INSTITUTIONAL EQUITY RESEARCH

Avenue Supermarts (DMART IN)

Solid execution + best store economics = Premium valuations

INDIA | RETAIL | INITIATING COVERAGE 30 April 2021

Avenue Supermarts, which owns and operates the DMart chain of supermarket stores, is the BUY only retailer in India to grow consistently and profitably. Our positive view on this company CMP RS 2890 stems from industry-leading asset turnover, high throughput due to its core offering of ‘Every Day Low Price’ driving high customer footfalls, and conversion and loyalty. Best-in-class store TARGET RS 3320 (+15%) economics, aggressive store expansion, right product mix, and low inventory days give it an COMPANY DATA edge over competitors. We believe that the company’s premium valuations factor in a big O/S SHARES (MN) : 648 opportunity for the organised groceries market, a strong moat, and execution excellence. MARKET CAP (RSBN) : 1930 Based on these dynamics, we initiate coverage with a DCF-based target of Rs 3,320. BUY. MARKET CAP (USDBN) : 26 Slow and steady approach towards online: We believe DMart’s strategy of slowly expanding in 52 - WK HI/LO (RS) : 3330 / 1954 LIQUIDITY 3M (USDMN) : 3.9 bigger cities would be fruitful, as the online grocery category remains at low-single-digits as a PAR VALUE (RS) : 10 percentage of the overall grocery market. Our analysis of competition suggests that DMart Ready (DMart’s online market) is present in only 9% of the cities where DMart offline stores exist. SHARE HOLDING PATTERN, % However, its online presence already covers 45% of the population where its offline stores are Mar 21 Dec 20 Sep 20 present. Flipkart and Grofers have the least overlapping presence with DMart’s covered cities. Promoters 75.0 75.0 75.0 Our analysis of 50 SKUs suggests that the order fulfilment rate is highest for Big Basket, followed DII 6.7 6.7 6.1 FII 10.1 10.1 10.3 by DMart Ready. Overall, DMart Ready and JioMart offer the lowest prices for 50% of their Others 8.2 8.2 8.6 inventory, while overall discounting is highest for DMart Ready. Leased, cluster-based approach for store opening will yield benefits: We expect DMart to open PRICE VS. SENSEX 126 stores over the next three years (FY22-24) compared to a mere 103 stores over FY18-21. The 280 company is moving towards controlled aggression in store openings – it is now looking for leased 240 properties vs. its earlier ownership model, since it has aggressive store-opening ambitions. Its 200 average area per store has seen a 4.1% CAGR from 28,500 sq. ft. in FY14 to touch 36,450 sq. ft. in FY20. We have modelled a 4.7% CAGR over FY21-25 to 46,500 sq. ft. per store by FY25. DMart 160 follows a 70:30 rule, where it opens 70% of its stores in existing markets and 30% in new 120 markets. While overall, Maharashtra and Gujarat account for 52% of its total stores, in last three 80 years, it opened only 29% of its new stores in these two states. 40 Best-in-class store economics: Our analysis of 10+ grocery retailers (listed and unlisted) suggests Jan/18 Jan/19 Jan/20 Jan/21 that while DMart is the second-largest grocery player in India in terms of revenue, it has the Avenue Super BSE Sensex highest operating margins. It has consistently outperformed peers in SSSG; we model 30%/16% Source: PhillipCapital India Research SSSG for FY23/24. Its revenue per sq. ft. CAGR was 4% over FY17-20; we have modelled a higher 10% over FY22-24. Its gross margin is below the industry’s average, as it offers the highest KEY FINANCIALS discounts to its customers. Its cost of retailing is the lowest, with the lowest employee and rental Rsmn FY21E FY22E FY23E costs in the industry. With no A&P spends and low opex, DMart has one of the highest operating Net Sales 2,38,013 3,08,648 4,38,020 margins in the sector. It is also one of the only grocery retailers to have positive operating cash EBIDTA 17,427 23,669 38,188 flow, because of its lowest inventory days. Net Profit 11,268 14,891 24,363 EPS, Rs 17.4 23.0 37.6 Financials: For DMart, we expect revenue CAGR of 34% over FY22-24 to Rs 553bn, higher than PER, x 166.1 125.7 76.8 19% over FY17-21. SSG growth of c.18% should lead revenue growth and the rest will come from EV/EBIDTA, x 106.0 78.2 48.6 store addition, as the company expands to 360 stores by FY24. We are building 15.4% gross P/BV, x 15.3 13.6 11.6 margins for FY24 and EBIDTA CAGR of 44% over FY22-24 to Rs 49bn in FY24 vs. Rs 21bn in FY20; ROE, % 9.2 10.8 15.1 PAT CAGR of 45% over FY22-24 to Rs 32bn. Free-cash-flow generation will start only from FY24, Source: PhillipCapital India Research Est. while cumulative operating cash flow will be Rs 68bn over FY22-24. RoIC will be at historic highs of 17% in FY24, while RoE/RoCE should be at 16%% each, due to high cash on the books. Ankit Kedia, Research Analyst Valuation and view: Avenue Supermarts is one of the strongest grocery retailers in India due to (+ 9122 6246 4122) [email protected] the following factors – market share gains, one of the best sales per sq. ft. ratios, lowest cost of retailing, good product assortment, highest operating margins across organised retailers, and one of the lowest inventory days. Its relentless focus on efficiency and offering the best value to customers has given it strong customer loyalty. We initiate coverage on Avenue Supermarts with a BUY rating and a DCF-based target of Rs3320, implying a valuation of 49x Sep’23 EV/EBIDTA. Key risks include – being underinvested in e-commerce, competitive intensity leading to higher discounting, and a delay in FCF generation because of elevated capex.

