Avenue Supermarts (DMART) owns and operates an emerging national supermarket chain

Avenue Supermarts

BSE Sensex

31,284

S&P CNX

9,634

Avenue Supermarts

Initiating Coverage | Sector: Retail

CMP: INR818

TP: INR804 (-2%)

Neutral

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1,6,12 Rel. Perf. (%)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val, (INR m)

Free float (%)

DMART IN

624.1

839 / 559

-11/-/-

510.5

7.9

5183

17.8

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 opening 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 4.1m sf and grown its sales and PAT at a CAGR of 40%

and 51% respectively.

Delivering value

Expect PAT CAGR of 41% over FY17-21



Financial Snapshot (INR b)

Y/E Mar

FY17 FY18E FY19E

Sales

119.0 163.1 217.9

EBITDA

9.8 13.7 18.7

4.8

8.0 11.2

EPS (Rs)

7.7 12.8 17.9

EPS Growth (%)

34.5 67.2 39.3

BV/Share (Rs)

61.6 70.5 83.0

P/E (x)

106.6 63.8 45.8

P/BV (x)

13.3 11.6

9.8

RoE (%)

17.9 19.4 23.3

RoCE (%)

14.2 16.7 23.4

Shareholding pattern (%)

As On

Promoter

Public

Others

Mar-17

82.2

17.8



Avenue Supermarts

Delivering value



Size of India’s retail sector stands at USD616bn with share of organized brick and

mortar retail at USD55bn (9%). While overall retail is expected to grow at a CAGR

of 11.7% to USD960b by 2020, organized brick and mortar retail is expected to

grow at a faster CAGR of 20.2% to USD115b (12%) thereby providing huge

opportunity of growth for DMART.

While food and grocery forms the largest share of organized brick and mortar

retail in 2016 at 24%, penetration of food and grocery still stood at 3% in 2016 of

total retail 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 accounts 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 7.5m sf by FY21) embellishing its growth potential.

Focus on cluster-based approach towards store expansion, rich product

assortment, owned store model, centralized 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 60bp to 8.8% by FY21, which along with savings

on interest cost, would drive up PAT margin from 4% to 5.4%. With higher asset

turns, 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 INR804 implies

2% downside.

Massive untapped opportunity offers high growth potential

Niket Shah

91 22 39825426

Niket.Shah@motilaloswal.com

Please click here for Video Link

21 June 2017

The Indian retail industry is expected to grow at a CAGR of 11.7% to USD960b by

2020 from USD616b, organized brick and mortar retail is expected to grow at a

faster CAGR of 20.2% to USD115b (12%). Thus, we believe, India’s retail Industry

offers massive scope for growth. With its strong track record and its cluster-

based approach towards expansion, DMART is well placed to benefit. Positioned

Avenue Supermarts

as a value retailer, its 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 INR29,019. Unlike most of its peers, DMART has

been able to grow profitably without sacrificing on margins. It has grown from one

store in 2002 to 131 stores across 11 states/UT’s. It is typically an early mover in

areas populated by lower-middle, middle and aspiring upper-middle income

consumers in the income bracket of INR25,000-75,000 per month. DMART plans to

open 25 new stores every year. Given that Gujarat and Maharashtra, which

contribute ~80% to its revenue, contribute only 21% towards total retail spend in

India (USD616b), the growth potential for DMART is immense.

Its secret sauce for success has stood the endurance test

A combination of rich product assortment and making it available at everyday low

price (EDLP) is DMART’s winning formula in value retailing. For EDLP, the company

focuses on everyday low cost (EDLC), the key ingredients of which are:



Right product assortment:

DMART focuses on the most popular SKUs(from the

perspective of its target customers’ monthly purchase basket) in each product

category. We believe this helps to improve sales velocity, lower pilferage and

ensure fresh products on the shelf. DMART enjoys revenue per square foot of

INR29,019 against less than INR17,500 (FY16 data) for peers. For DMART,

pilferage is less than 50bp of sales.



Owned stores model:

Its strategy of expanding through owned stores ensures

savings in rent costs (4-5% for peers) and protects it from escalation in rentals.

DMART believes that RoCE of owned stores is low for the first nine years, but is

substantially higher thereafter. Of its 131 stores, DMART owns ~85%.



Sourcing efficiency:

DMART purchases directly from manufacturers and primary

vendors, thus saving on distributor/dealer margins. Upfront payments to

suppliers(lowest payables among peers: 9 days) help it to avail cash discounts,

which it passes on to end consumers. The logistics partners we interacted with

indicate that though working with DMART means lower revenue per km, the

turnover offered is higher and payment is immediate.



Centralized sourcing:

40% of DMART’s total sourcing is centralized, giving it

greater bargaining power. It stocks faster moving products like food and grocery

in warehouses closer to its stores and slower moving products like apparel

further away, thus optimizing storage costs. We believe DMART can increase

centralized sourcing to 60%, leading to further savings in procurement, which

can be passed on to the end consumer.



Lower employee cost:

DMART works on a variable employee model, which

ensures low employee costs – below 2% of sales. Only~4,200 employees are on

its direct payroll. The balance staff are third-party party hires.



Input metric focus:

DMART rates its managers based on number of idle cash

counters, empty shelves (especially when stocks exist in warehouses), and level

of pilferage. It allots ESOPs to deserving employees, creating a sense of

ownership amongst employees.

EDLC-EDLP creates a powerful virtuous cycle of growth for the company.

21 June 2017

Avenue Supermarts

Participating in e-tail opportunity, too

E-tail penetration in foods and groceries (F&G; key revenue contributor to DMART)

is miniscule at 0.03% and is expected to be 0.2-0.45% by 2020. Key factors like

supply chain & logistics, perishable nature of products, and maintenance of

consistent quality will restrict the growth of e-tailing in the F&G category. We do not

see competition from web-only e-tailers in the F&G space as a big threat for DMART.

Yet, DMART intends to participate in the e-tail opportunity and is piloting its online

model in some areas of Mumbai, where customers can buy online and choose to

pick up their purchases at

D-Mart Ready

pick-up points or get doorstep delivery

against delivery charges. DMART considers the in-store model more beneficial, as it

helps to spread the fixed costs better, as against the typical e-tail model, where

delivery costs are involved.

PAT to register 41% CAGR over FY17-21

We expect DMART to register revenue CAGR of 31% to INR349b in FY21, driven by

addition of 25 stores every year and improving revenue per square foot. DMART has

clocked high inventory turns of ~12x and fixed asset turnover of 4x over FY12-17,

despite asset heavy model which in our view is commendable. With increasing scale,

its ability to source at better prices is expected to improve further, which should

drive 60bp EBITDA margin expansion to 8.8%, though DMART would pass on most of

the benefits to the consumer. With full debt repayment (post IPO proceeds) leading

to savings in interest cost, we expect PAT to register 41% CAGR over FY17-21. With

net working capital at 26 days, mainly through efficient management of inventory

(stable around 34 days) and improving RoCE (14.2% in FY17 to 27.5% in FY21E), we

believe DMART resembles the performance and track record of the world’s largest

and most successful retailer, ‘Walmart’.

Valuation and view

We believe DMART deserves to be valued at a premium as it stands out on account

of its top-notch execution capabilities. Our key rationales for premium valuations

include:

The only retail company to grow consistently and profitably:

DMART has

grown its total area of operations at 21% CAGR over FY12-17 and that too

without sacrificing its profitability. Its PAT grew at 51% CAGR over the same

period.

Profitable expansion without sacrificing on returns:

DMART has consistently

improved its return ratios despite following an asset-heavy model. Its post tax

RoCE improved from 8% in FY12 to 14.2% in FY17 (FY17 includes impact of fund

raising). Most of Indian peers follow an asset-light approach and have been

unable to make a positive RoE.

High Resemblance to Wal-Mart on all parameters:

Wal-Mart has showcased

consistent performance in terms of margins and return ratio over last 30 years.

During 2006-16, its gross margins have broadly remained in the range of 24-25%

while EBITDA and PAT margins have remained in range of 7.5-8% and 3.5-4%

respectively. Accordingly, it has consistently delivered an average RoE of 21%.

Similarly, DMART currently in its growth phase and has exhibited superior

performance on all parameters. It has registered revenue CAGR of 40% over

FY12-17, with consistent improvement in EBITDA/PAT margins from 6.3% / 2.7%

21 June 2017

Avenue Supermarts

in FY12 to 8.2% / 4% in FY17 with RoE improving from 9.5% in FY12 to 18% in

FY17 (FY17 includes impact of fund raising). Although, the gross margins of Wal-

Mart is higher at 25% vs DMART’s 15%, EBITDA margins of DMART are higher at

8% vs 7% of Wal-Mart because of low employee cost structure and other

expenses. PAT margins for FY17 stood at 4% (DMART) vs 3% (Wal-Mart).

