India Equity Research Retail September 23, 2020
AVENUE SUPERMARTS
COMPANY UPDATE
KEY DATA Rating HOLD Ace of the pack still; time to evolve Sector relative Overweight Price (INR) 2,049 12 month price target (INR) 2,157 Avenue SuperMarts (DMart) has aced the offline retail segment via its Market cap (INR bn/USD bn) 1,327/18.1 execution prowess, a rarity in food & grocery (F&G) retailing. Free float/Foreign ownership (%) 2,026.6/620.7 What’s Changed Organized F&G has clocked stupendous growth and remains the Target Price Rating/Risk Rating ⚊ biggest migration play in retail. In fact, Reliance Retail’s takeover of Future Retail has further consolidated the industry, entrenching these INVESTMENT METRICS 145 two strong players deeper. Our bottom-up analysis reveals DMart has 110 potential to open ~400 stores more (FY20: 214; FY20–22E target: 60). 75 40 In online retail, DMart has been conservative hitherto and has a lot of 5 -30 catch-up to do with peers. In light of the hastened online migration Sales Growth EPS Growth RoE PE (%) (%) (%) (x) and JioMart’s aggression, a compelling/aggressive strategy is Retail DMART IN Equity imperative for DMart’s future growth. Maintain ‘HOLD’.
FINANCIALS (INR mn) F&G retailing still lucrative, demands execution; DMart aces Year to March FY20A FY21E FY22E FY23E F&G remains the biggest value migration play in retail (merely 4% organised share). Revenue 2,48,702 2,26,625 3,23,563 3,95,184 Despite the humungous opportunity, most players have failed on execution, given EBITDA 21,283 16,226 27,746 34,282 Adjusted profit 13,010 10,425 18,209 22,595 wafer-thin margins. DMart is among the few to have profitably mastered the game Diluted EPS (INR) 20.1 16.1 28.1 34.9 via its locations and ELDP/EDLC focus, which have created a virtuous network loop. EPS growth (%) 38.9 (19.9) 74.7 24.1 The Reliance Retail-Future Group deal has consolidated the market further, making RoAE (%) 15.6 9.0 14.0 15.0 it better for incumbents. What would have been worrisome is if a company with an P/E (x) 110.7 138.1 79.1 63.7 unproven execution record were up against Reliance plus Future Retail. DMart’s EV/EBITDA (x) 67.6 87.9 51.5 41.5 Dividend yield (%) 0 0 0 0 execution has been proficient, which makes it highly probable that it would also partake of the benefits of this opportunity with Reliance.
PRICE PERFORMANCE E-commerce scale-up imperative for DMart; JioMart now aggressive
2,550 42,000 F&G will continue to be dominated by offline/brick & mortar (B&M) in the near 2,380 38,600 future (13% of organised F&G by FY25E). However, given the pace of e-commerce 2,210 35,200 growth, it is not too long before it becomes sizeable. We believe time is ripe for 2,040 31,800 players to get the model right before scaling it up. While DMart has cracked B&M 1,870 28,400 1,700 25,000 retailing, it has treaded cautiously in online retailing. A comparison with other Sep-19 Dec-19 Mar-20 Jun-20 providers shows DMart Ready must ramp-up in many categories, if it has to replicate DMART IN Equity Sensex its offline success online. Besides, with JioMart scaling up fast, it is imperative for
DMart to get its online model in place. Outlook and valuation: All priced in; maintain ‘HOLD’ Explore: We remain positive on DMart given the long-term structural play, lean cost structure, strong liquidity support and a superior execution record. In addition, its innovation and agility to respond to change (DOW, reduction in discounting, etc) gives it an advantage over other retailers. However, owing to lofty valuations, we maintain ‘HOLD/SP’ with a TP of INR2,157 (50x FY22E EV/EBITDA). The stock is Financial model Podcast trading at 51.5 FY22E EV/EBITDA. Upside risks to our thesis stem from faster-than-