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

AVENUE SUPERMARTS INITIATING COVERAGE

DMart: Slow and steady approach towards online Online grocery is very competitive, with all players making significant losses in this model. Currently, it is a six-player market, with online-only players such as Big Basket, Grofers, Amazon and Flipkart marking significant inroads. Among online players, JioMart and DMart are the only two players that have significant offline presence.

Given that 85-90% of online grocery business is from top-10 cities, DMart’s strategy Dmart’s management has followed a of slowly expanding in the biggest cities should prove fruitful, as online grocery slow-and-steady approach to grow its continues to occupy low-single-digits in the overall grocery market. DMart Ready is online business while competitors are present only in bigger cities such as Mumbai, Pune, Ahmedabad, Bangalore, and aggressively expanding their presence Hyderabad. It offers customers a choice of self-pickup through designated pick-up in smaller cities points, or home delivery for a small convenience fee.

Service offerings across online grocery players Company App Cities Minimum Delivery Fee Delivery Timelines Loyalty Membership Membership Fee Daily orders Downloads Presence order value Benefit approx. Jio Mart 10mn + 200 0 Free 1-3 days You earn 1 point Free 500,000 (Android) for every Rs. 200 spent and value of 1 point is Rs 0.70. Amazon 100mn + 300 200 Rs.59(non-prime), Next day delivery Amazon prime, Delivery Rs.129/month or 150,000 Pantry (Android) Rs.30(prime) & free /scheduled delivery. fee benefit, Prime early Rs.999/year above Rs.799 Delivery date is access displayed Big Basket 10mn + 30 0 < Rs.600 - Rs.50, Delivery slots for up No Delivery Charge Rs.299/6 months 280,000 (Android) Rs.600-Rs.1199 - to 6 days. Express above Rs.600, access to Rs.30-35, > Rs.1200 delivery in next 60 priority slots, Additional - Free. minutes for express offers, Special promos, items only Grofers 10mn + 27 0 Rs.49 & free above Delivery slots for up Available at wholesale Rs.79/month, 190,000 (Android) Rs.800 to 7 days prices, priority support Rs.249/6 months, and exclusive offers Rs.449/year Flipkart 100mn + 50 600 Rs.50 & free above Delivery slots for up Early access to sales, 4 Rs999/year or NA Supermart (Android) Rs.1200 to 7 days supercoins earned for earning 200 every Rs.100 spent. super coins in last 12 months DMart 5 mn+ 7 1000 Rs.49 -79 Delivery slots for up No Membership NA NA Ready (Android) to 4 days program Source: Company, Phillip Capital India Research

Online grocery – Rs 1.17tn opportunity by FY24… …but continues to remain sub 3% of overall F&B market 1400 2.5% 1171 1200 2.0% 1000

1.5% 800 669

600 1.0% 396 400 242 0.5% 151 200 101 62 0 0.0% 2018 2019 2020e 2021e 2022e 2023e 2024e 2019 2024e

Source: Netscribers Source: Redseer

 DMart Ready has started to offer top-up orders for a basket size of only Rs 500. This helps it to garner repeat orders from customers, who in the past were going to the nearest kirana store for top-up refill orders.

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AVENUE SUPERMARTS INITIATING COVERAGE

 We believe the recently launched offering of fresh fruits and vegetables (which its competitors offer online and which DMart does not sell in its stores) would also help it to garner incremental customers on its platform, as these perishable products are for home-delivery only, and not for pick-up from the nearest DMart Ready store.  Further, it has launched multiple general merchandising products such as innerwear, footwear, kitchen appliances, etc., on the platform, which gives it higher customer wallet share and increases loyalty.

DMart Ready has started to offer a Top-Up service DMart Ready offers fruits and vegetables for home delivery

Source: Company, Phillip Capital India Research

Our analysis of competition suggests that DMart Ready is present in only 9% of the cities where DMart offline stores are present. However, its online presence covers 45% of the population where its offline stores are present. Interestingly, Amazon Pantry is the only online player to have presence in 100% of the cities where DMart stores are present, while JioMart is at 67%. Flipkart and Grofers have the least overlapping presence with DMart’s covered cities.

DMart’s online city presence as % of offline city presence Online population addressed as % of DMart offline population across all cities 120% 120% 100% 100% 100% 100% 89%

80% 80% 72% 67% 59% 60% 60% 52% 45% 40% 40% 23% 15% 13% 20% 9% 20%

0% 0% Dmart Amazon Jiomart Big Basket Grofers Flipkart Dmart Amazon Jiomart Big Basket Grofers Flipkart Ready Ready

Source: Various Websites, Phillip Capital India Research

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AVENUE SUPERMARTS INITIATING COVERAGE

Our analysis of 50 SKUs across product categories showed:  Big Basket’s fulfilment rate was the highest, followed by Amazon Pantry and DMart Ready.  Flipkart Supermart had the least fulfilment rate over the last five months.  Overall, DMart Ready and JioMart offered the lowest price for 50% of their respective inventories, while overall discounting was highest for DMart Ready followed by JioMart.  Discounting was highest for personal care products followed by staples, while it was lowest for dairy and household products.