Thus, we take Wal-Mart as a benchmark for valuations considering DMART’s high

resemblance with it on financial parameters and performance. Wal-Mart during its

high growth phase period CY98-CY00, registered earnings CAGR of ~20% with

average 1 year forward valuation of 33x. Post its high growth phase, the growth has

tapered off mainly due to advent of online players. The earnings CAGR for CY01-16

has been 7% which also led to decline in PE multiple (average PE during the period

was 18x). We believe DMART is currently in its high growth phase and expect it to

ROE (14.2% and 18% in FY17 to 27.5% and 27.4% in FY21E, respectively). Given

DMART’s flawless execution in the past and visibility of high earnings growth going

forward, we believe it deserves P/E of 45x (35% premium to Wal-Mart average PE of

33x) FY19E EPS, arriving at a price target of INR804. We initiate coverage with a

Neutral

rating.

21 June 2017

Avenue Supermarts

Proven track record in value retailing

Well set to multiply through cluster-based approach



India’s retail sector offers massive opportunity – it is estimated to grow at a CAGR of

11.7% to become a USD960b industry by 2020. With the penetration of the organized

segment in Food & Groceries, the key revenue driver for DMART, being just 3%, the

company has ample scope for growth.

Positioned as a value retailer, DMART has established a strong track record of

profitable growth. Over FY12-17, while its overall revenue has grown at a CAGR of

40%, like-to-like revenue has consistently grown higher than 20%. Revenue per square

foot has grown from INR13,890 in FY12 to INR29,019 in FY17. Unlike most of its peers,

DMART has been able to grow profitably without sacrificing on margins.

It has grown from one store in 2002 to 131 stores across 11 states/UTs. However, it

derives ~80% of revenue from just two states – Maharashtra and Gujarat. Its cluster-

based store expansion strategy results in greater penetration within the states it is

already present in.

It intends to invest 75% of its profits earned within the existing cluster. Yet, it is

typically an early mover in areas populated by lower-middle, middle and aspiring

upper-middle income consumers in the income bracket of INR25,000-75,000 per

month. DMART plans to open 25 new stores every year.

Excellent track record as a successful value retailer

DMART has positioned itself as a one-stop retail store chain, catering to value-

seeking retail customers, largely from the lower-middle, middle and aspiring upper-

middle income segments (typically in income bracket of INR25,000-75,000 per

month). We believe its positioning as a value retailer meshes well with India’s

demographic profile and is a key success factor. On the back of its value retailing

strategy, DMART has witnessed 28% CAGR in number of bills over FY12-17to

108.5m, 40% CAGR in revenue, and a consistent 20%+ in like-to-like (24months)

revenue. Revenue per square foot has increased at CAGR of 16% to INR29,019 over

FY12-17. DMART has been able to grow profitably without sacrificing on margins,

unlike most peers that have been bleeding.

Exhibit 1: Bills cut have grown at a CAGR of 28%

Bills cut (nos in mn)

84.7

67.2

31.8

43.1

53.4

20.3%

108.5

31.6%

26.1%

22.4%

21.5%

21.2%

Exhibit 2: Excellent track record of like-to-like growth

LFL Growth

FY12

FY13

FY14

FY15

FY16

FY17

FY12

FY13

FY14

FY15

FY16

FY17

Source: Company, MOSL

Note: LFL is 24months.

Source: Company, MOSL

21 June 2017

Avenue Supermarts

Exhibit 3: Growing retail business area with stores

No of stores

Total Trading area(m sqft)

4.1

3.35

1.81

2.19

2.69

Exhibit 4: Consistent increase in revenue per square foot

Revenue per sqft (INR)

23,938

25,636

29,019

18,458

13,890

21,399

1.59

FY12

FY13

FY14

FY15

110

FY16

131

FY17

FY12

FY13

FY14

FY15

FY16

FY17

Source: Company, MOSL

Exhibit 5: Revenue has posted a strong 40% CAGR

Revenue(INR b)

51.3

39.6

40.3

37.4

33.3

38.6

Growth(%)

Exhibit 6: Margin discipline despite higher discounts

Gross Margin(%)

14.7

14.5

15.0

7.3

14.8

7.1

EBITDA Margin(%)

14.9

7.7

15.3

8.2

6.3

22.1

FY12

33.4

FY13

46.9

FY14

64.4

FY15

85.8

FY16

119.0

FY17

FY12

6.4

FY13

FY14

FY15

FY16

FY17

Source: Company, MOSL

Exhibit 7: PAT has posted a strong 51% CAGR

PAT(INR b)

71.9

46.1

55.4

31.2

51.3

49.5

Growth(%)

Exhibit 8: Strong track record of improving return ratios

ROE(%)

RoCE(%)

18.5

12.8

9.5

8.0

FY12

10.3

13.6

14.0

15.8

14.2

19.6

23.6

17.9

0.6

FY12

0.9

FY13

1.6

FY14

2.1

FY15

3.2

FY16

4.8

FY17

FY13

FY14

FY15

FY16

FY17

Source: Company, MOSL

Note: IPO proceeds led to decline in FY17

Source: Company, MOSL

Impressive growth since inception

After beginning operations with just one store in 2002, DMART has grown

impressively over the years. As at March31, 2017, it had 131 stores spread across

eleven states. Growth has accelerated in the last four years, with store count

increasing from 75 in FY14 to 131, and total store area increasing from 2.2msf

(million square feet) to 4.1msf as on 31st March 2017.

21 June 2017

Avenue Supermarts

Exhibit 9: Expanding presence across India through cluster approach

Source: Company, MOSL

The company offers an extensive range of products, which it classifies into three

major categories – foods, non-foods, and general merchandise and apparel. In FY17,

foods contributed 54% of revenue, non-foods contributed 20%, and general

merchandise and apparel contributed 26%.



Foods:

This category includes staples, groceries, fruits & vegetables, snacks &

processed foods, dairy & frozen products, beverages, and confectionery.



Non-foods:

This category includes home care products, personal care and

toiletries, and other over-the-counter products.



General merchandise & apparel:

This category includes bed & bath products,

home appliances, furniture, crockery, utensils, plastic goods, garments, and

footwear.

Exhibit 10: DMART F&G share in FY12

Others,

26.0%

Exhibit 11: DMART F&G share in FY17

Others,

26.4%

Foods,

53.0%

Non-Foods,

21.0%

Non-

Foods,

20.0%

Foods,

53.7%

Source: Company, MOSL

21 June 2017

Avenue Supermarts

Untapped geographies offer expansion opportunities

Huge growth potential lies ahead for D-mart on account of geographical expansion.

Currently, D-mart has major presence in Gujarat & Maharashtra, although the GDP

growth across various other Indian cities has been significant which makes them a

lucrative and appropriate market for expansion.

Tier 1 cities like Delhi and Chennai have witnessed a GDP growth of >9% indicating

significant room for penetration in these untapped geographies. Apart from Tier 1

cities, geographies like Gurgaon, Kota and Karnal have also shown attractive growth

in GDP where D-mart’s presence is limited. Future growth will emanate from

expanding footprint in such high growth geographies.

Exhibit 12: Huge geographic expansion opportunities

Source: Company, MOSL

21 June 2017

Avenue Supermarts

Low penetration of Food & Groceries provides huge potential for growth

Food and grocery (F&G) accounts for 67% of sales for the retail sector. Though the

share of F&G has declined by 1% from 2012 and is expected to decline to 66% by

2020, the share of F&G in organized retail has doubled from 1.5% in 2012 to ~3% in

2016 and is expected to be 5% by 2020. However, the penetration of food &

groceries as compared to other retail segments still remains near to the ground. The

share of F&G in organized retail is a meager ~3% compared to a share of 40% of

footwear segment, indicating a huge potential for further penetration.

