Avenue Supermarts (DMART) owns and operates an emerging national supermarket chain, ‘D-MART’. Focused on value retailing, it offers a wide range of fast-moving consumer (food and non-food) products, general merchandise and apparel. DMART has grown impressively from its first store in Mumbai in 2002 to 131 stores spread across 11 states. Over the last five years, it has expanded its total area of operations at a CAGR of 21% to 4.1 msf and grown its sales and PAT at a CAGR of 40% and 51%, respectively.
Expect PAT CAGR of 41% over FY17-21
The size of India’s retail sector stands at $616 bn with share of organised brick and mortar retail at $55 bn (9%). While overall retail is expected to grow at a CAGR of 11.7% to $960 bn by 2020, organised brick and mortar retail is expected to grow at a faster CAGR of 20.2% to $115 bn (12%) thereby providing huge opportunity of growth for DMART. While food and grocery forms the largest share of organised brick and mortar retail in 2016 at 24%, penetration of food and grocery still stood at 3% in 2016 of total retail and is expected to improve to 5% by 2020 which should provide significant opportunity for DMART given it derives 53.6% of its revenues from food and grocery segment.
Additionally, DMART derives ~80% of its total revenues from Maharashtra and Gujarat which account for 21% of total retail spends in India. DMART intends to invest 75% of its profits in the existing clusters and plans to add 25 stores annually (83.5% increase in area to 7.5 msf by FY21) embellishing its growth potential.
Focus on cluster-based approach towards store expansion, rich product assortment, owned store model, centralised sourcing and efficiency (40% of revenues), lower employee cost (below 2% of sales v/s >4.5% for peers), upfront payment to get cash discount have made DMART India’s only retail company to showcase consistent and profitable growth over last decade.
We expect it to deliver 31% revenue CAGR and 41% PAT CAGR over FY17-21. Ebitda margin is likely to expand 60 bp to 8.8% byFY21, which along with savings on interest cost, would drive up PAT margin from 4% to 5.4%. With higher asset returns, RoCE and RoE is likely to improve from 14% and 18% in FY17 to 27.5% and 27.4% respectively in FY21. DMART stock has given 2.7x return from IPO price, which largely captures past track record of creating unique scalable retail business model driven by flawless execution as well as captures the future growth. We value the stock at 45x FY19E EPS, and initiate coverage with a Neutral rating. Our target price of Rs 804 implies 2% downside.
Growing its profitability without sacrificing on margins
Positioned as a value retailer, DMART’s overall revenue has grown at a CAGR of 40% and like-to-like revenue has grown higher than 20% in the last five years. Revenue per square foot has grown at a CAGR of 16% to Rs 29,019. Unlike most of its peers, DMART has been able to grow profitably without sacrificing on margins. It is typically an early mover in areas populated by lower-middle, middle and aspiring upper-middle income consumers. Given that Gujarat and Maharashtra, which contribute 80% to its revenue, contribute only 21% towards total retail spend in India, the growth potential for DMART is immense.