Analysis by grocery segment:  Dairy: Flipkart offers no discounts in dairy products, DMart and JioMart offer average discount of 7-8%.  Staples: Average discounting for this category is 17% with DMart, Grofers, and JioMart offering c.19% discount.  Packaged Food: Average discounting is 14% with DMart/JioMart offering c.20% discount.  Beverages: While average discount is 9%, DMart offers 15% discount.  Personal care: DMart offers 28% discount against average discount of 20% across players.

Fulfilment rate is highest for DMart and Amazon Pantry Overall DMart, JioMart offer lowest price for 50% of inventory Amazon Pantry Grofers Amazon Pantry Grofers Big Basket D-Mart Big Basket D-Mart JioMart Flipkart Supermart JioMart Flipkart Supermart 110% 80%

100% 60% 90% 40% 80%

70% 20%

60% 0% 50%

40% -20% 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr

Source: Various Websites, Phillip Capital India Research

Discounting is highest for hygiene, followed by staples DMart offers highest discounts across categories Dairy Staples Amazon Pantry Grofers Packaged Food Drinks & Beverages Big Basket D-Mart Hygiene Household JioMart Flipkart Supermart 30% 25%

25% 20%

20% 15% 15% 10% 10% 5% 5%

0% 0% 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr

Source: Company, Phillip Capital India Research

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AVENUE SUPERMARTS INITIATING COVERAGE

Dairy: JioMart, followed by DMart, offer highest discounts Staples: Highly competitive category with 15-20% discount Amazon Pantry Grofers Amazon Pantry Grofers Big Basket D-Mart Big Basket D-Mart JioMart Flipkart Supermart JioMart Flipkart Supermart 14% 40%

12% 35% 10% 30% 8% 25% 6% 20% 4% 15% 2% 10% 0% -2% 5% 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr

Source: Various Websites, Phillip Capital India Research

Packed Food: DMart/ JioMart lead discounting Beverages: DMart offers highest discounts Amazon Pantry Grofers Amazon Pantry Grofers Big Basket D-Mart Big Basket D-Mart JioMart Flipkart Supermart JioMart Flipkart Supermart 30% 25%

25% 20% 20%

15% 15%

10% 10% 5% 5% 0%

-5% 0% 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr

Source: Various Websites, Phillip Capital India Research

Personal Care: DMart’s average discount offered is 28% Household products: DMart, JioMart offer high discounts Amazon Pantry Grofers Amazon Pantry Grofers Big Basket D-Mart Big Basket D-Mart JioMart Flipkart Supermart 35% JioMart Flipkart Supermart 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr 15-Oct 15-Nov 15-Dec 15-Jan 15-Feb 15-Mar 15-Apr

Source: Various Websites, Phillip Capital India Research

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Financials Analysis of online grocery players Financial analysis across online players suggests that all companies are making significant losses with online gross margins significantly lower than offline gross margins, given that the revenue mix is skewed towards lower-margin food products with minimal share from general merchandise. While revenue growth continues to be high, losses have not moved in the same proportion with normalising A&P spends. Amazon F&B offers private-label products of the company online, while DMart Ready continues to be small compared to Big Basket and Grofers.

Financials across online grocery peers Rs Mn DMart Ready Big Basket Grofers Amazon F &B FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY19 FY20 Revenue 441 1436 3540 15832 27546 37900 5328 12823 1390 7144 % growth 225 147 74 38 141 414 COGS 409 1278 3177 14,285 25,449 34,881 4,934 11,996 1,405 6,188 Gross Profit 33 158 363 1547 2097 3019 393 827 -15 956 Gross Margin % 7% 11% 10% 10% 8% 8% 7% 6% -1% 13% Employee Expenses 128 161 266 1540 2732 3435 1560 2490 111 174 % of sales 29% 11% 7% 10% 10% 9% 29% 19% 8% 2% A&P / Discounts 25 15 10 944 1889 1481 742 2104 0 0 % of sales 6% 1% 0% 6% 7% 4% 14% 16% 0% 0% Freight/Distribution 17 40 74 265 598 818 755 990 220 964 % of sales 4% 3% 2% 2% 2% 2% 14% 8% 16% 13% Other Expenses 258 386 498 1866 2437 2371 695 1926 932 2744 % of sales 59% 27% 14% 12% 9% 6% 13% 15% 67% 38% Total Expenses 837 1,880 4,025 18,899 33,105 42,986 8,687 19,506 2,668 10,070 EBIDTA -396 -444 -484 -3068 -5560 -5086 -3359 -6683 -1278 -2926 EBIDTA Margin% -89.7% -30.9% -13.7% -19.4% -20.2% -13.4% -63.0% -52.1% -91.9% -41% Depreciation 106 111 327 238 547 841 243 440 10 107 EBIT -485 -514 -738 -3306 -6106 -5926 -3602 -7122 -1288 -3033 Source: Company, Phillip Capital India Research

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AVENUE SUPERMARTS INITIATING COVERAGE

Leased, cluster-based approach for store opening to yield benefits We expect DMart to open 126 stores over next three years (FY22-24) compared to a mere 103 stores opened over FY18-21. It has faced multiple challenges in the past such as:  Availability of quality locations at affordable price points, because DMart follows an ownership model.  Learning curve in new clusters/cities stayed steep.  In metro markets, high rentals and regulatory clearances elongated the store- opening process.  Store opening was slow due to high internal KPIs for new-store openings, coupled with focus on profitable store economics rather than aggressive store openings; DMart has had zero store closures in the past due to its unique store- ownership model.