Exhibit 13: Modern Retail Penetration Category wise

50%

40%

30%

20%

10%

Food & Grocery

Apparel &

Accessories^

Footwear

Jewellery &

Watches

Pharmacy &

Wellness

Consumer

Electronics

Home & Living

Others^^

22%

32.5%

40%

43.5%

2016

2020

Modern Retail Penetration Category wise

32%

25%

10% 12%

12% 14%

27%

30%

Source: Techopak report titled “Industry Report on Indian Food and General Merchandise Retail Industry” – August, 2016

^Accessories includes Bags, Belts, Wallets

^^Others include Books & Stationery, Toys, Eyewear, Sports, Goods, Alcoholic Beverages & Tobacco

Exhibit 14: Retail spending by states in India (USD b)

Share of F&G in Retail

Share of Other Retail categories

Share of F&G in Organized Retail

US$960b

US$ 326b, (34%)

US$616b

US$386b

US$ 125b, (32%)

US$ 261b, (68%)

2012

US$4b

(1.5%)

2016

US$ 203b, (33%)

US$ 413b, (67%)

US$13b

(3%)

2020(P)

US$31b

(5%)

US$ 634b, (66%)

Source: Industry sources, Technopak Research & Analysis; Note: Other retail comprises of Apparel, Jewelry & Watches, Pharmacy & Wellness,

Footwear, Mobile, Electronics, Home & Living. Others Year mentioned in FY

The organized F&G market has grown at a CAGR of 33% to reach USD13b in 2016

from USD4b in 2012, and is expected to further grow at a CAGR of 26% to reach

USD31b by 2020.

In India, 16 states contribute ~85% of the total retail spend. These states would

continue to have a significant share of the total retail consumption. The retail

opportunity in three southern states – Karnataka, Andhra Pradesh and Telangana– is

currently ~USD100b. According to Technopak, these three key southern states

21 June 2017

Avenue Supermarts

should witness robust growth over the next four years as well. Maharashtra

contributes the highest share of ~19% and should continue to grow steadily while

Gujarat is another state that is expected to continue growing steadily.

Exhibit 15: Retail spending by top cities in India (USD b)

381

Top 2 Cities

Next 6

Next 16

Next 50

Rest of India

Source: Company, MOSL

Top 2 Cities:

Delhi and Mumbai

Next 6 cities:

Bangalore, Chennai, Hyderabad, Ahmedabad, Pune, Kolkatta

Next 16 cities:

Surat, Jaipur

D-Mart has chosen the best states in terms of retail spending

Currently, DMART is present in Maharashtra (60 stores), Gujarat (29), Telangana and

Andhra Pradesh (21), Karnataka (10), Madhya Pradesh and Chhattisgarh (5), NCR (1),

Daman (1) and Rajasthan (3) and Tamil Nadu (1).The five key states where DMART is

already present account for 40% of the total retail spend in India, with Maharashtra

being the highest at USD94b (15%) of the total retail spending of USD616b.

Maharashtra accounts for the highest share of DMART stores – 60of 131 stores

(46%), and contributes ~63% of its total revenue, followed by Gujarat at ~19%.

Exhibit 16: Break-up of retail spending by states (USD b)

Exhibit 17: Growth in retail spending across D-Mart states

14%

349

267

616

10%

11%

12%

Maharashtra

Gujrat

AP &

Telangana

Karnataka

Madhya

Pradesh

Source: Company, MOSL

21 June 2017

Avenue Supermarts

Exhibit 18: Maharashtra and Gujarat contribute 82% of DMART revenue

Source: Company, MOSL

Cluster-based approach to growth

DMART follows a cluster-based store expansion strategy. It opens new stores within

a radius of a few kilometers of its existing stores and distribution centers. This allows

it to achieve (a) better understanding of local needs and preferences, (b) increased

penetration in under-served markets, (c) higher cost efficiency due to economies of

scale, and (d) greater brand visibility.

In the process of opening new stores, DMART takes into account factors like (a)

population density, (b) customer and vehicular traffic, (c) customer accessibility, (d)

potential growth of local population and economy, (e) area development potential

and future development trends, (f) estimated spending power of the population and

local economy, and (g) payback period estimated on the basis of expected sales

potential, strategic benefits, proximity and performance of competitors, and store

site characteristics.

The company’s go-to-market strategy allows setting up stores of 10,000-60,000sf in

areas with a population of 60,000 to areas as large as metropolitan cities. This

allows higher flexibility to grow. The company intends to add 25 stores every year

and has a clear strategy of re-investing ~75% of the money earned into existing

clusters and the balance in creating new clusters. Out of the 21 new stores added

from FY17, 15 stores (71%) have been added in the existing clusters. Going ahead,

the company intends to increase market penetration and expand store network in

Maharashtra and Gujarat, and strengthen store network in AP, Telangana, Madhya

Pradesh, Karnataka, Chhattisgarh, Tamil Nadu and Northern India. It intends to add

3.4msf of additional retail area by FY21.

21 June 2017

Avenue Supermarts

Exhibit 19: Increasing presence in existing clusters, thus becoming stronger

States

Maharashtra

Gujarat

Telangana& Andhra Pradesh

Karnataka

MP &Chattisgarh

NCR

Daman

Rajasthan

Tamil Nadu

Total

FY12

FY13

FY14

FY15

FY16

FY17

131

110

Source: Company, MOSL

We believe choosing the store location is one of the most critical factors for any

retail supermarket chain. Unlike aggressive expansion by other retail chains, DMART

has selected a calibrated approach of opening stores in selected areas within a

particular state, resulting in better management. Most D-Mart stores are located in

the suburbs in the metros and tier-II/III cities, with high middle class population,

which keeps the operational costs low. It enjoys first mover advantage in many

areas where no other retail chains are present (for example, Koparkhairne and

Malad in suburban Mumbai), resulting in better traction and early customer loyalty.

We believe DMART is well set to expand further and replicate its successful value

retailing model in new clusters.

21 June 2017

Avenue Supermarts

Success formula has stood endurance test

Has created a virtuous cycle of growth



A combination of rich product assortment and making it available at everyday low

price (EDLP) is DMART’s winning formula in value retailing. For EDLP, the company

focuses on everyday low cost (EDLC), the key ingredients of which are right product

assortment, owned store model, sourcing efficiency, and low employee costs.

The company focuses on improving sales velocity by stocking the best-selling SKUs and

brands in each product category that it identifies based on local preferences, and

offering them at a minimum discount of 6%. Popular products at relatively low prices

helps improve footfalls, leading to increased velocity in sales and lower pilferage.

DMART achieves the ability to offer higher discounts through (a) upfront payment to

suppliers (lowest payables in the industry: 9days), (b) direct sourcing from

manufacturers, thus eliminating distributor margins (typically 4-5%), (c) savings in

rental cost (4-5% of sales in case of peers), as it owns ~85% of its real estate, and (d)

40% centralized sourcing through cluster-based approach.

DMART passes on most of its cost savings to customers in the form of discounts (EDLC

to EDLP strategy), which leads to higher footfalls, followed by higher revenue per

square foot and further sourcing benefits, thus creating a virtuous cycle.

Achieving right product assortment is the key

Our channel checks suggest that DMART focuses on stocking only the best-selling or

most popular SKUs identified based on local preferences. This increases sales

velocity and lowers pilferage. In detergents, for instance, we observed that only two

SKUs of 500gm and 2kg were available at the D-Mart store we visited against six

SKUs at a nearby competitor. Stocking and selling large quantities of few SKUs

enables bulk buying of the specific SKU’s at better prices.

We understand that DMART determines the optimum SKUs to be kept on its shelves

based on the monthly requirements of a typical middle-class customer – a typical

salaried person prefers to shop for non-perishable items once a month. Achieving

the right assortment through an optimum mix of national, state and local level

brands based on area-specific trends is an art that DMART has mastered.

The company offers an extensive range of products, which it classifies into three

major categories – foods, non-foods, and general merchandise and apparel. In FY17,

foods contributed 53.7% of revenue, non-foods contributed 20%, and general

merchandise and apparel contributed 26.3%.

Exhibit 20: Highest revenue per square foot amongst peers

25636

Revenue / Sqft (INR - FY16)

16311

7538

16898

17547

5722

Dmart

Reliance

Hyper City

Spencer's

Future Retail

Source: Company, MOSL

21 June 2017

Avenue Supermarts

Exhibit 21: Passes on most of the cost benefit to customers

Gross Margin (FY16)

30%

20%

19%

15%

19%

Dmart

Hyper City

Spencer's

Star Bazaar

Future Retail

Source: Company, MOSL

Owned store model protects from escalation of lease rentals

Unlike peers, DMART follows the owned store model. It believes that in the asset-

light leased store model, RoIC could be superior in the first 8-9 years, but then rent

escalation begins to take a toll. Of its 131 stores, DMART owns ~85% and remaining

are on long-term lease. It has already signed 60 properties at different timelines;

most of them are greenfield. It believes in opening stores near residential colonies in

tier-II/tier-III cities or in suburban areas in the metropolitan cities, and steers clear

from up-market malls. No-frills store layout and decor, large size (average store size:

28,000sf) and controlled advertising rein in operating costs. DMART is trying the

leased store model for

D-Mart Ready,

its pilot pick-up stores.