expected store expansion and increasing traction in DMart Ready. Downside risk remains from higher aggression from competitors and waning of DMART’s EDLP moat. Corporate access Video
Nihal Mahesh Jham Abneesh Roy Prateek Barsagade +91 (22) 6623 3352 +91 (22) 6620 3141 +91 (22) 4063 5407 [email protected] [email protected] [email protected]
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Financial Statements
Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 2,48,702 2,26,625 3,23,563 3,95,184 Share capital 6,478 6,478 6,478 6,478 Gross profit 37,673 33,087 49,182 60,068 Reserves 1,04,320 1,14,744 1,32,954 1,55,548 Employee costs 4,561 4,759 5,759 7,034 Shareholders funds 1,10,797 1,21,222 1,39,431 1,62,026 Other expenses 6,064 6,345 8,413 10,275 Minority interest 5 5 5 5 EBITDA 21,283 16,226 27,746 34,282 Borrowings 37 37 37 37 Depreciation 3,744 3,709 4,176 5,053 Trade payables 4,335 4,242 5,412 6,427 Less: Interest expense 691 507 522 538 Other liabs & prov 3,357 3,357 3,357 3,357 Add: Other income 600 1,926 1,297 1,515 Total liabilities 1,20,762 1,31,204 1,50,701 1,74,432 Profit before tax 17,448 13,937 24,344 30,207 Net block 58,698 59,704 76,871 91,087 Prov for tax 4,438 3,512 6,135 7,612 Intangible assets 783 783 783 783 Less: Other adj 0 0 0 0 Capital WIP 3,644 4,000 4,800 5,000 Reported profit 13,010 10,425 18,209 22,595 Total fixed assets 63,124 64,486 82,454 96,869 Less: Excp.item (net) 0 0 0 0 Non current inv 0 0 0 0 Adjusted profit 13,010 10,425 18,209 22,595 Cash/cash equivalent 1,079 13,791 12,139 18,168 Diluted shares o/s 648 648 648 648 Sundry debtors 196 310 443 487 Adjusted diluted EPS 20.1 16.1 28.1 34.9 Loans & advances 1,091 1,200 1,200 1,200 DPS (INR) 0 0 0 0 Other assets 21,112 17,706 22,760 27,752 Tax rate (%) 25.4 25.2 25.2 25.2 Total assets 1,20,762 1,31,204 1,50,701 1,74,432
Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Store count 214.0 224.0 269.0 309.0 Reported profit 17,448 10,425 18,209 22,595 Store addition 38.0 10.0 45.0 40.0 Add: Depreciation 3,744 3,709 4,176 5,053 Retail space (mn sq ft) 7.8 8.3 10.3 12.1 Interest (net of tax) 691 2,433 1,818 2,053 EBITDA margin (%) 8.6 7.2 8.6 8.7 Others (395) 0 0 0 Net profit margin (%) 5.2 4.6 5.6 5.7 Less: Changes in WC (3,762) 3,703 (1,900) (1,899) Revenue growth (% YoY) 24.3 (8.9) 42.8 22.1 Operating cash flow 12,801 16,757 16,169 20,189 EBITDA growth (% YoY) 30.3 (23.8) 71.0 23.6 Less: Capex 17,122 4,356 21,050 18,200 Adj. profit growth (%) 44.2 (19.9) 74.7 24.1 Free cash flow (4,320) 12,401 (4,881) 1,989
Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY %) 4.8 (6.0) 7.0 0 RoE (%) 15.6 9.0 14.0 15.0 Repo rate (%) 4.4 3.5 3.5 0 RoCE (%) 21.2 12.4 19.1 20.4 USD/INR (average) 70.7 75.0 73.0 0 Inventory days 31 35 27 27 SSSG (%) 10.9 (11.0) 27.0 9.0 Receivable days 1 0 0 0 COGS (%) 84.9 85.4 84.8 84.8 Payable days 8 8 6 6 Staff costs (%) 1.8 2.1 1.8 1.8 Working cap (% sales) 0 0 0 0 Other expense (%) 30.8 33.0 30.0 30.0 Gross debt/equity (x) 0 0 0 0 EBITDA margin (%) 4.7 5.3 4.8 4.7 Net debt/equity (x) 0 (0.1) (0.1) (0.1) Inventory days 8.6 7.2 8.6 8.7 Interest coverage (x) 25.4 24.7 45.2 54.4
Valuation Metrics Valuation Drivers Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Diluted P/E (x) 110.7 138.1 79.1 63.7 EPS growth (%) 38.9 (19.9) 74.7 24.1 Price/BV (x) 13.0 11.9 10.3 8.9 RoE (%) 15.6 9.0 14.0 15.0 EV/EBITDA (x) 67.6 87.9 51.5 41.5 EBITDA growth (%) 30.3 (23.8) 71.0 23.6 Dividend yield (%) 0 0 0 0 Payout ratio (%) 0 0 0 0
Source: Company and Edelweiss estimates
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F&G retailing: Still lucrative; eventually about execution