Aggressive leased store openings might depress margins but will raise RoIC With its new store-opening ambitions (controlled aggression), DMart has started looking for leased properties vs. its earlier exclusively ownership-driven model. It is looking at leasing properties for a longer duration, which gives it an edge to build a brand and pull customers over the medium to long term. We believe it has strengthened its real-estate team and has a strong deal pipeline for both owned and leased properties with an aim of faster store opening.

The ownership model has been successful for the company in the past, as moving rentals (which account for 4-5% of the operating cost for any retailer) to the balance sheet, gave DMart an edge in aggressively discounting its merchandise, and strengthening its value proposition. However, this strategy forced it to commit significant capital upfront and the success of its properties became extra critical for it to get the desired results. Hence, the company was extremely conservative in terms of opening stores in the past, which also resulted in lower RoICs, as it got its capital blocked in sub-par assets. However, with the management willing to open stores on the leased model, we believe store opening velocity will rise over the next three years. This model results in lower margins, but high RoICs.

Interestingly, DMart is opening larger stores over the past few years, as it is attaining new store maturity much faster than anticipated, and hence flattening the growth curve. It is using higher space to display a high assortment of general merchandise products that have higher margins and lastly the incremental capex needed for the larger stores in less and offers higher RoCE. Hence, its average area per store has seen a CAGR of 4.1% from 28,500 sq. ft. in FY14 to touch 36,450 sq. ft. in FY20. We have modelled a CAGR of 4.7% over FY21-25 to 46,500 sq. ft. per store by FY25.

We expect aggressive store opening from FY22 Total area to reach c.16mn sq. Ft. by FY24

No of Stores New Addition (rhs) Area/store (sqft) Total Area (Mn sqft) 400 60 49000 18 350 16 50 46000 300 43000 14 40 12 250 40000 10 200 30 37000 8 150 34000 20 6 100 31000 4 10 50 28000 2 0 0 25000 0 FY16 FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Source: Company, Phillip Capital India Research

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AVENUE SUPERMARTS INITIATING COVERAGE

Store lease model offers high RoIC Rs Mn Own Model Lease Model Revenue 246750 246750 Gross Margin % 14.8% 14.8% Gross Profit 36591 36591 Staff 4247 4247 % of Revenue 1.7% 1.7% Rent 847 6576 % of Revenue 0.3% 2.7% Other Expenses 11,112 11,112 % of Revenue 4.5% 4.5% Total Expenses 226366 232095 EBIDTA 20385 14656 Margin % 8.3% 5.9% Depreciation 2550 944 EBIT 17835 13711 EBIT Margin % 7.2% 5.6% RoIC 17% 31% Source: Company, Phillip Capital India Research

DMart follows a cluster-based approach for store opening, as opening more stores in an existing state/city offers better operating leverage. This is because cost structures are far better utilized, given that it understands the consumer better, and this gives it higher ability to grow sales per sq. ft. and gross margins than it would have in a new market. This approach offers a multiplier effect in terms of lower costs and higher customer traction. We believe the company follows a 70:30 rule – where it opens 70% of its stores in existing markets and 30% in new markets.

Barring Maharashtra and Gujarat, in all its new states, DMart has expanded to multiple stores only after a 3-4 year learning curve. In Karnataka, its store count expanded to 20 stores in FY20 from three stores in FY13, while in Telangana/AP, to 41 stores in FY20 from 4 in FY12. In Madhya Pradesh and Tamil Nadu too, store count expanded after two years of understanding the market.

While overall, Maharashtra and Gujarat account for 52% of its total stores, in the last three years, it opened only 29% of its stores in these two states. South Indian states – Telangana, Andhra Pradesh, Karnataka and Tamil Nadu – accounted for 47% of new stores.

Presence in existing cluster gets stronger FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Maharashtra 34 40 46 50 58 60 62 70 76 Gujarat 14 14 17 22 26 29 30 34 37 Telangana/AP 4 5 7 10 16 21 29 32 41 Karnataka 3 3 5 5 6 10 12 16 20 Madhya Pradesh/ CG 2 4 5 9 9 16 Tamil Nadu 1 3 5 10 Rajasthan 3 5 5 7 Punjab 0 3 4 5 NCR 1 1 1 1 Daman 1 1 1 1 Total 55 62 75 89 110 131 155 177 214 Source: Company, Phillip Capital India Research

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AVENUE SUPERMARTS INITIATING COVERAGE

Maharashtra accounts for 35% of overall stores Stores opening in the last 3 years outside core regions

13.6% 10.8% 19.3% Maharashtra Maharashtra Gujarat 5.1% 10.8% 35.5% Gujarat Telangana 7.9% Telangana Karnataka 9.6% Karnataka Madhya Pradesh 12.0% Andhra Pradesh AP 9.3% Madhya Pradesh Tamil Nadu 12.0% Others Others 11.2% 13.3% 17.3% 12.0%

Source: Company, Phillip Capital India Research

We believe that over the next 12-15 years, the company has the potential to open 1,230 stores (5.3x FY21 store count) through its cluster-based approach, leased model, pan-India network; it will expand its store presence to 780+ cities from the current 90+ cities. Total area could reach 55mn sq. ft. from current 9mn sqft. We believe the company has started to open stores in cities/towns that have a population of less than 100,000; average population per stores for 26 cities is less than 200,000. In larger cities such as Pune and Hyderabad, DMart has 16/20 stores with average population per stores at 200,000/340,000. This gives us confidence that the company will penetrate deeper into a city to gain higher market share in the long run.