For adding to its owned stores, DMART chooses one of three options:

1. Buys land, on which it builds a store in 3-4 years.

2. Identifies land and acquires it with the condition that the landowner would build

the store based on its specifications. This option usually results in the store

being built quicker than in the first option.

3. Identifies and acquires a readymade structure. This is the quickest way to

acquire stores.

Exhibit 22: Owned store model saves from rental costs and its escalation (FY16 data)

Lease Rentals (% of sales)

8.4%

5.5%

5.3%

3.9%

0.2%

Dmart

Hyper City

Spencer's

Star Bazaar

Future Retail

Source: Company, MOSL

Since inception, DMART has understood the basic needs of the customer. It follows

no-frills store layouts, opens stores in high catchment residential areas rather than

in malls, offers fewer choices of no-frills products and owns most of its stores,

resulting in lower operational costs and best-in-class revenue per square foot.

21 June 2017

Avenue Supermarts

Exhibit 23: Basic store layout with no flashy interiors, helping to keep costs low

Source: MOSL

Robust supply chain management and upfront payment to vendors

Over the years, DMART has built robust supply chain management, involving

planning, merchandizing, sourcing, vendor management, logistics, quality control,

pilferage control, and replacement & replenishment.

Efficient inventory management is critical for profitability in the retail business.

DMART’s cluster-based approach to establishing stores helps it to achieve best-in-

class inventory turnover (34 days in FY17). It has implemented SAP, which ensures

real time inventory and supply management.

DMART makes upfront payment to suppliers and logistics providers, which helps it

to maintain strong relationships and achieve lower costs. Our interaction with a

logistics service provider highlighted that though the revenue offered per km is

lower incase of DMART, the turnover offered is higher and payment is immediate.

This also leads to consistency in sourcing without any risk of stock-outs.

Exhibit 24: Believes in upfront payment to suppliers

Payable Days

111

Dmart

Hyper City

Spencer's

Star Bazaar

Future Retail

Source: Company, MOSL

21 June 2017

Avenue Supermarts

Increasing centralized sourcing adding to efficiency

Currently, DMART sources 40% of its requirement through centralized sourcing. The

warehouses in which it stores fast-moving items like grocery are located closer to

clusters while the warehouses in which it stores items like apparel are located a little

away from clusters; this helps to save on capital cost. To support its 131 stores, the

company has 21 distribution centers and six packaging centers. We believe that as

the scale of stores improves further, centralized sourcing would increase, generating

further efficiency.

Lower manpower cost

DMART follows a dual system for its manpower requirement: (1) it hires key

employees on its own payroll, and (2) obtains employees in job roles where attrition

is high on contract basis. Currently, it has ~4,200 employees on its payroll. A large

part of its floor staff and security staff is on contract basis, which also helps to keep

costs low. DMART’s employee cost has consistently been below 2% of sales.

Exhibit 25: Functions on low employee costs

Employee costs (INR m)

1.9

2.1

1.7

1.6

1.7

1.6

% of sales

873

FY14

1,341

FY15

1,490

FY16

1,925

FY17

2,773

FY18E

3,487

FY19E

4,489

FY20E

5,593

FY21E

Source: Company, MOSL

Input metric-focused company

DMART rates its store managers on parameters like (a) percentage of cash counters

operational at the store, (b) stock availability, especially when stock is available at

the warehouse and not on the store’s shelves, and (c) pilferage. The only output

metric the company looks at is RoIC. Typically, the target is to achieve 5% EBITDA

margin and 10% RoIC in the first 24 months. If that is achieved, the company moves

on to achieving 15% RoIC, and if that is achieved, it stops looking at this metric and

starts focusing on soft factors. If a store fails to achieve 10% RoIC in 24 months, the

company works to fix issues but curtails further investments in the store. According

to the management, some of the older stores have started hitting 100% RoIC.

Creating a virtuous cycle

DMART passes on the benefits of low costs (EDLC) to customers in the form of low

prices (EDLP). Low prices help to attract higher footfalls, in-turn leading to

higher/faster sales, and higher bargaining power and sourcing efficiencies,

translating into lower costs. This creates a powerful virtuous cycle of growth.

21 June 2017

Avenue Supermarts

Exhibit 26: Virtuous cycle of value retailing

Everyday Low Cost through sourcing efficiency, owned

stores, basic store layout, low employee cost

Leading to further

sourcing efficiency

driving better cost

Virtuous

Cycle

Of Growth

Drives Everyday Low Price

as it passes on maximum

benefits to customers

Higher footfall and right

product assortments leads to

higher turnover of products

Drives Everyday Low Price as

it passes on maximum

benefits to customers

21 June 2017

Avenue Supermarts

Participating in e-tail opportunity, too

Piloting online model with pick-up facilities



E-tail in India is on a rapid growth trajectory and is expected to reach 4-6% of the total

retail opportunity by 2020 from ~2% in FY16. The size of e-tail is expected to increase

from USD12b currently to USD38.5b-57.5b by 2020.

E-tail penetration in foods and groceries (key revenue contributor to DMART) is

miniscule at 0.03% and is expected to be 0.2%-0.45% by 2020. Key factors like supply

chain & logistics, perishable nature of products and consistency in quality will restrict

the growth of e-tailing in the F&G category.

We do not see competition from web-only e-tailers in the F&G space as a big threat for

DMART. Yet, DMART intends to participate in the e-tail opportunity and is piloting its

online model in some areas of Mumbai, where customers can buy online and choose

to pick up their purchases at D-Mart Ready pick-up points or get doorstep delivery

against delivery charges.

E-tailing to constitute 4-6% of India’s retail market by FY20

E-tailing in India is on a rapid growth trajectory and is expected to reach 4-6% of the

total retail market by FY20, up from 2% in FY16. It is likely to mirror the growth

witnessed in China owing to (a) low penetration of organized retail, and (b)

dominance of web-only e-tailers. Technopak estimates the opportunity size at

USD38.5b-USD57.5b by FY20.

Exhibit 27: E-tail penetration of key categories in India

FY16

Categories

Electronics

Apparel & Lifestyle

Home & Living

Food & Grocery

Overall Market

Retail Size

US$ bn

26.5

413

616

E-tail Size

US$ bn

5.25-5.95

2.9-3.45

0.53

0.12

12.3

E-tail

Penetration

15%-17%

6%-7%

0.03%

Retail Size

US$ bn

41.75

634

960

FY20 (P)

E-tail Size

US$ bn

15.8-26.5

10-14.8

3-5.85

1.2-2.85

38.5-57.5

E-tail

Penetration

25%-42%

13.5%-20%

7.5%-14%

0.2%-0.45%

4%-6%

Source: Company, MOSL

In FY12, the size of the e-tail market was only USD0.6b. The then key categories –

electronics, books, stationery, and music accounted for ~50% of the e-tail market.

Currently, the e-tail market in India is 2% (~USD12b) of the overall retail market and

is projected to be 4-6% (USD39b-USD58b) of the overall retail market by FY20.

Consumer electronics, being a highly standardized category, currently constitutes a

major portion of the e-tail market in India. It is followed by apparel and lifestyle.

Going ahead too, these two categories are expected to lead the online space.

21 June 2017

Avenue Supermarts

Exhibit 28: Retail share across traditional and organized brick &mortar and online stores

Unorganised Retail

0.14%

12%

93%

Organised B&M Retail

Etail

89%

83%

2012

2016

2020

Source: Company, MOSL

In relatively mature markets like the USA, where organized retail penetration is high,

multi-channel retail chains lead the online market. In a relatively new market like

China (with 20% organized retail market), pure play e-tailers lead the online market.

India is likely to go the China way in terms of web-only players dominating the

online market, given the low organized retail penetration (around 9%).