Following Reliance Retail’s acquisition of Future Retail, a question has again arisen: what would be its impact on DMart? What remains unchanged though is the opportunity in India’s F&G retailing. We believe the opportunity is big enough to accommodate two well-funded players. The joker in the pack is the terms of trade from FMCG players: can they undermine DMart’s Everyday Low Price (EDLP) moat? For FMCG companies, organized channel (modern trade plus e- Opportunity size unchanged; now a two strong player market commerce) makes up ~15% of market. Organised F&G retailing has a market share of merely 4%, which is the lowest among Organised retail is only ~4% of market consumption categories. The organised F&G segment has clocked highest growth (reflected as a much higher portion of in companies’ growth too) and is expected to remain the highest growing too. F&G category vegetables and pulses is unorganised. remains the biggest value migration play in retail.
Organised F&G Retail’s growth trajectory to continue
6,000
4,800
3,600 (INR bn) 2,400
1,200
0 FY16 FY19 FY25E
Source: Company, Technopak, Edelweiss Research
F&G: Superior growth prospects in consumption basket
30.0
25.0
20.0
(%) 15.0
10.0
5.0
0.0 Food & Home & Footwear Pharmacy Apparel Consumer Total Organized Grocery Living durable FY16-19 FY19-25E
Source: Company, Technopak, Edelweiss Research
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Growing well, but organized F&G penetration lags other categories
Organized penetration - FY19 (%) 35
30
25
20
(%) 15
10
5
0 F&G F&G F&G F&G Jewelry & Consumer Apparel Footwear Pharmacy Home & Others FY16 FY19 FY22E FY25E Watches durable Living
Source: Company, Technopak , Edelweiss Research
Note penetration for FY19 for categories ex-F&G
F&G retailing is operations-heavy and scale/throughput are critical for success given wafer- thin margins. The factors that have driven throughput in the past can be summed up as a combination of: i) right locations and formats; ii) competitive pricing led by quick working capital release for vendors and ii) an extremely lean cost structure. Thus, despite the opportunity, most players have failed on execution.
Many competitors, multiple formats Future Avenue Samara & Formats Reliance Spencer Trent Amazon Flipkart Retail Supermarket Amazon Reliance Convenience -Easy Day Spencer's Smart stores -Nilgiris Neighborhood Point Reliance Supermarkets Food Bazaar Nature's Basket Star Market More Fresh Reliance -Big Bazaar Spencer's More Hypermarkets DMart Star Bazaar Smart -Hypercity Hyper Megastore Reliance Cash & Carry Best Price Market Flipkart B2B marketplace JioMart Wholesale -Amazon Pantry Flipkart E-commerce JioMart Tathastu DMart Ready Spencers.in My247market Via Amazon.in -Amazon Supermarket Fresh Source: Company, Edelweiss Research
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Despite multiple players, market concentrated
100
80
60 (%) 40
20
0 FY12 FY16 FY19
Future Group Reliance D'Mart Spencer's More Hypercity* Star Others
Note: Hypercity was acquired by Future Retail.
Only three players managed to scale up
400
320
240 (INR bn) 160
80
0 Reliance Avenue Future Group More Spencer Trent Supermarkets Source: Company, Edelweiss Research, For More – revenues for FY19
DMart is one of the few to have profitably mastered the game, from choosing the right locations to creating its network loop. The key contributors in our view: Operational efficiency plus better terms of trade from FMCG companies given the lower payable days Passing the price benefit to consumers and insisting on having the cheapest basket Leveraging price to attract footfall (took share from unorganized players) Highest revenue per square foot as result of smart mix of SKUs and products Higher efficiencies in terms of all cost line items. The key point we make here is that DMart is able to achieve its EDLP moat only because it has thoroughly imbued the concept of EDLC as well. And, with EDLC in place, the company has allowed every store to drop prices or match them, or even offer lower prices than local competition, if needed.