Total store potential Population Range Total Cities Potential Avg. Store/City Total Stores Potential 70,000 to 300,000 614 1 614 300,000 to 1,000,000 123 3 369 1,000,000 and above 47 1 per 400,000 247 Total 784 1230 Source: Phillip Capital India Research

From our competitor profiling, we gauge that 42% stores of Big Bazaar, Reliance Smart (49%), More (56%), and Spencers (48%) are present in cities where DMart stores are already present. Comparing cities, Metro Cash & Carry, Walmart Cash & Carry and Spar are present in only 15-23% cities where DMart is present, while 75- 97% of their current stores are in cities where the DMart is present.

% of stores in cities where DMart is present % of cities overlapping with DMart 120% 60% 56% 52% 97% 100% 50% 84% 75% 75% 80% 40% 35% 31% 56% 57% 60% 49% 48% 30% 42% 23% 40% 20% 15% 15% 8% 20% 10% 4%

0% 0%

Source: Company, Phillip Capital India Research

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AVENUE SUPERMARTS INITIATING COVERAGE

Superior store economics DMart has consistently posted high-teens SSSG on superior store economics. We have modelled SSSG growth of 30%/16% for FY23/24 as FY21/22 would be affected negatively by Covid-19. DMart has outperformed peers in SSSG terms over the medium term. It considers stores that have completed 24 months of operations to calculate its LTL performance and 70-75%+ of its stores for SSSG calculations. We believe older stores are maturing faster and growing in-line with inflation, which could moderate SSSG over the long term. We calculate our SSSG growth by factoring bill cuts/store and growth in average ticket size.

70%+ stores operational for 24 months and above High teens SSSG to continue Stores operational for 24 months % of total 35 300 85% 30

250 25 80% 20 200 15 75% 10 150 70% 5 100 0

65% -5 50 -10 0 60% -15 FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY16 FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Source: Company, Phillip Capital India Research

 We expect revenue per sq. ft. to see 10% CAGR over FY22-24 to Rs 37,261, based on aggressive store openings and the lower base of FY22 due to Covid-19.  We have modelled 6.5% CAGR over FY22-24 in bill cuts per store, against 4.7% CAGR over FY15-20. We have factored 1.14mn bill cuts per store in FY24 against 1.03mn in FY20. We believe bill cuts would increase with the increasing frequency of customer walk-ins and modern trade gaining share from kirana stores.  We are building slightly higher 6% CAGR in ticket sizes over FY22-24 (5.1% CAGR over FY15-20) due to inflation and rising share of general merchandise.

Sales/sq. ft. to grow at a healthy rate from FY22 Bill cuts/store CAGR of 4.5% over FY22-24 Sales/Sqft (Rs) % growth Bill Cuts (Mn) Bill Cuts/store 40000 20% 450 1.20

35000 15% 400 1.10 30000 10% 350 5% 300 1.00 25000 0% 250 20000 0.90 -5% 200 15000 -10% 150 0.80 10000 -15% 100 0.70 5000 -20% 50 0 -25% 0 0.60 FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Source: Company, Phillip Capital India Research

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Mastered its product offerings  DMart has a deep knowledge of the customers across clusters, so it has mastered the art of product assortment.  It does not offer a significant choice to customers in terms of brands, while Reliance Smart/Big Bazaar do, and stocks the most popular brands that more than 90% of customers would buy.  Its assortments are of large-size SKUs (for bulk buying) at favourable prices rather than keeping more SKUs of unknown brands that would confuse customers.  DMart gets 27-28% of its revenue from general merchandise. These are high- gross-margin products (unlike food/non-food products) and predominantly cater to lower income classes and the mass market.  It has improved its products offering over time, and competes effectively with unorganised/street products, predominantly in the apparel category.  In some branded products, the discounts it offers on are higher than what general trade offers, such as in footwear and cookware.

Average ticket size CAGR of 6% over FY22-24 Revenue mix moving in favour of general merchandise Average ticket Size (Rs) % growth Food Non-Food General Merchandise 1800 10.0% 100% 1600 25.9% 26.4% 26.8% 28.4% 28.3% 27.3% 1400 8.0% 80% 1200 21.2% 20.6% 19.9% 6.0% 60% 20.0% 20.5% 20.3% 1000 800 4.0% 40% 600 52.8% 53.1% 53.3% 51.6% 51.3% 52.4% 400 2.0% 20% 200 0 0.0% 0% FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY15 FY16 FY17 FY18 FY19 FY20

Source: Company, Phillip Capital India Research

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Competitor analysis: DMart continues to be a leader in grocery retailing across parameters

Store count across players #2 player in the grocery business by revenue (Rs mn) 1200 400000

1000 350000 300000 800 250000 600 200000 400 150000 100000 200 50000 0 0

Source: Company, MCA, Phillip Capital India Research

DMart has the best operating margins in industry Gross margin (%) for DMart is below industry average

25000 EBIDTA (Rsmn) Margin (%, rhs) 12 30

20000 8 25

15000 4 20

10000 0 15

5000 -4 10 5 0 -8 0 -5000 -12

Source: Company, MCA, Phillip Capital India Research

DMart: Lowest rent as % of revenue due to an ownership DMart: One of the lowest employee costs as % of revenue model 10 12 9 8 10 7 6 8 5 6 4 3 4 2 1 2 0 0

