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Avenue Supermarts Limited AVEU.BO, DMART in Value Retailer at Premium Multiples; Initiate with Price: Rs664.40 Neutral Price Target: Rs635.00

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Avenue Supermarts Limited AVEU.BO, DMART in Value Retailer at Premium Multiples; Initiate with Price: Rs664.40 Neutral Price Target: Rs635.00 Completed 07 Apr 2017 04:07 AM HKT Disseminated 07 Apr 2017 04:44 AM HKT Asia Pacific Equity Research 07 April 2017 Initiation Neutral Avenue Supermarts Limited AVEU.BO, DMART IN Value Retailer at Premium Multiples; Initiate with Price: Rs664.40 Neutral Price Target: Rs635.00 We initiate on Avenue Supermarts (ASL) with a Neutral rating and Mar-18 price India target of Rs635. ASL (operates stores under D-Mart brand), with a strong Consumer, Retail, Media execution track record, is a quality play on the Indian F&G retail sector in our AC opinion, being the fastest-growing and most profitable retailer. We forecast Latika Chopra, CFA 27%/34% revenue/EPS CAGR over FY17-20. However, significant gains post the (91-22) 6157-3584 [email protected] listing (120% above the offer price) lead to current valuations of 55x/42x Bloomberg JPMA CHOPRA <GO> FY18E/19E P/E, which fairly reflect the long-term growth opportunity in our J.P. Morgan India Private Limited view. Any minor lapse near term (store opening, comps, and/or margins) and Ebru Sener Kurumlu substantial investments in E-Commerce (earnings dilutive) could strain valuation (852) 2800-8521 multiples. [email protected] Much to like here. Food retailing is about format and execution and in our J.P. Morgan Securities (Asia Pacific) Limited view ASL has been able to achieve this combination well. We like ASL’s execution capabilities, single format focus, best-in-class productivity metrics Price Performance (sales densities ~2-3x peers), prudent store expansion strategy and strong focus 650 on customer satisfaction partly aided by its ‘everyday low price’ positioning. 550 Despite its capital-intensive strategy of ownership (vs renting), its asset turns Rs 450 are similar to peers. We believe it is a relatively “safe” play on India’s 350 consumption growth story, given the non-cyclical nature of the food retail 250 business. Despite low gross margins (owing to low price positioning), ASL has Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 AVEU.BO share price (Rs) amongst the highest EBITDA margins (vs peers) owing to tight control on NIFTY (rebased) operational costs (employee, SG&A) and high sales comps. YTD 1m 3m 12m Abs 111.4 111.4 111.4 111.4 Growth drivers. 1) Significant headroom to gain share with prudent store % % % % expansion (~2.1mn sq ft over FY18-20E), 2) Sustaining healthy average SSSG Rel 98.1% 108.0 99.4% 89.5% momentum at ~18% over FY17-20E (vs 25% over FY12-16), 3) Inflation (for % HPC/Food has been rising) should aid comps, 4) Scope for margin improvement exists with scale benefits, though we build stable margins, 5) Private label growth and contribution from online over the medium term. What are the risks? 1) E-Commerce threat – upside risk to investments in the online channel (global retailers have witnessed margin erosion with higher E- commerce outlays), 2) High capex intensity: FCF to remain negative for the next few years, and 3) Slower-than-expected network expansion and/or tepid SSSG. Valuations are factoring in the growth opportunity. Post the bumper listing (120%+ above offer price), valuations at 55x/42x FY18E/19E P/E leave little room for disappointment we think. Our PT is based on a forward EV/EBITDA multiple of 23x and P/E multiple of 40x, implying a PEG of 1.9x, which is in line with the global/regional peer average. Analysis of early-stage P/E multiples of global retailers (traded at 40-60x) justify the premium valuations we believe. Avenue Supermarts Limited (Reuters: AVEU.BO, Bloomberg: DMART IN) Rs in mn, year-end Mar FY15A FY16A FY17E FY18E FY19E Company Data Revenue (Rs mn) 64,394 85,881 116,203 149,190 191,234 Shares O/S (mn) 562 Net Profit (Rs mn) 2,117 3,188 5,048 7,423 9,827 Market Cap (Rs mn) 373,089 EPS (Rs) 3.87 5.68 8.09 11.89 15.75 Market Cap ($ mn) 5,750 Revenue growth (%) 37.4% 33.4% 35.3% 28.4% 28.2% Price (Rs) 664.40 EPS growth (%) 30.7% 46.7% 42.5% 47.0% 32.4% Date Of Price 06 Apr 17 ROE 19.6% 23.5% 18.7% 17.4% 19.2% 3M - Avg daily vol (mn) - P/E (x) 171.7 117.0 82.1 55.9 42.2 3M - Avg daily val ($ mn) - EV/EBITDA (x) 83.2 58.0 36.5 27.9 21.6 NIFTY 9261.95 Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% Price Target End Date 31-Mar-18 Source: Company data, Bloomberg, J.P. Morgan estimates. See page 47 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com Latika Chopra, CFA Asia Pacific Equity Research (91-22) 6157-3584 07 April 2017 [email protected] Key catalysts for the