Avenue Supermarts (DMART IN)

Rating: REDUCE | CMP: Rs1,572 | TP: Rs1,270

January 14, 2019 5-10% EPS Cut; Retain Reduce

Q3FY19 Result Update Key Points

☑ Change in Estimates | ☑ Target |  Reco . Gross margin declined by 170bps on conscious strategy to reduce prices

Change in Estimates . Operation expenses increased 30bps as D’Mart invested in creating Current Previous capabilities for future in terms of infrastructure, people and longer operating FY20E FY21E FY20E FY21E Rating REDUCE REDUCE hours during festival season. Target Price 1,270 1,286 Sales (Rs. m) 256,636 329,396 252,408 323,969 . EBIDTA margins declined 200bps as Cost of retail increased by 30bps YoY to % Chng. 1.7 1.7 EBITDA (Rs. m) 23,221 32,098 24,186 32,090 6.4% % Chng. (4.0) - EPS (Rs.) 21.6 30.4 22.7 30.5 % Chng. (5.0) (0.4) . Added 4 new stores, pending capex of Rs841mn out of IPO proceeds for construction of stores and purchase of fit outs

Key Financials We cut FY19 and FY20 EPS estimates of D’Mart by 10.7% and 5% following FY18 FY19E FY20E FY21E 200bps margin decline and just 2% PAT growth in 3Q19. D’Mart continues to Sales (Rs. m) 150,332 198,095 256,636 329,396 EBITDA (Rs. m) 13,528 16,620 23,221 32,098 focus on strong sales led by “Everyday Low price” strategy. Margins have Margin (%) 9.0 8.4 9.0 9.7 been impacted by higher spends behind new store infrastructure, people and PAT (Rs. m) 7,678 9,416 13,459 18,995 EPS (Rs.) 12.3 15.1 21.6 30.4 expenses to manage festive demand through higher operating hours. D’Mart Gr. (%) 60.4 22.6 42.9 41.1 has lowered prices across categories led by benefits from higher economies DPS (Rs.) - 1.5 2.0 3.0 of scale which reinforces its pole position of a value retailer. Yield (%) - 0.1 0.1 0.2 RoE (%) 18.0 18.6 22.3 25.4 RoCE (%) 22.9 26.6 32.3 37.5 D’Mart has growth strategy is place led by 1) gradual acceleration in store EV/Sales (x) 6.5 5.0 3.8 3.0 openings (added 21 stores in FY16 and FY17 and 24 stores in FY18) 2) ramp EV/EBITDA (x) 72.4 59.1 42.3 30.4 PE (x) 127.8 104.2 72.9 51.6 up of D’Mart ready model from 58 locations in 4Q 3) ramp up in young clusters P/BV (x) 21.0 18.0 14.8 11.8 like Punjab, Tamilnadu, Rajasthan, NCR and MP and 4) higher sales share of general merchandise and apparel from 28.4% (up 200 bps in FY18)

Key Data AVEU.BO | DMART IN We expect profit growth to bounce back from 4Q as low base will come into 52-W High / Low Rs.1,699 / Rs.1,060 Sensex / Nifty 36,010 / 10,795 play, although number of store openings in 4Q will be a key factor to watch Market Cap Rs.981bn/ $ 13,907m Shares Outstanding 624m out for. We remain positive on D’Mart given strong cluster based strategy, 3M Avg. Daily Value Rs.1872.39m Everyday low prices model and strong balance sheet. We estimate 34.5% PAT CAGR over FY18-21. However, valuations at 72.8xFY20 EPS of Rs21.6 and Shareholding Pattern (%) 51.6xFY21 EPS of Rs30.4 factors in the expected growth. Retain reduce with Promoter’s 82.20 a target price of Rs1270 (45xDec20 EPS). Foreign 5.45 Domestic Institution 3.01 Public & Others 9.34 Adj. PAT up only 2.1% to R.2.57bn: Net Sales increased 33.1% to Rs54.51bn. Promoter Pledge (Rs bn) - Gross Margins declined by 170bps to 14.7% due to conscious strategy to reduce prices across consumer categories. EBIDTA increased by 7.5% YoY to Rs4.53bn Stock Performance (%) 1M 6M 12M on 200bps margin decline. Cost of retail increased by 30bps led by 40bps higher Absolute 1.6 (1.5) 26.2 overheads despite 10bps lower employee cost. Operating costs increased due to Relative (0.8) (0.8) 20.9 spends on new store infrastructure and employees. During the festive season, store operated for longer hours which also resulted in operating costs increasing. Adj. Amnish Aggarwal PAT grew only 2.1% Rs2.57bn due to increase in finance costs by 36%, [email protected] | 91-22-66322233 depreciation by 33% and tax rate by 25bps and decline in other income by 36.7%. Nishita Doshi D’Mart added 4 stores during the quarter (9 stores in 9MFY19) taking the total [email protected] | 91-22-66322381 stores to 164.