Source: Company, MCA, Phillip Capital India Research

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DMart: Lowest opex as % of revenue across retailers A&P spends across players as % of revenues 25 6

20 4 15

10 2 5

0 0

Source: Company, MCA, Phillip Capital India Research

Inventory days for DMart lower than cash & carry players DMart has the lowest payable days across players 100 120

80 100 80 60 60 40 40

20 20

0 0

Source: Company, MCA, Phillip Capital India Research

Cash-conversion cycle (days) across players DMart: Only retailer to have positive CFO

30 CFO Capex 20000 20 10 15000 0 -10 10000 -20 5000 -30

-40 0 -50 -60 -5000

Source: Company, MCA, PhillipCapital India Research

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Financial analysis Revenue CAGR of 34% over FY22-24  We see revenue CAGR of 34% over FY22-24 to Rs 553bn, higher than 19% CAGR over FY17-21.  Revenue growth would be led by c.16% SSSG growth in FY24 and remaining by store addition as it expands to 360 stores by FY24.

EBIDTA CAGR of 44% over FY22-24  We are building 15.4% gross margins for FY24, mere 60/30bps margin expansion compared to FY20/21. Gross margins will expand as the discounting reduces in the grocery vertical, and with higher contribution from general merchandise division, which has higher gross margins. Hence, operating margins would increase to 8.9% in FY24 from 8.6% in FY20 on operating leverage. Hence, EBIDTA CAGR would be 44% over FY22-24 to touch Rs 49bn in FY24 compared to Rs 21bn in FY20. PAT CAGR should be 45% over FY22-24 to touch Rs 32bn.

Revenue CAGR of 34% over FY22-24 EBIDTA CAGR of 44% over FY22-24

Revenue (Rsbn) % growth (rhs) EBIDTA (Rsbn) Margins% (rhs) 600 50 60 10 9 500 40 50 9 400 30 40 8 8 300 20 30 7 200 10 20 7 6 100 0 10 6 0 -10 0 5 FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Gross margins to inch back to 15%+ from FY21 PAT CAGR of 45% over FY22-24

15.8 PAT (Rsmn) % growth (rhs) 35 70 15.6 60 30 15.4 50 15.2 25 40 30 15.0 20 20 14.8 15 10

14.6 10 0 -10 14.4 5 -20 14.2 0 -30 FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Source: Company, Phillip Capital India Research

To become FCF positive from FY24  We have modelled 18 days of cash-conversion cycle, factoring inventory days of 24 and 7 creditor days. These cash-conversion days would be marginally better compared to 18-20 days in FY15-20, mainly due to lower inventory days because of operating efficiencies.

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 DMart would continue to remain debt-free after its Rs 42bn fund raising in FY20; we expect free-cash generation only from FY24, while cumulative operating cash flow will be Rs 68bn over FY22-24.  We have modelled cumulative capex of Rs 79bn over three years, as the company would go for aggressive store openings and renovations over the next three years.  Return ratios should improve significantly from lows of FY20. RoIC will be at historic highs of 17% in FY24 while RoE/RoCE should be at 16% each due to high cash on books.

To turn FCF positive from FY24 Cash-conversion cycle to remain stable Debtor Days Inventory Days 35000 FCF OCF Creditor Days Cash Conversion Cycle (rhs) 30000 35 24

25000 30 22 20000 25 20 15000 20 18 10000 15 16 5000 10 14 0

-5000 5 12

-10000 0 10 FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Source: Company, Phillip Capital India Research

Remains debt free despite high capex, net D/E (x) Return ratios to inch up significantly 0.2 18% RoCE RoE RoIC 0.1 17% 0.1 16% 0.0 15%

-0.1 14% 13% -0.1 12% -0.2 11% -0.2 10% -0.3 9% -0.3 8% FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e

Source: Company, Phillip Capital India Research

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Valuations  Avenue Supermarts is one of the strongest groceries retailers in India due to market-share gains, one of the best sales/sq. ft., lowest cost of retailing, product assortment, highest operating margins across organised retailers, coupled with one of the lowest inventory days.  Opening stores through the leased route (vs. only ownership model earlier) will help the company to expand its footprint faster vs. competition. Starting DMart Ready in key cities will help it to overcome the e-commerce threat in its core markets.  Relentless focus on efficiency and offering best value to customers. It has able to drive strong customer loyalty. We initiate coverage on Avenue Supermarts with a BUY rating and DCF-based target price of Rs 3,320, implying 49x September 2023 EV/EBIDTA.

DCF Valuation assumptions (Rs mn) WACC 10.4% PV of FCF 578811 Terminal Growth rate % 6.0% Terminal value 8,731,955 PV of Terminal Value 1,549,662 Total value of firm 2,128,474 add: investments/associates 2873 less net debt (cash) -20,528 Total Equity Value 2,151,875 Number of shares outstanding (m) 648 Value per share (Rs) 3,320 Source: Company, Phillip Capital India Research

Key Risks Under investment in e-commerce There has been a significant shift in consumer behaviour post Covid-19 – towards online commerce. Underinvestment in online grocery would hurt DMart’s market share. Online would hurt DMart’s margins, as typically online accounts for lower sales of general merchandise, which has high margins.

Competitive intensity could increase discounting Sustenance of Every Day Lower Price is critical for the success of the company. However, with increasing competition, the company could be forced to increase discounting to maintain its loyal customers and its competitive advantage. This would impact margins that are already wafer-thin.