Exhibit 29: Top retailers worldwide have seen significant growth in online channel

Store

Wal-Mart Stores (US)

Otto (Germany)

Tesco (UK)

Macy's (US)

Casino Guichard-Perrachon (France)

Suning Commerce Group (China)

The Home Depot (US)

Best Buy (US)

Lojas Americanas (Brazil)

Home Retail Group (UK)

Sears Hokdings Corp (US)

The Gap (US)

2014 Total

Retail Revenue

485,651

12,843

99,713

28,105

64,462

17,733

83,176

40,339

6,899

9,295

31,198

16,435

2009-14

Retail Rev

CAGR

3.5%

2.1%

1.8%

3.7%

13.1%

13.3%

4.7%

-4.1%

23.5%

8.4%

12.3%

17.0%

2014 E-com

Retail Sales

12,200

8,397

6,504

5,400

4,606

4,199

3,765

3,500

3,403

3,241

2,850

2,500

2011-14

E-com Rev CAGR

24.0%

6.7%

14.6%

34.9%

15.8%

63.5%

42.9%

15.3%

23.5%

8.4%

12.3%

17.0%

2014 E-com Rev

(% of Total Rev)

2.5%

65.4%

6.5%

19.2%

7.1%

23.7%

4.5%

8.7%

49.3%

34.9%

9.1%

15.2%

Source: Company, MOSL

The growth in e-tail is driven by improvement in mobile phone and internet

penetration, increasing number of internet-habituated consumers, improved

supply-side and limitations of organized brick & mortar stores. The evolution of e-

tail in India is marked by the dominance of web-only players. The early years of the

new millennium saw the launch of several e-tailing sites like Rediff and Indiaplaza. E-

tailing was initially to provide products online without any specific focus on

customer service and experience. The defining moment in Indian e-tail occurred

with the entry of e-tailers like Flipkart and Myntra in 2007.

21 June 2017

Avenue Supermarts

F&G category to be least impacted by growing e-tail

Different categories (and sub-categories) would be impacted differently by e-tailing,

depending on category dynamics and purchase behavior. Factors and key

differentiators that render a category more or less suited to e-commerce are:



Supply chain &logistics



Perishability



Cyclicity



Installation



Service support



Positioning



Customization

Based on the above analysis, the impact across categories is expected to emerge

across the following pillars of growth:

High Impact:

Marked by categories that will shift to online channel rapidly;

Medium Impact:

Categories that will need support before they witness rapid

shift to the online channel; and

Low Impact:

Categories that will move to the online channel slowly as

compared to the High and Medium Impact categories.

Exhibit 30: Retail share across traditional and organized B&M and E-tail

KEY CATEGORIES

High Impact

Books & DVDs

Small Electronics

Fashion & Lifestyle

E-Tail will drive significant Indian demand in

the next five years driven by greater

adoption.

Following category dynamics shall define

rationale for the same:

Higher standardization

Low value ticket size

Low involvement

Discretionary / range-brands

KEY CATEGORIES

Medium Impact

Home Improvement

White Goods

Kids

Jewelry

Eyewear

E-Tail will complement the sales that is marked

by existing channels and formats - traditional

brick & mortar, organized brick and mortar. The

primary category rationale for the same are:

High involvement categories

Longer product life / low frequency of purchase

High ticket size

Low standardization

High experience factor

KEY CATEGORIES

Low Impact

Food & Grocery

Home Improvement

(e.g furniture)

High Value Jewelry

E-Tail will witness limited impacts over the

next five years and the key rationale for the

same:

Need based

In-adept logistics capabilities

Quality consistency

21 June 2017

Avenue Supermarts

The world over and in India, e-commerce continues to work on the model that can

allow smooth transition of food and grocery retailing to the online channel.

However, it takes time and sustained deployment of human and financial resources.

In 2016, food and grocery (F&G) comprised less than 4% of the world’s total e-

commerce market size. In India as well, the share of F&G in e-commerce continues

to be small at less than 1%; by FY20, it is projected to grow to 4-6%.

In India, the online groceries market is currently concentrated in the top-8 cities, led

by the NCR and Bangalore. The top three players – Bigbasket, Grofers and Amazon

Now account for 75% of the online groceries space.

Exhibit 31: E-tailing – F&G market in India

Source: Technopak Research & Analyst

The Indian F&G e-tailers would continue to leverage the traction gained within these

top-8 cities. Over the next five years, F&G e-tailing could achieve good traction in

the top-20 cities provided the players involved stabilize the right business model.

These players will need to figure out their business proposition and model to grow

to smaller cities. Consumers in smaller cities typically do not face the time and travel

challenges that consumers in larger cities do in making trips to the popular local

market for regular daily shopping. Furthermore, the leading general merchandise

retailers in these cities also deliver to the home.

21 June 2017

Avenue Supermarts

D-Mart piloting online model offering pick-up through ‘D-Mart Ready’

The F&G category is the backbone for DMART and contributes over 54% to its

revenue. Though the online channel may not be a significant threat to DMART, the

company recognizes its growth potential and has forayed into the online channel

through its pilot stores, ‘D-Mart Ready’. Currently, it is piloting in some regions of

Mumbai. DMART plans to operate through a differentiated model, where it offers

two options to customers: (1) a customer can buy online and pick up the

merchandise at a chosen time from a selected pick-up point, or (2) have the

merchandise home delivered and pay an extra delivery charge. For the online

channel, the minimum order that the customer has to place is INR1,000. DMART

believes that offering free home delivery may not be profitable for a value retailer;

hence, the option of free pick-up or chargeable doorstep delivery.

Exhibit 32: ‘D-Mart Ready’ website interface and app-based shopping

Source: MOSL

21 June 2017

Avenue Supermarts

Exhibit 33: ‘D-Mart Ready’ website interface

Source: MOSL

21 June 2017

Avenue Supermarts

Expect 41% earnings CAGR over FY17–21

All-round growth ahead



We expect DMART to add 25 stores every year, with majority of the stores coming in

existing clusters. We expect its total retail area to increase from 4.1msf in FY17 to

7.5msf in FY21.

Revenue per square foot would increase from INR29,019 in FY17 to INR46,462 in FY21,

implying a CAGR of 12%. Revenue would grow at a CAGR of 31% from INR118.9b in

FY17 to INR349b in FY21.

DMART has consistently improved its EBITDA margin from 6.3% in FY12 to 8.2% in

FY17, which should improve further, as further economies of scale flow into the

business. We expect 60bp improvement over FY17-21 to 8.8%.

Despite capex-heavy model, its consistent improvement in asset turnover coupled

with margin improvement is likely to deliver strong RoCE of 27% in FY21. We believe

asset turnover will improve from 2.2x in FY17 to 4.6x in FY21.

Expect revenue CAGR of 31% over FY17-21

D-Mart’s constant focus to achieve higher velocity of sales through its value retailing

model is expected to increase revenue per sqft by a CAGR of 12% over FY17-21E.

This coupled with addition of 25 stores each in next four years, is expected to drive

revenue growth by 31% CAGR over FY17-21E to INR349b in FY21E. Approximately,

75% of new store addition is expected in existing cluster while balance will be in

creating new clusters.

Exhibit 34: Revenue to post 31% CAGR over FY17–21

Revenue (INR b)

40.3

37.4

33.3

38.6

37.1

Growth %

33.6

15.9

28.7

24.6

11.9

7.1

Exhibit 35: Strong improvement in revenue per square foot

Revenue per sqft (INR)

13.2

14.0

Growth %

12.0

10.0

46.9

64.4

85.8

119.0 163.1 217.9 280.6 349.6

21399 23938 25636 29019 33081 37713 42238 46462

Source: Company, MOSL

Exhibit 36: Addition of 25 stores annually

No. of stores

Retail area (m sqft)

5.8

6.6

7.5

Exhibit 37: EBITDA margins to remain stable

EBITDA (INR b)

7.3

7.1

7.7

8.2

8.4

Margin %

8.6

8.7

8.8

2.2

2.7

3.4

4.1

4.9

110

131

156

181

206

231

3.4

4.6

6.6

9.8

13.7

18.7

24.4

30.8

Source: Company, MOSL

21 June 2017

Avenue Supermarts

Improvement in margins and asset turnover to generate higher RoCE

DMART has maintained a strong track record of 15% gross margin, which is expected

to continue, given its sourcing efficiency. As it gains scale, gross margin should

improve, but DMART is likely to pass on most of the gains to its customers. Over

FY17-21E, we expect 20bp expansion in gross margin to 15.5% and 60bp expansion

in EBITDA margin to 8.8% in FY21.

An average capex of INR6.7b is expected over next four years, and net working

capital days are likely to remain stable. Asset turnover should improve from 2.2x in

FY17 (impacted due to IPO) to 4.6x in FY21. This should lead to an improvement in

RoCE from 14.2% in FY17 to 27.5% in FY21. Additionally, with scale, DMART should

report positive FCF of INR6,128m in FY20 and INR9,214m in FY21.