January 14, 2019 1 Avenue Supermarts

Net Sales up 33.4%; Ad. PAT up 2.1% on 200bps decline in margins Y/E March Q3FY19 Q3FY19 YoY gr. (%) Q2FY19 9MFY19 9MFY18 YoY gr. (%) Net Sales 54,509 40,939 33.1 48,725 148,829 111,989 32.9 Gross Profit 8,009 6,711 19.3 6,983 22,113 17,932 23.3 % of NS 14.7 16.4 (1.7) 14.3 14.9 16.0 (1.2) Other Expenses 3,476 2,493 39.4 3,087 9,456 7,504 26.0 % of NS 6.4 6.1 0.3 6.3 6.4 6.7 (0.3) EBITDA 4,533 4,217 7.5 3,896 12,657 10,429 21.4 Margins (%) 8.3 10.3 (2.0) 8.0 8.5 9.3 (0.8) Depreciation 522 393 32.8 444 1,369 1,081 26.6 Interest 149 110 35.9 101 350 462 (24.3) Other Income 86 137 (36.7) 139 368 577 (36.3) PBT 3,949 3,851 2.5 3,491 11,306 9,462 19.5 Tax 1,378 1,334 3.3 1,109 3,971 3,235 22.8 Tax rate (%) 34.9 34.6 0.3 31.8 35.1 34.2 0.9 Adjusted PAT 2,571 2,518 2.1 2,382 7,335 6,228 17.8 Source: Company, PL

Added 4 stores in 3QFY19; Cost of retail up 10bps QoQ and 30bps YoY 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 No of Stores 136 141 155 157 160 164 Area (mn Sq.ft.) 4.2 4.4 4.9 5.0 5.1 5.2 Sales/Ft 8,353 9,304 7775 9181 9637 10531 Gross Profit/Ft 1,348 1,525 1157 1434 1381 1547 EBIDTA/FT 757 958 601 851 771 876 Cost of retail % 7.1 6.1 7.1 6.3 6.3 6.4 Source: Company, PL

EBIDTA/Ft and Cost of retail likely to improve on healthy SSG FY16 FY17 FY18 FY19E FY20E FY21E Sales/Ft 28,136 31,120 32,719 35,848 39,408 43,104 Gross Profit/Ft 3,845 4,475 5,145 4,934 5,583 6,345 EBIDTA/FT 1,993 2,417 2,915 2,784 3,264 3,847 Capex/Ft 9,632 8,925 10,103 10,599 9,664 9,710 Cost of retail % 7.2% 7.0% 6.9% 6.5% 6.4% 6.3% Working Cap/Ft 1,263 1,631 1,723 1,921 2,076 2,250 Source: Company, PL

January 14, 2019 2 Avenue Supermarts

Bill Cuts increased by 23.9% to 134.4mn in FY18 LTL growth at 14.2% in FY18

Bill Cuts Growth % Av Bill value Growth % (RHS) LFL growth

12.0 9.2 10.0 30.0 8.2 26.1 22.4 10.0 8.0 25.0 21.5 21.2

8.0 5.7 10.9 5.5 20.0 5.0 4.8 6.0 14.2 6.0 15.0

4.0 6.0

4.0 5.8 1.8 10.0

5.1 5.0 4.8 2.0 2.0 3.9 5.0 0.0 0.0 0.0 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY14 FY15 FY16 FY17 FY18