Delay in FCF generation DMart owns a majority of the stores, as it buys real estate. With strong store- opening capex, FCF generation over next couple of years could remain subdued, and could get delayed even more if leased store openings are low.

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Company profile  Avenue Supermarts Limited is a Mumbai-based company, which owns and operates D-Mart stores.  D-Mart is a national supermarket chain that offers customers a range of home and personal products under one roof.  Offers a wide range of products under foods, non-foods (FMCG), general merchandise and apparel categories; grocery and staples, dairy and frozen, fruits and vegetables, home and personal care, bed and bath, crockery, footwear, toys and games, kids’ apparel, apparel for men and women and daily essentials.  Opened its first store in Mumbai, Maharashtra in 2002.  As of 31 December, 2020, it had 221 operating stores with a retail business area of 8.17mn sq. ft. across Maharashtra, Gujarat, Daman, Andhra Pradesh, Karnataka, Telangana, Tamil Nadu, Madhya Pradesh, Rajasthan, NCR, Chhattisgarh and Punjab.  Offers customers good-quality products at great value, based on the Everyday Low Cost/Everyday Low Price (EDLC/EDLP) principle.

Key store opening timelines

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Key management team NAME DESIGNATION PROFILE Mr. Ignatius Navil MD & CEO  On the board since January 2006 Noronha  Degree in science from S.I.E.S. College, Mumbai; a post-graduate degree in marketing management from NMIMS, Mumbai.  Several years of experience in the consumer goods industry.  Has worked with Hindustan Unilever Limited for eight years. Mr. Ramakant Baheti Whole-time Director &  Chartered Accountant; degree in Commerce from Maharishi Dayanand Saraswati Group CFO University, Ajmer.  22 years of experience in finance. Mr. Elvin Machado Whole-time Director  Economics graduate from St. Xavier’s College; M.A. from Mumbai University.  In 1988, joined Hindustan Unilever as a Trainee Territory Sales.  After 18 years with Unilever, joined Avenue Supermarts Limited in 2007 as General Manager-Operations.  Presently looking after operations for the newly established circles of Madhya Pradesh, Chhattisgarh, Rajasthan, NCR, and Punjab. Mr. Narayanan Bhaskaran Chief Operating Officer,  Joined as Vice President of HR in 2008 Retail – North and South  Currently the COO of Retail in North and South regions.  Graduate B. Com. Degree from University of Madras; post-graduate degree from XLRI, Jamshedpur. Mr. Niladri Deb Chief Financial Officer  Chartered Accountant; graduate in B. Com. From St. Xaviers College; Management Program at IIM, Ahmedabad.  Worked at Usha International, ITC Ltd., and Kraft Heinz.  Joined DMart in 2008  Was Managing Director of Kraft Heinz Company in of the Indian business units before that. Mr. Dheeraj Kampani Vice-president, Buying  MBA in Marketing from Nagpur University. and Merchandising  He joined D-mart’s team in 2005, before which he worked at Spencers and Hindustan Unilever Ltd. Mr. Hitesh Shah Vice-president,  Associate Vice President of Operations, since 2014 Operations  Vice President of Operations in 2019. Source: Company, Phillip Capital India Research

