 9.5 7.1 8.4 4.5 Loans & Advances & Other CA 19.4 29.5 45.8 48.3 72.8 128. Total Current Assets 268.6 38.6 489. 633. 788. 1,65.6 Creditors 64.4 94.4 122.6 118.5 191.8 237.5 Provisions & Other CL 92.6 14.8 178.9 232.8 293.5 333.5 Total Current Liabilities 157. 235.2 31.5 351.3 485.3 571. Net Current Assets 111.6 145.5 187.5 281.7 32.7 494.7 LT L& A, Other Assets 35.6 52.9 42.6 8.4 17.7 17.8 Application of Funds 1,33.9 1,257. 1,56.1 2,3.5 2,615. 3,196.7 Exhibit 19: Key Ratios Year End March FY13 FY14 FY15 FY16 9MFY17 Valuation (at 299) P/E 175.9 11.4 77.3 52.3 NA EV/EBITDA 91.4 57.5 42.8 29.6 NA P/BV 23.6 19.5 15.6 12.3 NA Operating Ratios EBITDA Margin 6.4 7.3 7.1 7.7 8.8 PAT Margin 2.8 3.4 3.3 3.7 4.5 Return Ratios RoE (%) 11.9 16.9 17.7 21.1 2.6 RoCE (%) 14.1 19.5 19.8 22.4 21.6 Page 8
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com Page 9
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