Source: Company, PL Source: Company, PL

Sales/Sq. ft. increased to Rs 43,104 Foods continue to remain the highest contributor

Sales/ sq.ft Growth (RHS) Foods Non Foods General merchandise & Apparel 11.1 50000 10.6 10.2 12 100.0 9.4 25.9 26.4 26.4 28.4 40000 10 80.0 6.6 8 30000 60.0 21.2 20.6 20.0 20.0 5.1 6 20000 40.0 4 52.8 53.1 53.7 51.6

10000 2 20.0

28136

31120

32719

36361

40068 43826 0 0 0.0 FY16 FY17 FY18 FY19E FY20E FY21E FY15 FY16 FY17 FY18

Source: Company, PL Source: Company, PL

January 14, 2019 3 Avenue Supermarts

ITO has stabilized, FA turnover to increase further Return ratios to improve sharply

Inventory Turnover Fixed Asset Turnover ROE ROCE 38.0 40.0 16.0 14.7 32.6 14.3 14.0 14.2 14.4 14.3 14.4 14.4 35.0 14.0 27.6 27.3 30.0 23.8 23.2 12.0 25.0 20.2 21.0 25.4 22.3 10.0 20.0 27.7 15.912.7 23.5 8.0 15.0 19.7 5.5 18.4 18.5 18.6 6.0 4.4 4.7 5.1 10.0 3.7 3.9 3.9 4.3 4.0 5.0 2.0 0.0

0.0

FY14 FY15 FY16 FY17 FY18

FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY13

FY21E FY20E FY19E Source: Company, PL Source: Company, PL

Net cash positive from FY17 CFO to increase at 15.9% CAGR between FY18-21

15.0 Net Debt (Rs bn) Cash flow From Operations (Rs m) 11.6 16,000 14,526 10.0 8.6 14,000 12,538 5.0 12,000 10,821 9,340 0.5 10,000 0.0 8,000 6,200 -1.0 -1.2 6,000 4,598 -5.0 -3.9 -5.3 4,000 1,816 -10.0 2,000

0

FY15

FY16 FY17

FY18 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

FY19E FY20E FY21E Source: Company, PL Source: Company, PL

January 14, 2019 4 Avenue Supermarts

Financials

Income Statement (Rs m) Balance Sheet Abstract (Rs m) Y/e Mar FY18 FY19E FY20E FY21E Y/e Mar FY18 FY19E FY20E FY21E Net Revenues 150,332 198,095 256,636 329,396 Non-Current Assets YoY gr. (%) 26.4 31.8 29.6 28.4 Cost of Goods Sold 126,356 168,777 217,114 276,693 Gross Block 40,307 50,132 60,773 72,474 Gross Profit 23,976 29,318 39,522 52,703 Tangibles 39,800 49,549 60,103 71,704 Margin (%) 15.9 14.8 15.4 16.0 Intangibles 507 583 670 770 Employee Cost 2,826 3,685 4,876 6,259 Other Expenses 7,622 9,013 11,425 14,346 Acc: Dep / Amortization 7,089 9,156 11,691 14,674 Tangibles 6,877 8,909 11,363 14,254 EBITDA 13,528 16,620 23,221 32,098 Intangibles 212 247 328 420 YoY gr. (%) 37.9 22.9 39.7 38.2 Margin (%) 9.0 8.4 9.0 9.7 Net fixed assets 33,218 40,975 49,082 57,801 Tangibles 32,923 40,640 48,740 57,450 Depreciation and Amortization 1,590 2,060 2,527 2,976 Intangibles 294 335 342 350

EBIT 11,938 14,560 20,694 29,123 Capital Work In Progress 1,471 1,544 1,622 1,703 Margin (%) 7.9 7.3 8.1 8.8 Goodwill 783 783 783 783 Non-Current Investments 414 414 414 414 Net Interest 595 448 354 247 Net Deferred tax assets (450) (705) (918) (1,225) Other Income 693 397 218 348 Other Non-Current Assets 876 912 997 1,091

