Avenue Supermarts (D’mart), India’s profitable food & grocery (F&G) retailer, is amongst the few retailers which has not only cracked the retail business model, but also sustained >20% same stores sales growth (SSSG).
Commendably, D’mart has maintained its inventory turnover at an impressive ~30 days (peers at >75 days) due to the sharp focus on everyday consumption items. With good getting better, we expect D’mart to clock revenue, EBITDA and PAT CAGR of 28.1%, 32.1% and 41.4%, respectively, over FY17-20. We also expect RoE to improve by ~350bps over FY17-20. However, considering that stock is fairly valued, we initiate coverage with ‘HOLD/SU’ and assign 35x EV/EBITDA multiple (~40% premium to FRL’s target multiple) to arrive at TP of Rs 1,290.
Retail entails having the right format, scale, size and execution strategy, and D’mart clearly has impressive credentials and prowess in all these mentioned aspects.
In spite of its capital-intensive model (works on ownership model instead of lease model), D’mart not only clocks best-in-class EBITDAR margins (8.5% versus peers’ average of 6.6%) and RoCE, but has also managed its leverage ratio (debt to equity at 0.3x) well.
Finally, gross margins (~15%) may be low, but D’mart has sustained EBITDA margins at ~8% levels, a sheer outcome of strong inventory throughput and tight leash on costs.
During FY13-17, D’mart clocked revenue, EBITDA and PAT CAGR of 37.4%, 46.2% and 50.3%, respectively. Drawing on proven execution capabilities, sustained >20% SSSG, stable stores expansion, humongous store expansion opportunities (68% of stores in only 2 states) and steady margin booster, we expect D’mart to register revenue, EBITDA and PAT CAGR of 28.1%, 32.1% and 41.4%, respectively, over FY17-20. Key growth catalysts are: customer loyalty; likely shift of consumers towards mall like organised shopping experience; and introduction of private labels.
While we aver that D’mart is a perfect play on the Indian retail story, we abide by Warren Buffet’s admonition – an investor should understand that “Price is what you pay, value is what you get”. Hence, with limited upside from current levels (31.4x FY20E EV/EBITDA), we initiate coverage with ‘HOLD/SU’ and TP of Rs 1,290.