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Profitability: DMart’s best in the game Reliance DMart More Spencer Star Bazaar Revenue (INR bn) 346 249 43 26 12 Revenue/Sq.ft 45,424 36,307 20,268 15,975 24,625 Gross Margin (%) NA 15.1 19.7 21.2 19.3 Others expenses (%) NA 6.6 20.3 18.1 25.4 EBITDA Margin (%) 7.8 8.6 -0.6 3.1 -6.1 RoCE (%) NA 20.8 -33.2 0.7 NA Debt/EBITDA NA 0.0 NM 0.9 NA Source: Company, MCA, Edelweiss Research
With organised F&G retailing moving from a three-player market to a duopoly, the industry structure only gets better for incumbents. What would have been worrisome is if a company with an unproven execution record were up against a combined entity such as Reliance plus Future Retail. But DMart has scripted an enviable execution track record over the last two decades and that implies it would make the most of the organised retailing opportunity along with Reliance.
Reliance’s focus was anyways turning towards JioMart. The Future Retail acquisition will possibly see Reliance focusing on first optimizing the store count and getting profitability back rather than continuing expansion. Can terms of trade offered by FMCG players change? Following the Future Retail acquisition, Reliance will make up ~9% of FMCG companies’ top line versus ~6% earlier. Hence, we do not expect FMCG companies’ bargaining power to be impacted. Besides, critically for DMart, terms of trade should not be very different, given both are relatively sizeable and important to these companies. However, we will keep close tabs on terms of trade for these companies.
In terms of private labels, Reliance has a keener higher focus and is likely to introduce its own brands. DMart however has a limited focus on private labels, mainly in categories such as staples. Reliance, on the other hand, has a private label presence in staples as well as snacking. Store expansion: Still a lot of potential in existing clusters DMart has been conservative with expansion; it has been more a question of the company’s prudence rather than opportunity. It was conservative in the earlier decade (55 stores over FY02–12) when most other grocery retailers expanded aggressively, but expanded significantly thereafter.
DMart follows a cluster-based store expansion strategy. It is evident from its store expansion history that the states of Maharashtra, Gujarat, Telangana and AP constitute the core cluster. Karnataka, MP and Chhattisgarh, TN and Rajasthan are upcoming clusters.
Cluster-based approach to expansion Category State FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Maharashtra 34 40 46 50 58 60 62 70 76 Core Gujarat 14 14 17 22 26 29 30 34 37 cluster Telengana & AP 4 5 7 10 16 21 29 32 41 Karnataka 3 3 5 5 6 10 12 16 20 Upcoming MP & Chattisgarh 2 4 5 9 9 16 cluster TN 1 3 4 10 Rajasthan 3 5 5 7 Punjab - 3 4 5 New NCR 1 1 1 1 ventures Daman 1 1 1 1 Total 55 62 75 89 110 131 155 176 214
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DMart’s presence in Indian states by GDP and population
Core cluster Core 20% Not cluster present 31% 35%
Not present 51%
Upcoming cluster 25% New Upcoming New ventures cluster ventures 7% 27% 4% Source: Company, Edelweiss Research
DMart has till now only managed to etch a sizeable presence in four Indian states, namely, Maharashtra, Gujarat, AP and Telangana. Even in its core market of Maharashtra, only ~6% of total market is currently organised, implying big room for expansion.
Even if we consider the current penetration in its core cluster (~1 store per 2mn of population), DMart has the potential to open 350–400 stores in other geographies (ex-core cluster) at present. The states it has a presence in only comprise ~50% of population/~65% of GDP.