stock price: Upside risks to our view: Downside Risks to our view: 1) SSSG comps, 2) Pace of store 1) Better-than-expected SSSG trends, 2) Higher 1) Weak SSSG comps, 2) Significant drag from new addition and 3) Margin trends. inflation aiding comps, 3) Margin uptick from store losses, 3) Higher competitive intensity, 4) increased cost optimization, 4) Faster-than- Significant losses from E-commerce and 5) Slower estimated store additions and 5) Positive store expansion ramp up. contribution from E-commerce. Key financial metrics FY15 FY16 FY17E FY18E FY19E Valuation and price target basis Revenues (Rs mn) 64,394 85,881 116,203 149,190 191,234 Our Mar-18 PT is Rs635. Our PT is based on a forward Revenue growth (%) 37.4% 33.4% 35.3% 28.4% 28.2% EV/EBITDA multiple of 23x and P/E multiple of 40x, implying EBITDA (Rs mn) 4,590 6,635 10,066 13,158 17,090 a PEG of 1.9x, which is in line with the global/regional peer EBITDA margin (%) 7.1% 7.7% 8.7% 8.8% 8.9% average. Analysis of early-stage P/E multiples of global Tax rate (%) 34.3% 34.9% 35.0% 35.0% 35.0% retailers (traded at 40-60x) justify the premium valuations we Net Profit (Rs mn) 2,117 3,188 5,048 7,423 9,827 believe. EPS (Rs) 3.9 5.7 8.1 11.9 15.7 LFL growth trends EPS growth (%) 30.7% 46.7% 42.5% 47.0% 32.4% DPS (Rs) - - - - - BVPS (Rs) 22 27 62 74 90 Operating cash flow (Rs mn) 2,220 4,471 4,489 7,189 9,517 Free cash flow (Rs mn) (636) (1,038) (720) (2,519) (2,112) Net margin (%) 3.3% 3.7% 4.3% 5.0% 5.1% ROE (%) 19.6% 23.5% 18.7% 17.4% 19.2% ROCE (%) 21.4% 24.2% 22.3% 22.1% 27.1% Key model assumptions FY15 FY16 FY17E FY18E FY19E Revenue/sqft(Rs) 26,388 28,136 32,909 37,699 40,598 . Source: Bloomberg, Company data and J.P. Morgan Retail space(mn sqft) 2.66 3.33 3.79 4.24 5.05 estimates EBITDA margin (%) 7.1% 7.7% 8.7% 8.8% 8.9% JPMe vs. consensus, change in estimates Source: Bloomberg, Company data and J.P. Morgan estimates. EPS FY18E FY19E JPMe old NA NA Sensitivity analysis EBITDA EPS JPMe new 11.9 15.7 Sensitivity to FY18E FY18E % change NA NA 1 % change in revenue/sqft 1.5% 1.7% Consensus NA NA 50bp change in EBITDA Margin 5.7% 6.6% Source: Bloomberg, Company data and J.P. Morgan estimates. Source: Bloomberg, Company data and J.P. Morgan estimates. 2 Latika Chopra, CFA Asia Pacific Equity Research (91-22) 6157-3584 07 April 2017 [email protected] Table of Contents Investment Summary ...............................................................4 Investment Positives................................................................4 #1 – Focused Value retailing player with best in class productivity metrics and enviable track record ...............................................................................................5 #2 – Inflation aids comps.........................................................................................8 #3 – Significant headroom to gain market share: Prudent store expansion strategy....9 #4 – Good Store Economics: High Operating Efficiency and Lean Cost Structure ..10 #5 – Healthy Return profile with opportunity to improve .......................................14 Investment Negatives.............................................................15 #1- FCF to remain negative in the short term .........................................................15 #2- Online Threat; Risk of increased outlay on E-commerce investment.................16 #3 – High valuation versus international peers .......................................................19 Valuation Analysis..................................................................20 Price Target and Recommendation ........................................................................20 DCF Valuation......................................................................................................22 Risks to Price Target .............................................................................................23 Company Analysis .................................................................23 Overview ..............................................................................................................23 Store Network and Distribution/Packing Centers ...................................................24 Revenue Mix and Merchandising...........................................................................25 Subsidiaries and Associate ....................................................................................26 Management Details..............................................................................................26 Board of Directors.................................................................................................28 Shareholding Pattern .............................................................................................28
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