Exhibit 38: PAT to post strong 41% CAGR over FY17-21

71.9

PAT (INR b)

67.2

51.3

31.2

49.5

39.3

2.9

31.9

28.0

3.4

1.6

2.1

3.2

4.8

8.0

11.2

14.7

18.8

3.5

3.4

2.2

3.0

3.1

3.7

3.9

4.4

5.0

Growth %

Exhibit 39: Fixed asset turnover to improve to 6x

Fixed Asset Turnover (x)

Asset Turnover (x)

4.6

4.5

4.2

5.5

6.0

Source: Company, MOSL

Exhibit 40: Debt repayment out of IPO proceeds

0.6

0.7

Net Debt/Equity

Exhibit 41: Return ratios on upward trajectory

RoE

23.6

18.5

19.6

17.9

15.8

19.4

23.4

16.7

RoCE

23.3

25.8

25.9

27.4

27.5

-0.1

0.0

-0.1

13.6

14.0

14.2

Source: Company, MOSL

Exhibit 42: CFO to remain healthy

Cash Flow from operations (INR b)

58.5

67.7

49.0

48.7

49.7

51.2

53.0

54.6

% of EBITDA

Exhibit 43: Turning FCF positive in FY18

FCF (INR m)

6182

2982

204

9214

2.0

2.2

4.5

4.8

6.8

9.6

12.9

16.8

-724

-2549

-1989

-1947

Source: Company, MOSL

21 June 2017

Avenue Supermarts

Exhibit 45: Consistent inventory days as key to Working

capital discipline

Growth %

Inventory (Days)

Debtor (Days)

Creditor (Days)

Exhibit 44: Store addition to continue

Gross Block (INR b)

14.0

18.3

25.0

30.8

37.3

43.8

50.6

57.8

Source: Company, MOSL

21 June 2017

Avenue Supermarts

Valuation and view

Initiating with Neutral rating



We take Wal-Mart as a benchmark for valuations considering DMART’s high

resemblance with it on financial parameters and performance. Wal-Mart during its

high growth phase period CY98-CY00, registered earnings CAGR of ~20% with average

1 year forward valuation of 33x.

Post its high growth phase till CY00, the growth has tapered off mainly due to advent

of online players. The earnings CAGR for CY01-16 has been 7% which also led to

decline in PE multiple (average PE during the period was 18x).

We believe DMART is currently in its high growth phase and expect it to register

revenue/PAT CAGR of 31% / 41% over FY17-21 with improving RoCE and ROE (14.2%

and 18% in FY17 to 27.5% and 27.4% in FY21E, respectively).

Given DMART’s flawless execution in the past and visibility of high earnings growth

going forward, we believe it deserves P/E of 45x (35% premium to Wal-Mart average

PE of 33x) FY19E EPS, arriving at a price target of INR804. We initiate coverage with a

Neutral rating.

Only retailer to consistently achieve profitable growth

We observe that most Indian retailers have exhibited a volatile financial trajectory

and lack of capital efficiency. Against this, DMARTs financial performance has been

strong and consistent on all fronts. Most of its peers are yet to show profitability;

companies like Titan that have a healthy track record undergo cycles. DMART has

expanded its total area of operations at a CAGR of 21% over FY12-17 and that too

without sacrificing profitability. Its PAT grew at 51% CAGR over this period.

Exhibit 46: DMART stands out in terms of growth trajectory

Total trading area(m sqft)

PAT (INR b)

4.8

4.1

3.4

1.8

0.6

FY12

0.9

2.2

2.7

1.6

2.1

3.2

1.6

FY13

FY14

FY15

FY16

FY17

Source: Company, MOSL

Exhibit 47: Most retailers yet to turn profitable (PAT; INR b)

Hyper City

Spencer's

0.1

Star Bazaar

Exhibit 48: A few retailers profitable, but inconsistent

(PAT; INR b)

Titan Co Ltd

7.3

Shoppers Stop Ltd

7.3

8.2

Trent Ltd

6.9

6.0

-0.9

-0.7 -0.9

-0.7

-0.8 -0.9

-1.5

-0.5

-1.7

-2.1

-2.6

FY12

FY13

FY14

-1.4

0.2

-0.4

-0.1 -0.3

FY13

-0.1-0.2

FY14

0.4

1.3

0.0

0.6

FY15

FY16

FY12

FY15

FY16

Source: Company, MOSL

21 June 2017

Avenue Supermarts

Expanding without sacrificing returns

DMART has exhibited outstanding performance by consistently growing its return

ratios despite following an asset-heavy model. Most of its peers follow an asset-light

approach and have been unable to achieve positive RoE. We note that Star Bazaar,

Spencers, and Hypercity all have negative RoE. In FY17, DMART’s RoE declined on

account of fund raising through IPO.

Exhibit 49: DMART’s RoE has grown consistently despite growth

No. of stores

18.5

12.8

9.5

19.6

RoE %

23.6

17.9

FY12

FY13

FY14

FY15

110

FY16

131

FY17

Source: Company, MOSL

Mismanagement of working capital has led to fall of multiple retailers in

the past; DMART has maintained strong discipline

Rapid expansion and inability to manage working capital has led to the fall of many

retail chains in India. Subhiksha and Vishal Retail are examples of two retailers that

failed miserably, mainly on account of poor inventory management and credit

default. Subhiksha’s history of credit defaults led to supply breakages. This led to

situations where at some times the stores had very high inventory and at other

times, there were stock-outs. This led to customer dissatisfaction. Vishal’s

distribution center-led model failed, as it could not build an IT network. Buying at

warehouses was rarely aligned to customer needs and resulted in dead inventory.

Exhibit 50: DMART’s strong working capital management

Inventory (Days)

Debtor (Days)

Creditor (Days)

FY14

FY15

FY17

FY16

FY18E

FY19E

FY20E

FY21E

Source: Company, MOSL

Compared to Indian retailers, DMART has exhibited superior performance on all

parameters. It has registered revenue CAGR of 40% over FY12-17 with consistent

improvement in EBITDA / PAT margins from 6.3% / 2.7% in FY12 to 8.2% / 4% in

FY17. Its unique approach of cluster-based growth, rich product assortment, and

supply chain efficiency have been the key to DMART’s performance.

21 June 2017

Avenue Supermarts

Exhibit 51: DMART’s superior performance

CAGR FY12-17 (%)

Revenue

Revenue per sqft

EBITDA

PAT

Source: Company, MOSL

High resemblance between Walmart and DMART

Wal-Mart has showcased consistent performance in terms of margins and return

ratio over last 30 years. Its Gross margins have broadly remained in the range of 20-

25% while EBITDA and PAT margins have remained in range of 6-8% and 3-4%

respectively. Accordingly, it has consistently delivered an average RoE of 23%.

Similarly, DMART currently in its growth phase and has exhibited superior

performance on all parameters. It has registered revenue CAGR of 40% over FY12-

17, with consistent improvement in EBITDA/PAT margins from 6.3% / 2.7% in FY12

to 8.2% / 4% in FY17 with RoE improving from 9.5% in FY12 to 18% in FY17 (FY17

includes impact of fund raising). Although, the gross margins of Wal-Mart is higher

at 25% vs DMART’s 15%, EBITDA margins of DMART are higher at 8% vs 7% of Wal-

Mart because of low employee cost structure and other expenses. PAT margins for

FY17 stood at 4% (DMART) vs 3% (Wal-Mart).

Exhibit 52: Consistent gross margins (%)

Walmart

25.0

24.9

24.8

D-Mart

24.8

25.1

7.8

6.3

14.7

14.5

15.0

14.8

14.9

7.7

6.4

Exhibit 53: Consistent EBITDA margins (%)

Walmart

D-Mart

7.5 7.1

7.0

7.7

7.5 7.3

FY12

FY13

FY14

FY15

FY16

FY12

FY13

FY14

FY15

FY16

Source: Company, MOSL

Exhibit 54: Both are consistent on PAT margins (%)

Walmart

3.5

2.7

3.6

2.8

3.4 3.4

D-Mart

3.4 3.3

3.0

3.7

Exhibit 55: Matched RoE %

Walmart

22.5

23.0

21.0

12.8

9.5

D-Mart

18.5

20.8 19.6

18.1

23.6

FY12

FY13

FY14

FY15

FY16

FY12

FY13

FY14

FY15

FY16

Source: Company, MOSL

21 June 2017

Avenue Supermarts

Strong growth opportunities lie ahead for DMART

DMART derives ~63% of revenue from just one state, Maharashtra, which accounts

for only 15% of India’s total retail spending. Similarly, Gujarat, which contributes

~19% to DMART’s revenue, accounts for just 6% of total retail spending in India. We

believe DMART has ample growth opportunities.