Profit Before Tax 12,036 14,508 20,558 29,223 Current Assets Margin (%) 8.0 7.3 8.0 8.9 Investments 682 750 825 907 Inventories 11,634 15,476 19,894 25,338 Total Tax 4,158 5,092 7,098 10,228 Trade receivables 335 434 562 722 Effective tax rate (%) 34.5 35.1 34.5 35.0 Cash & Bank Balance 5,602 2,488 2,218 5,544 Other Current Assets 694 792 1,027 1,318 Profit after tax 7,878 9,416 13,459 18,995 Total Assets 56,483 65,476 78,595 97,121 Minority interest 0 - - - Share Profit from Associate (200) - - - Equity Equity Share Capital 6,241 6,241 6,241 6,241 Adjusted PAT 7,678 9,416 13,459 18,995 Other Equity 40,450 48,154 60,112 76,853 YoY gr. (%) 60.4 22.6 42.9 41.1 Total Networth 46,691 54,395 66,353 83,094 Margin (%) 5.1 4.8 5.2 5.8 Extra Ord. Income / (Exp) 380 3 3 3 Non-Current Liabilities Long Term borrowings 2,460 1,640 820 - Reported PAT 8,058 9,419 13,462 18,998 Provisions 7 17 40 90 YoY gr. (%) 68.0 16.9 42.9 41.1 Other non current liabilities - - - - Margin (%) 5.4 4.8 5.2 5.8 Current Liabilities Other Comprehensive Income - - - - ST Debt / Current of LT Debt 1,933 2,500 2,500 2,500 Total Comprehensive Income 8,058 9,419 13,462 18,998 Trade payables 3,173 4,330 5,518 7,076 Equity Shares O/s (m) 624 624 624 624 Other current liabilities 1,754 1,875 2,432 3,121 EPS (Rs) 12.3 15.1 21.6 30.4 Total Equity & Liabilities 56,482 65,476 78,595 97,121 Source: Company Data, PL Research Source: Company Data, PL Research

January 14, 2019 5 Avenue Supermarts

Cash Flow (Rs m) Key Financial Metrics

Y/e Mar FY18 FY19E FY20E FY21E YearY/e Mar FY18 FY19E FY20E FY21E

PBT 12,036 14,508 20,558 29,223 Per Share(Rs) Add. Depreciation 1,590 2,060 2,527 2,976 EPS 12.3 15.1 21.6 30.4 Add. Interest 595 448 354 247 CEPS 14.9 18.4 25.6 35.2 Less Financial Other Income 693 397 218 348 BVPS 74.8 87.2 106.3 133.1 Add. Other (201) - - - FCF (2.5) (1.4) 3.7 10.4 Op. profit before WC changes 14,021 17,017 23,439 32,446 DPS - 1.5 2.0 3.0 Net Changes-WC (1,890) (2,893) (3,300) (3,976) Return Ratio(%) Direct tax (4,158) (5,092) (7,098) (10,228) RoCE 22.9 26.6 32.3 37.5 Net cash from Op. activities 7,973 9,031 13,041 18,243 ROIC 23.8 23.4 27.4 32.1 Capital expenditures (9,539) (9,892) (10,711) (11,776) RoE 18.0 18.6 22.3 25.4 Interest / Dividend Income - - - - Balance Sheet Others (260) (65) (72) (80) Net Debt : Equity (x) 0.0 0.0 - 0.0 Net Cash from Invt. activities (9,799) (9,957) (10,783) (11,855) Net Working Capital (Days) 21 21 21 21 Issue of share cap. / premium 220 (586) - - Valuation(x) Debt changes (10,580) (253) (820) (820) PER 127.8 104.2 72.9 51.6 Dividend paid - (1,128) (1,504) (2,256) P/B 21.0 18.0 14.8 11.8 Interest paid (595) (448) (354) (247) P/CEPS 105.8 85.5 61.4 44.6 Others - - - - EV/EBITDA 72.4 59.1 42.3 30.4 Net cash from Fin. activities (10,956) (2,415) (2,678) (3,323) EV/Sales 6.5 5.0 3.8 3.0 Net change in cash (12,782) (3,342) (421) 3,064 Dividend Yield (%) - 0.1 0.1 0.2 Free Cash Flow (1,566) (861) 2,330 6,467 Source: Company Data, PL Research Source: Company Data, PL Research