Key metrics by cluster
Population (mn) Stores Population/Store (Mn) Core cluster 280 154 1.8 Upcoming cluster 341 53 6.4 New ventures 49 7 7.1 Not present 700 - - Total 1,371 214 Source: Company, Edelweiss Research
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Online leg-up imperative as JioMart preps up Despite the growth potential in online (40% CAGR FY19–25E), India’s F&G market will remain offline/B&M-focused (Etail to reach 13% of organized F&G by FY25E). That said, omni capabilities will be critical as, given its pace of growth, it is not too long before it becomes sizeable. Hence, we argue the time is ripe to get the model right before scaling it up.
India to remain a predominantly B&M market
Organized F&G retailing 6,000
4,800
3,600
2,400 (INRbn)
1,200 CAGR: 40% 0 FY19 FY25E
Etail Offline
Source: Company, Edelweiss Research
At present, DMart Ready is serving only Mumbai, although the company has plans to roll out the service to other cities soon. During the lockdown, DMart had extended e-commerce services to other cities, but those have been rolled back since.
DMart’s execution has been spectacular and best in class in B&M retailing, but the company is still taking cautious steps in online retailing via DMart Ready. The channel doesn’t have a history of profitability, a probable reason the company might be wary thereof. A comparison with other online providers shows DMart will have to ramp up across many categories, if it has to replicate its offline success online.
DMart yet to ramp up presence and service offerings Card App Download Minimum Delivery fee Daily Order Platform Cities Delivery Timeline Tie- Membership (mn) Order (INR) (INR) ('000) ups Jiomart 200 5+ 0 0 2-3 Days Yes Yes 400 Amazon Pantry 300 NA 200 0-59 Next Day Yes Yes 100+ Big Basket 30 10+ None 0-50 Same Day + Express Yes Yes 250-300 Grofers 27 10+ None 0-49 Next Day Yes Yes 100+ Flipkart Supermart 26 NA 600 0-50 Next Day Yes Yes NA DMart Ready 1 5+ 1000 49 2-5 days No No NA Source: Company, Edelweiss Research, Google Playstore, Press articles
A comparison of prices and SKUs across platforms shows JioMart has a much sharper pricing approach than others in staples, wherein it has a notable private label presence across most categories. DMart remains cheapest in the discretionary segment, with high competition from JioMart in the Personal and home care segment. SKUs at Amazon Pantry and Flipkart Supermart are much fewer than DMart Ready and Big Basket; even JioMart has fewer options than DMart Ready in the sampled categories.
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Comparison of pricing basket DMart Big Amazon Flipkart Products SKU JioMart Cheapest Ready Basket Pantry Supermart Staples Aashirvaad Atta - Whole Wheat 10 kg 375 375 386 388 389 DMart Ready Rice (Kolam - Private Label) 5 kg 299 270 310 295 307 JioMart Rice (India Gate - Rozaana Basmati) 5 kg 345 345 379 349 380 DMart Ready Tur Dal (Basic - Private Label) 1 kg 112 116 118 112 119 DMart Ready Moong Dal (Basic - Private Label) 1 kg 135 117 111 140 161 Big Basket Fortune Sunlite Refined Sunflower Oil 1 L 121 119 125 119 118 Flipkart Supermart Tata Salt 1 kg 18 18 17 18 20 Big Basket Sugar (Basic - Private Label/Basic) 1 kg 48 45 45 46 52 JioMart Sub Total 1,453 1,405 1,491 1,467 1,546 JioMart Personal and home care Santoor Sandal and Turmeric Soap (pack of 4) 150 gms/unit 39 39 42 40 NA DMart Ready Lux Soap (pack of 3) 150 gms/unit 30 29 36 36 NA JioMart Dove Shampoo - Daily Shine 340 ml 195 180 218 200 218 JioMart Parachute Coconut Oil 200 ml 72 73 78 85 75 DMart Ready Colgate Active Salt Toothpaste 300 gm 127 124 124 119 138 Amazon Pantry Tide Plus - Jasmine & Rose 2 kg 182 172 172 211 212 JioMart Surf Excel Matic Top Load 4 kg 774 774 999 999 NA DMart Ready Vim Dishwash Bar 200 gms/unit 14 13 13 13 20 Big Basket Harpic Power Plus 1 L 148 153 139 151 160 