Value DMART at 45x P/E multiple on FY19E EPS

Thus, we take Wal-Mart as a benchmark for valuations considering DMART’s high

resemblance with it on financial parameters and performance. Wal-Mart during its

high growth phase period CY98-CY00, registered earnings CAGR of ~20% with

average 1 year forward valuation of 33x. Post its high growth phase till CY00, the

growth has tapered off mainly due to advent of online players. The earnings CAGR

for CY01-16 has been 7% which also led to decline in PE multiple (average PE during

the period was 18x). We believe DMART is currently in its high growth phase and

expect it to register revenue/PAT CAGR of 31% / 41% over FY17-21 with improving

RoCE and ROE (14.2% and 18% in FY17 to 27.5% and 27.4% in FY21E, respectively).

Given DMART’s flawless execution in the past and visibility of high earnings growth

going forward, we believe it deserves P/E of 45x (35% premium to Wal-Mart average

PE of 33x) FY19E EPS, arriving at a price target of INR804. We initiate coverage with

Neutral

rating.

Exhibit 56: Walmart’s 1-year forward P/E

19.4

17.7

P/E (x)

Avg(x)

Source: Company, MOSL

Exhibit 57: Peer Comparison

Company Name

Global Players

Wal-Mart Stores Inc

Costco Wholesale Corp

Target Corp

Indian Players**

Titan Co Ltd

Shoppers Stop Ltd

Trent Ltd

Avenue Supermarts Ltd*

MOSL Estimates

7,183

459

1,257

7,912

110

227,715

71,447

28,087

-3

-5

-17

Market

Cap.

(USD mn) CY17E CY18E

EV/EBITDA

CY17E

CY18E

RoE %

CY17E

CY18E

EV/Sales

CY17E

CY18E

Sales

PAT CAGR

CAGR

CY16-18E

**Data refers to FY18E,19E for Indian players

21 June 2017

Avenue Supermarts

Bull & Bear case

Bull case



In the bull case, we are assuming that improvement macro-economic situation



will lead to higher consumption and would drive revenue growth. This will aid

efficient sourcing of goods and would reduce raw material costs. We assume

revenue CAGR of 42% over FY17-21 (31% in base case) and PAT CAGR of 54%

over the same period (41% in base case).

We assume that greater focus on fast-moving basic products would lead to

reduced inventory and receivable days, in turn leading to better cash

generation, which would further fuel growth.

We assume DMART’s established value retailing model will multiply further and

expand presence in other geographies across India, leading to new store

additions of 35 each over the next four years against the base case of 25 new

store additions. We assume that improved operational efficiency would also

increase revenue per square foot from the stores, which would grow at a CAGR

of 15% over FY17-21 (12% in base case).

We are assuming 80bp EBITDA margin to 9% increase over FY17-21. This will

lead to EPS CAGR of 54%.

Assuming a target multiple of 49x (peak valuation of Wal-Mart) in the bull case

instead of 45x that we have taken for the base case, we get a bull case target

price of INR1,073 (upside of 31% to CMP) instead of the base case target price of

INR804 (downside of 2%), based on FY19E EPS.

Bear case



In the bear case, we are assuming an increase in raw material costs with DMART

unable to pass it on and subdued consumption levels would hamper revenue

growth. We assume revenue CAGR of 20% over FY17-21 (31% in base case) and

PAT CAGR of 23% over the same period (41% in base case).



We assume that DMART would not be able to multiply further and expansion

across other geographies would be restricted, which would lead to new store

additions of only 15 each over the next four years against the base case of 25

new store additions. We assume lower churn of inventory on shelves would also

hamper growth in revenue per square foot from the stores, which would grow

at a CAGR of 8% over FY17-21 (12% in base case).



We assume 80bp EBITDA margin decline over FY17-21. This will lead to EPS

CAGR of 23%.



Assuming a target multiple of 30x, we get a bear case target price of INR357

(downside of 56%) instead of the base case target price of INR804 (downside of

2%), based on FY19E EPS.

21 June 2017

Avenue Supermarts

Exhibit 58: Scenario Analysis – Bull Case

Sales (INR m)

Sales growth (%)

EBITDA (INR m)

EBITDA Margin (%)

EBITDA growth (%)

PAT (INR m)

PAT Margin (%)

PAT growth (%)

EPS (INR)

Target multiple (x)

Target price (INR)

Upside/downside (%)

Exhibit 59: Scenario Analysis – Bear Case

FY17

FY18E

FY19E

118,977 144,640 173,983

38.6

21.6

20.3

9,812 10,703 12,875

8.2

7.4

48%

20%

4,788

6,073

7,419

4.0

4.2

4.3

49.5

26.8

22.2

7.7

9.7

11.9

357

-55

Source: Company, MOSL

FY17

FY18E

FY19E

118,977 180,134 260,602

Sales (INR m)

38.6

51.4

44.7

Sales growth (%)

9,812 15,311 22,672

EBITDA (INR m)

8.2

8.5

8.7

EBITDA Margin (%)

48%

56%

48%

EBITDA growth (%)

4,788

9,043 13,671

PAT (INR m)

4.0

5.0

5.2

PAT Margin (%)

49.5

88.9

51.2

PAT growth (%)

7.7

14.5

21.9

EPS (INR)

Target multiple (x)

1073

Target price (INR)

Upside/downside (%)

Source: Company, MOSL

21 June 2017

Avenue Supermarts

SWOT Analysis



Best in class

operational efficiency

compared to peers

Relationship with

suppliers and logistics

provider

Strong execution

capability in

identifying locations

for store opening.



Key management

personnel risk and

promoter risk

Asset heavy model

for expansion

Rapid expansion is

difficult since largely

follows ownership

model



Huge opportunity for

growth in new states

apart from

Maharashtra and

Gujarat

To capitalize on online

opportunity through D-

Mart Ready stores

Scope to increase

centralized sourcing

To increase share of

private label brands



Pricing aggression from

web only players.

Failure to identifying

and buying key

properties.

Sharp increase in real

estate prices.

Hyper-Inflationary

situation impacting

food and groceries



21 June 2017

Avenue Supermarts

Key risks

Key management personnel

DMART’s growth has been driven by the management skills and guidance of Mr.

Radhakishan Damani (Promoter) and a large part of its success as a value retailer

can be attributed to him. He continues to guide and mentor the other key personnel

(MD, Mr Ignatius Navil Naronha, CFO and ED, Mr Ramakant Baheti). Any loss of

services of key management personnel and inability to hire new talent to replace

key management personnel may have an adverse effect on the business.

High concentration in Maharashtra and Gujarat

Maharashtra and Gujarat contributed 80% of DMART’s revenue in FY17.The high

concentration of DMART stores in these two states exposes DMART to adverse

developments related to competition, economic, political, demographic, and any

other changes in these states. Additionally, its cluster-based approach only adds to

concentration risk.

Competition from web-only e-tailers

E-commerce in India has witnessed intense competition, with deep discounts and

regular promotions by several e-tailers. There could be competitors with higher

financial resources and greater experience in managing internet-based businesses

than DMART. Inability to effectively compete with e-tailers could hurt its online

business as well as existing business.

Failure to identify changing trends and consumer preferences

Right product assortment based on local preference for products and identification

of changing consumer trend is the key to DMART’s higher revenue per square foot.

Failure to replicate this in the new states that DMART enters may lead to poor

performance by the company. This could pose a risk to its future growth strategy.

21 June 2017

Avenue Supermarts

Management overview

Mr Ramesh S Damani, Chairman and Independent Director

Mr Ramesh S Damani is the Chairman and an Independent Director of the company.

He holds a graduation degree in Commerce from University of Bombay. He holds a

post-graduation degree in Business Administration, Marketing from California State

University, Northridge. He has over 18 years of experience in the securities market.

Prior to joining, he founded Ramesh S Damani Finance Private Limited, a stock

broking company registered with the BSE, but subsequently closed the broking

business. He is also presently a director on the board of Ramesh S Damani Finance

Private Limited. He has been a Director since September 9, 2009.

Mr Ignatius Navil Naronha, Managing Director

He is the Managing Director of the company and holds a graduation degree in

Science from University of Bombay and a post-graduation degree in Marketing

Management from Narsee Monjee Institute of Management Studies, Mumbai. He

has over 20 years of experience in the consumer goods industry. Prior to joining, he

worked with Hindustan Unilever Limited for eight years. During this period, he

worked in the field of market research, sales and modern trade and at the time of

leaving this organization, he was designated as the Key Account Manager - Modern

Trade. He has been a Director since January 2, 2006.

Mr Ramakant Baheti, Chief Financial Officer

He is the Chief Financial Officer and an Executive Director of the company. He holds

a graduation degree in Commerce from Maharishi Dayanand Sarswati University,

Ajmer. He is a chartered accountant and a member of the ICAI. He has 19 years of

experience in Finance. Prior to joining, he was the Manager-Finance of Bright Star.