Quarterly Financials (Rs m)

Y/e Mar Q4FY18 Q1FY19 Q2FY19 Q3FY19 Net Revenue 38,100 45,594 48,725 54,509 YoY gr. (%) 22.5 26.7 38.9 33.1 Raw Material Expenses 32,432 38,474 41,742 46,501 Gross Profit 5,668 7,121 6,983 8,009 Margin (%) 14.9 15.6 14.3 14.7 EBITDA 2,945 4,227 3,896 4,533 YoY gr. (%) (30.2) 43.5 (7.8) 16.3 Margin (%) 7.7 9.3 8.0 8.3 Depreciation / Depletion 465 403 444 522 EBIT 2,480 3,824 3,453 4,012 Margin (%) 6.5 8.4 7.1 7.4 Net Interest 132 100 101 149 Other Income 149 143 139 86 Profit before Tax 2,497 3,866 3,491 3,949 Margin (%) 6.6 8.5 7.2 7.2 Total Tax 826 1,360 1,233 1,378 Effective tax rate (%) 33.1 35.2 35.3 34.9 Profit after Tax 1,671 2,506 2,258 2,571 Minority interest - - - - Share Profit from Associates - - - - Adjusted PAT 1,671 2,506 2,258 2,571 YoY gr. (%) 72.9 43.4 18.2 2.1 Margin (%) 4.4 5.5 4.6 4.7 Extra Ord. Income / (Exp) - - - - Reported PAT 1,671 2,506 2,258 2,571 YoY gr. (%) 72.9 43.4 18.2 2.1 Margin (%) 4.4 5.5 4.6 4.7 Other Comprehensive Income 3 (2) (1) (1) Total Comprehensive Income 1,674 2,505 2,256 2,570 Avg. Shares O/s (m) 624 624 624 624 EPS (Rs) 2.7 4.0 3.6 4.1 Source: Company Data, PL Research

January 14, 2019 6 Avenue Supermarts

Recommendation History

No. Date Rating TP (Rs.) Share Price (Rs.) 1 25-Jan-18 Reduce 900 1,157 2 13-Apr-18 Reduce 900 1,469 3 6-May-18 Reduce 1,003 1,490 4 15-Jun-18 Reduce 1,197 1,569 5 10-Jul-18 Reduce 1,197 1,522 6 30-Jul-18 Reduce 1,285 1,595 7 5-Oct-18 Reduce 1,301 1,346 8 14-Oct-18 Reduce 1,286 1,412 9 7-Jan-19 Reduce 1,286 1,571

Analyst Coverage Universe Sr. No. CompanyName Rating TP (Rs) Share Price (Rs) 1 Asian Paints Accumulate 1,300 1,396 2 Avenue Supermarts Reduce 1,286 1,571 3 Britannia Industries Accumulate 3,231 3,144 4 Colgate Palmolive Hold 1,157 1,303 5 Crompton Greaves Consumer Electricals BUY 276 227 6 Dabur India Hold 427 420 7 Emami Accumulate 521 419 8 Future Retail BUY 604 459 9 GlaxoSmithKline Consumer Healthcare Hold 8,520 7,488 10 Hindustan Unilever Hold 1,880 1,785 11 ITC BUY 364 282 12 Jubilant FoodWorks Accumulate 1,395 1,217 13 Kansai Nerolac Paints Accumulate 474 467 14 Marico BUY 387 387 15 Nestle India Accumulate 11,129 10,786 16 Pidilite Industries Accumulate 1,121 1,103 17 Titan Company BUY 1,115 944 18 Tribhovandas Bhimji Zaveri Accumulate 78 71 19 Voltas Accumulate 658 542

PL’s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

January 14, 2019 7 Avenue Supermarts

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We/I, Mr. Amnish Aggarwal- MBA, CFA, Ms. Nishita Doshi- CA, B.Com Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. (US Clients)

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PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co-managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. 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