Big Basket Sub Total 1,580 1,557 1,821 1,853 823 Flipkart Supermart Discretionary Haldiram Aloo Bhujia 150 gms 31 33 35 35 35 DMart Ready Cadbury Bournvita 1 kg 365 365 390 375 446 DMart Ready Britannia Good Day Cashew Cookies 200 gms 30 30 40 NA 35 DMart Ready Amul Cheese/Other brands 200 gms 113 113 122 NA 120 DMart Ready Amul Butter 100 gms 45 44 43 NA 49 Big Basket Gowardhan Classic Paneer 200 gms 77 75 97 NA 85 JioMart Maggi/Kissan Tomato Ketchup 500 gms 90 92 100 100 105 DMart Ready Maggi Masala Noodles 70 gms 11 11 11 11 11 Big Basket Brooke Bond Red Label 250 gms 112 125 106 120 120 Big Basket Nescafe Classic 50 gms 125 125 140 156 NA DMart Ready Sub Total 999 1,013 1,083 797 1,006 Amazon Pantry Total 4,032 3,975 4,395 4,117 3,374 Source: Company, Edelweiss Research
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Jiomart: Significant improvement in user interface Jiomart was among the top three downloaded shopping apps in August Similar to B&M retailing, Reliance’s Jiomart remains the biggest potential disruptor online too. 2020 after Flipkart and Amazon To recall, Jiomart is the online extension of Reliance Retail’s grocery business. The company plans to: i) supply grocery online; and ii) act as a distributor to retail shops (kirana) in the longer run. Reliance has already started offering online delivery in more than 200 cities and uses WhatsApp as a platform to order along with its recently launched app. JioMart’s peak daily orders are already higher than peers.
Jiomart app interface - Ease of use comparable to other grocery apps
Source: Company
More importantly, Jiomart has seen a significant improvement in user experience over the last two months; its interface is now comparable to other pure-play e-commerce players.
Summary of our interface checks
Key Positives Key Negatives Pricing is decent Depth of products much lower than peers Delivery was hassle free No non-vegetarian items Packaging better than other ecommerce players No option to choose delivery slot Quality of vegetables better than other ecommerce players Complaint resolution is via WhatsApp, very quick, effective with a lot of analytics Source: Edelweiss Research
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Potential Amazon-RIL tie-up: A bigger worry for vertical F&G retailers DMart is a single category and offline-focused (currently) retailer. Amazon and Reliance, on the other hand, have aspirations of capturing the entire retail basket. While Amazon is an online retailer moving offline, Reliance has a similar grand aspiration the other way round, i.e. from offline to online.
The likelihood of a these two coming together is low prima facie considering the independent focus on hyper local/online via Amazon Pantry, Amazon Fresh and JioMart. Amazon’s investments in More and Future Retail fit the bill as these offline retailers wanted to use Amazon’s network to build online strength (similar to Shoppers Stop in apparel). With JioMart being the focus for Reliance and now with Future Retail under its belt, synergies for Reliance look limited.
Should a marriage of convenience take place between Reliance and Amazon that is bound to accelerate the shift online, DMart will be under tremendous pressure to ramp up its online capabilities.
DMart is a single category retailer
Source: Edelweiss Research DMart’s e-commerce plans needs a leg-up DMart’s conservative approach to online does protect profitability, and management’s intent is clear on this. At its annual meet in August 2020, DMart reiterated: i) focus on brick & mortar; ii) grocery e-commerce focus only in large towns. In our view, in the long run, considering the opportunity size and how the market is evolving, DMart will have to find a balance to capture the online potential. Too conservative an approach remains a bigger risk than the RIL-Future Retail merger in our view.