He was also a director of Damani Share and Stock Brokers Private Limited, a stock

broking company. He has been a Director since January 2, 2006.

Mr Elvin Machado, Executive Director

He is an Executive Director of the company. He holds a graduation degree in

Economics from the University of Bombay. He has over 28 years of experience in the

sales and marketing. Prior to joining, he worked with Hindustan Unilever Limited for

approximately 18 years and at the time of leaving the organization, he was

designated as the Branch Operations Manager - East (Rural).He has also worked

with Mayo Health Care Private Limited. He is responsible for real estate acquisitions.

He has been a Director since June 10, 2015.

21 June 2017

Avenue Supermarts

Assumptions

Exhibit 60: Assumption sheet

FY14

Stores (nos)

New Store Additions (nos)

Total trading area (lacs sqft)

Sqft per store

Growth %

Revenue per sqft (INR)

Growth %

Net Sales (INR m)

21.9

29,200

21,399

16%

46,865

FY15

26.9

30,225

23,938

12%

64,394

FY16

110

33.5

30,455

25,636

85,881

FY17

131

41.0

31,298

29,019

13%

118,977

FY18E

156

49.3

31,611

33,081

14%

163,133

FY19E

181

57.8

31,927

37,713

14%

217,933

FY20E

206

66.4

32,246

42,238

12%

280,576

FY21E

231

75.2

32,569

46,462

10%

349,550

Source: Company, MOSL

21 June 2017

Avenue Supermarts

Financials and Valuation

Consolidated - Income Statement

Y/E March

Total Income from Operations

Change (%)

Raw Materials

Gross Margins

Margin (%)

Employees Cost

Other Expenses

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT after EO Exp.

Total Tax

Tax Rate (%)

Minority Interest

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY14

46,865

40.3

39,845

7,020

15.0

873

2,729

43,448

92.7

3,417

7.3

570

2,847

557

158

2,449

835

34.1

1,614

71.9

3.4

FY15

64,394

37.4

54,879

9,515

14.8

1,341

3,592

59,811

92.9

4,583

7.1

815

3,768

724

183

3,226

1,109

34.4

2,117

31.2

3.3

FY16

85,838

33.3

73,035

12,802

14.9

1,490

4,676

79,201

92.3

6,636

7.7

984

5,652

913

179

4,918

1,715

34.9

3,202

51.3

3.7

FY17

118,977

38.6

100,810

18,167

15.3

1,925

6,429

109,165

91.8

9,812

8.2

1,278

8,534

1,220

286

7,600

2,683

35.3

129

4,788

49.5

4.0

FY18E

163,133

37.1

138,011

25,123

15.4

2,773

8,646

149,430

91.6

13,703

8.4

1,601

12,103

185

12,288

4,178

34.0

103

8,006

67.2

4.9

FY19E

217,933

33.6

184,153

33,780

15.5

3,487

11,550

199,191

91.4

18,742

8.6

1,906

16,836

186

17,022

5,788

34.0

11,152

39.3

5.1

FY20E

280,576

28.7

237,087

43,489

15.5

4,489

14,590

256,166

91.3

24,410

8.7

2,219

22,191

190

22,381

7,609

34.0

14,705

31.9

5.2

(INR Million)

FY21E

349,550

24.6

295,370

54,180

15.5

5,593

17,827

318,790

91.2

30,760

8.8

2,548

28,212

386

28,598

9,723

34.0

18,822

28.0

5.4

Consolidated - Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Total Loans

Deferred Tax Liabilities

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Other Current Liabilities

Provisions

Net Current Assets

Appl. of Funds

E: MOSL Estimates

FY14

5,468

4,088

9,556

6,408

265

16,229

13,969

2,252

11,717

888

155

5,316

3,783

554

884

1,847

1,226

533

3,469

16,229

FY15

5,615

6,377

11,992

9,043

305

21,340

18,321

3,041

15,281

981

152

7,134

5,396

380

1,287

2,208

1,185

843

179

4,926

21,340

FY16

5,615

9,589

15,204

11,770

399

27,374

24,960

4,025

20,935

817

293

8,970

6,717

351

1,818

3,641

1,944

1,640

5,329

27,374

FY17

6,241

32,177

38,418

14,810

505

53,734

30,807

5,303

25,504

1,529

531

30,662

9,479

210

18,843

2,130

4,491

2,607

1,800

26,171

53,734

FY18E

6,241

37,781

44,022

505

44,528

37,307

6,904

30,403

1,631

531

17,976

12,856

268

1,916

2,936

6,013

3,403

2,447

163

11,963

44,528

FY19E

6,241

45,588

51,829

505

52,334

43,807

8,810

34,997

1,743

531

23,091

17,154

358

1,656

3,923

8,028

4,541

3,269

218

15,064

52,334

FY20E

6,241

55,881

62,122

505

62,628

50,632

11,029

39,603

1,683

531

31,147

22,085

461

3,550

5,050

10,335

5,846

4,209

281

20,812

62,628

(INR Million)

FY21E

6,241

69,057

75,298

505

75,803

57,798

13,577

44,221

2,097

531

41,831

27,514

575

7,450

6,292

12,876

7,283

5,243

350

28,955

75,803

21 June 2017

Avenue Supermarts

Financials and Valuation

Ratios

Y/E March

Basic (INR)

EPS (diluted from FY17)

Cash EPS (diluted from FY17)

BV/Share (diluted from FY17)

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Net Debt/Equity

FY14

3.0

3.9

17.5

0.0

FY15

3.8

5.2

21.4

0.0

217.0

156.6

38.3

7.3

102.1

0.0

-4.5

19.6

14.0

14.3

3.5

3.0

3.2

5.2

0.7

FY16

5.7

7.5

27.1

0.0

143.4

109.7

30.2

5.5

70.9

0.0

-3.5

23.6

15.8

16.1

3.4

3.1

2.5

6.2

0.7

FY17

7.7

9.7

61.6

0.0

106.6

84.2

13.3

3.8

46.4

0.0

-3.5

17.9

14.2

18.8

3.9

2.2

6.8

7.0

-0.1

FY18E

12.8

15.4

70.5

4.3

30.0

63.8

53.1

11.6

2.8

33.4

0.5

0.4

19.4

16.7

21.8

4.4

3.7

3.0

-0.1

FY19E

17.9

20.9

83.0

6.0

30.0

45.8

39.1

9.8

2.1

24.4

0.7

5.3

23.3

23.4

25.0

5.0

4.2

2.9

0.0

FY20E

23.6

27.1

99.5

7.9

30.0

34.7

30.2

8.2

1.6

18.7

1.0

11.0

25.8

25.9

27.8

5.5

4.5

3.0

-0.1

FY21E

30.2

34.2

120.7

10.1

30.0

27.1

23.9

6.8

1.3

14.7

1.2

16.4

27.4

27.5

30.4

6.0

4.6

3.2

-0.1

0.0

-1.3

18.5

13.6

14.4

3.4

2.9

5.1

0.6

Consolidated - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(Inc)/Dec in FA

Free Cash Flow

(Pur)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

FY14

2,449

570

557

-750

-827

1,998

-17

1,981

-2,706

-724

-2,694

1,148

-552

652

-60

614

554

FY15

3,226

815

724

-1,000

-1,520

2,245

-25

2,220

-4,770

-2,549

-4,731

326

2,634

-621

2,345

-166

546

380

FY16

4,929

984

908

-1,641

-686

4,494

-23

4,471

-6,461

-1,989

-123

-6,574

2,892

-816

2,082

-21

372

351

FY17

7,600

1,278

934

-2,683

-2,350

4,780

-168

4,612

-6,559

-1,947

-237

286

-6,511

18,700

3,039

-1,220

-129

20,390

18,492

351

18,843

FY18E

12,288

1,601

-185

-4,178

-2,719

6,806

-6,602

204

185

-6,417

-14,810

-2,402

-103

-17,315

-16,927

18,843

1,916

FY19E

17,022

1,906

-186

-5,788

-3,360

9,595

-6,612

2,982

186

-6,426

-3,346

-83

-3,428

-260

1,916

1,656

FY20E

22,381

2,219

-190

-7,609

-3,854

12,947

-6,765

6,182

190

-6,575

-4,412

-66

-4,478

1,894

1,656

3,550

(INR Million)

FY21E

28,598

2,548

-386

-9,723

-4,243

16,794

-7,580

9,214

386

-7,194

-5,647

-53

-5,699

3,900

3,550

7,450

21 June 2017

REPORT GALLERY

RECENT INITIATING COVERAGE REPORTS

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Avenue Supermarts

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