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Financials

Income Statement Cash Flow Y/E Mar, Rs mn FY21E FY22E FY23E FY24E Y/E Mar, Rs mn FY21E FY22E FY23E FY24E Net sales 2,37,702 3,08,275 4,37,573 5,52,939 Pre-tax profit 15,166 20,123 32,923 42,573 Growth, % -3.5 29.7 41.9 26.4 Depreciation 3,938 5,071 6,321 7,784 Other income 311 373 447 537 Chg in working capital -1,274 -2,290 -8,157 -7,546 Total income 2,38,013 3,08,648 4,38,020 5,53,476 Total tax paid -3,898 -5,232 -8,560 -11,069 Raw material expenses -2,02,047 -2,62,034 -3,71,062 -4,68,339 Other operating activities -1,668 -1,525 -1,055 -1,022 Employee expenses -5,012 -6,064 -7,399 -9,026 Cash flow from operating activities 12,263 16,147 21,472 30,721 Other Operating expenses -13,527 -16,881 -21,371 -26,775 Capital expenditure -18,110 -21,766 -26,860 -30,417 EBITDA 17,427 23,669 38,188 49,335 Chg in investments 4,500 7,000 1,000 0 Growth, % -17.9 35.8 61.3 29.2 Other investing activities 1,990 1,588 1,121 1,091 Margin, % 7.3 7.7 8.7 8.9 Cash flow from investing activities -11,620 -13,178 -24,739 -29,326 Depreciation -3,938 -5,071 -6,321 -7,784 Free cash flow (ex-Lease Liability) EBIT 13,490 18,598 31,868 41,551 Equity raised/(repaid) 0 0 0 0 Growth, % -24.3 37.9 71.4 30.4 Debt raised/(repaid) -377 0 0 0 Margin, % 5.7 6.0 7.3 7.5 Dividend (incl. tax) Interest paid -314 -63 -66 -69 Other financing activities -314 -63 -66 -69 Other Non-Operating Income 1,990 1,588 1,121 1,091 Cash flow from financing activities -691 -63 -66 -69 Non-recurring Items 0 0 0 0 Net chg in cash -48 2,906 -3,333 1,325 Pre-tax profit 15,166 20,123 32,923 42,573 Tax provided -3,898 -5,232 -8,560 -11,069 Valuation Ratios Profit after tax 11,268 14,891 24,363 31,504 FY21E FY22E FY23E FY24E Others (Minorities, Associates) Per Share data Net Profit 11,268 14,891 24,363 31,504 EPS (INR) 17.4 23.0 37.6 48.6 Growth, % -16.5 32.1 63.6 29.3 Growth, % (16.5) 32.1 63.6 29.3 Net Profit (adjusted) 11,268 14,891 24,363 31,504 Book NAV/share (INR) 189.3 212.3 249.9 298.5 Unadj. shares (m) 647.8 647.8 647.8 647.8 FDEPS (INR) 17.4 23.0 37.6 48.6 CEPS (INR) 23.5 30.8 47.4 60.7 Balance Sheet CFPS (INR) 18.9 24.9 33.1 47.4 Y/E Mar, Rs mn FY21E FY22E FY23E FY24E DPS (INR) - - - - Cash & bank 867 3,773 440 1,765 Return ratios Debtors 652 846 1,200 1,516 Return on assets (%) 8.7 10.0 13.8 15.0 Inventory 19,563 22,832 32,401 40,942 Return on equity (%) 9.2 10.8 15.1 16.3 Loans & advances 6,400 7,360 8,464 9,734 Return on capital employed (%) 9.2 10.6 14.8 16.1 Other current assets 258 284 312 343 Turnover ratios Total current assets 27,740 35,094 42,818 54,301 Asset turnover (x) 2.8 3.0 3.5 3.6 Investments 29,053 22,053 21,053 21,053 Sales/Total assets (x) 2.0 2.3 2.8 2.9 Gross fixed assets 82,995 1,04,061 1,29,921 1,59,138 Sales/Net FA (x) 3.5 3.6 4.1 4.3 Less: Depreciation -11,968 -17,040 -23,360 -31,145 Working capital/Sales (x) 0.2 0.2 0.1 0.1 Add: Capital WIP 4,119 4,819 5,819 7,019 Receivable days 0.9 0.9 0.9 0.9 Net fixed assets 75,146 91,841 1,12,379 1,35,012 Inventory days 29.6 25.1 23.0 24.2 Non-current assets 13 13 13 13 Payable days 6.9 6.6 6.6 7.0 Total assets 1,31,951 1,49,000 1,76,263 2,10,379 Working capital days 23.6 19.4 17.2 18.1 Liquidity ratios Current liabilities 6,266 8,417 11,309 13,913 Current ratio (x) 7.8 5.8 4.8 4.7 Provisions 155 163 171 180 Quick ratio (x) 7.7 5.8 4.8 4.7 Total current liabilities 6,422 8,580 11,480 14,092 Interest cover (x) 43.0 296.3 483.6 600.5 Total Debt 2,424 2,424 2,424 2,424 Dividend cover (x) - - - - Deferred Tax Liabilities 482 482 482 482 Total debt/Equity (%) 0.0 0.0 0.0 0.0 Total liabilities 9,328 11,486 14,386 16,998 Net debt/Equity (%) (0.2) (0.1) (0.1) (0.1) Paid-up capital 6,478 6,478 6,478 6,478 Valuation Reserves & surplus 1,16,146 1,31,037 1,55,399 1,86,903 PER (x) 166.1 125.7 76.8 59.4 Shareholders’ equity 1,22,624 1,37,514 1,61,877 1,93,381 PEG (x) - y-o-y growth 9.6 5.5 2.0 1.2 Total equity & liabilities 1,31,951 1,49,000 1,76,263 2,10,379 Price/Book (x) 15.3 13.6 11.6 9.7 Source: Company, PhillipCapital India Research Estimates Yield (%) - - - - EV/Net sales (x) 7.8 6.0 4.2 3.4 EV/EBITDA (x) 106.0 78.2 48.6 37.6

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Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. We have different threshold for large market capitalisation stock and Mid/small market capitalisation stock. The categorisation of stock based on market capitalisation is as per the SEBI requirement.

Large cap stocks Rating Criteria Definition BUY >= +10% Target price is equal to or more than 10% of current market price NEUTRAL -10% > to < +10% Target price is less than +10% but more than -10% SELL <= -10% Target price is less than or equal to -10%.

Mid cap and Small cap stocks Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15% SELL <= -15% Target price is less than or equal to -15%.

Disclosures and Disclaimers

PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. 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The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

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Sr. no. Particulars Yes/No 1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for No investment banking transaction by PCIL 2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of No the company(ies) covered in the Research report 3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No 4 PCIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the No company(ies) covered in the Research report 5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or No brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. Investment in securities market are subject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whether trading/investment is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek independent third party trading/investment advice outside PhillipCapital/group/associates/affiliates/directors/employees before and during your trading/investment. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PhillipCapital and any of its employees, directors, associates, and/or employees, directors, associates of PhillipCapital’s group entities or affiliates is not inducing you for trading/investing in the financial market(s). Trading/Investment decision is your sole responsibility. You must also read the Risk Disclosure Document and Do’s and Don’ts before investing. Kindly note that past performance is not necessarily a guide to future performance. For Detailed Disclaimer: Please visit our website www.phillipcapital.in

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Compensation and Investment Banking Activities

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Rosenblatt Securities Inc. or any affiliate has not managed or co-managed a public offering of securities for the subject company in the past 12 months, nor received compensation for investment banking services from the subject company in the past 12 months, neither does it or any affiliate expect to receive, or intends to seek compensation for investment banking services from the subject company in the next 3 months.

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