DMart Ready: Key Financials
(INR mn) FY17 FY18 FY19 FY20 Revenue 12 441 1,436 3,540 EBITDA (161) (379) (404) (405) PBT (261) (481) (508) (800) Source: Company, Edelweiss Research
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Company Description DMart is an emerging national supermarket chain with focus on value retailing. The company has been one of the largest and most profitable F&G retailers in India. It offers a wide range of products with focus on foods, non-foods (FMCG) and general merchandise & apparel product categories. In 2002, DMart opened its first store in Mumbai. As at June 2020, the company had 216 stores with retail business area of ~7.9mn sq ft. DMart operates and manages all its stores. The company operates predominantly on ownership basis (including long-term lease arrangements, where lease period is of more than 30 years and the building is owned by DMart) instead of rental model. It opens stores using cluster-based approach on the basis of adjacencies and focuses on efficient supply chain that targets densely-populated residential areas with a majority of lower-middle, middle and aspiring upper-middle class consumers. DMart’s distribution and packing centres form the backbone of its supply chain that supports its retail store network. Investment Theme DMart’s core MOAT has translated not only into strong revenue growth, but also robust profitability and return ratios. During FY12-17, DMart sustained consistent SSSG above the 20% print. However, that has come off since due to older stores maturing. The company’s competitive prices are derived from right product assortment, lower payable days, right location size and cluster-based store expansion, among others. Consequently, a strong SSSG helped DMart expand gross/EBITDA margins from 14.5%/6.4% in FY13 to 15.0%/8.2% in FY19. Key Risks Sustenance of EDLP program and increased competition. Purchase of real estate at favourable rates and hence the store expansion. This arrangement entails huge initial cash outflow, which may involve taking higher debt. In the scenario where new stores fail to pick up as anticipated, then incremental debt taken for same would need to be serviced from cash flows of other stores, which could impact overall profitability of business. Revenue concentration in largely from Western India – Maharashtra and Gujarat. Competition from e-commerce companies
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Additional Data Management Holdings – Top 10* CEO Ignatius Navil Noronha % Holding % Holding CFO Niladri Deb Bright Star Inv 13.70 Vanguard Group 0.68 SBI MF 4.21 Blackrock 0.62 COO Udaya Bhaskar Yarlagadda Axis AMC 2.76 GSAM 0.32 Group CFO Ramakant Baheti Capital Group 0.91 Robeco 0.27 Auditor S R B C & Co LLP ICICI Pru AMC 0.70 UTI AMC 0.27
*Latest public data
Recent Company Research Recent Sector Research Date Title Price Reco Date Name of Co./Sector Title Avenue Supermarts - Result Update 'BRAVEHEART SERIES' Titan 13-Jul-20 2201 Hold 24-Aug-20 Titan Company Q1FY21; Result Update Company - Annu; Company Update Avenue Supermarts - Result Update 'BRAVEHEART SERIES' Titan 23-May-20 2300 Hold 18-Aug-20 Titan Company Q4FY20; Result Update Company - Jewe; Company Update Avenue Supermarts - Result Update Shoppers Stop - Result Update 12-Jan-20 1639 Reduce 14-Aug-20 Shoppers Stop Q3FY20; Result Update Q1FY21 - L; Result Update
Rating Interpretation Daily Volume 20 2550 TP 2,300 2245 16
1940 TP 12 (INR) 1,639 1635 (Mn) TP TP TP 8 1,290 1,2741,300 1330 4 1025 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 0 DMART IN Equity Buy Hold Reduce Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20
Source: Bloomberg, Edelweiss research Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage Rating Rationale
Buy Hold Reduce Total Rating Expected absolute returns over 12 months
Rating Distribution* 160 64 14 238 Buy: >15%
>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%
Market Cap (INR) 175 60 12 247 Reduce: <-5% * stocks under review
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Disclaimer for U.S. Persons This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Edelweiss Financial Services Inc. ("EFSI"). Transactions in securities discussed in this research report should be effected through Edelweiss Financial Services Inc.
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In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the “Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”).
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Disclaimer for Canadian Persons This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research analysts' business or relationship with a subject company or trading of securities by a research analyst.
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Disclaimer for Hong Kong persons This report is distributed in Hong Kong by Edelweiss Securities (Hong Kong) Private Limited (ESHK), a licensed corporation (BOM -874) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to Section 116(1) of the Securities and Futures Ordinance “SFO”. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The report also does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual recipients. The Indian Analyst(s) who compile this report is/are not located in Hong Kong and is/are not licensed to carry on regulated activities in Hong Kong and does not / do not hold themselves out as being able to do so.
Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved.
Aditya Narain Head of Research [email protected]
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