Company Update TP Rs3,699 Key Stock Data Avenue Supermarts BUY CMP Rs3,015 Bloomberg / Reuters Potential upside / downside +23% Sector Retail A 100 bagger story! Previous Rating HOLD Shares o/s (mn) 648 Summary V/s Consensus Market cap. (Rs mn) 1,952,814 The best recourse to conviction is best-in-class-research. We have attempted one on EPS (Rs) FY21E FY22E FY23E Market cap. (US$ mn) 28,195 Avenue Supermarts (DMART). We believe, DMART stock is a 100 bagger, even from IDBI Capital 16.5 31.9 41.0 3-m daily average value (Rs mn) 605.2 current price, over the next 25years. This company has potential of compounding EPS at Consensus 17.0 30.9 40.5 52-week high / low Rs3,328 / 1,736 +28% CAGR over FY21-46E. In this report; we share, our learning from research that we % difference (2.9) 3.3 1.1 Nifty / Sensex 49,802 / 14,721 have done to understand evolution of the most popular hard-discounter in US - The Walmart (physical + ecommerce) and thereby implications; similarities, shortcomings Shareholding Pattern (%) Relative to Sensex (%) and optionality for DMART. This is an original work (not what management said), ideas have been inspired by books that we have read so-far (>60 after lockdown; on politics, Promoters 75.0 religion, brands, retail etc.) and last 49 years annual reports/transcripts that we have FII 10.1 browsed on Wal-Mart. We see DMART as a high conviction BUY idea. We upgrade our DII 6.5 valuation multiple to 60x EV/EBITDA as we expect DMART to grow at higher rate for Public 8.4 longer period of time. Our revised target price stands at Rs 3,699. Key Highlights and Investment Rationale Price Performance (%) As per conservative estimate; DMART to become 100 bagger in next 25 years -1m -3m -12m As per our study; DMART should be able to grow store network/revenue/PAT at Absolute (5.4) 18.3 48.6 17%/28%/28% CAGR over FY22-46E. In FY46, if we value the company at 33x EPS, Rel to Sensex (1.8) 12.1 (14.3) DMART would be a 100 bagger even from the current valuation (P/E at 76x FY23E EPS). We draw our confidence in these forecasts by our study on the evolution of Walmart. Financial snapshot (Rs mn) Where DMART stands today (with 229 stores), Walmart was at same place in 1979 Year FY19 FY20 FY21E FY22E FY23E (229 stores). Walmart has been able to grow revenue at 33% CAGR during 1979-1995 Revenue 1,99,163 2,46,750 2,36,070 3,65,560 4,59,620 (17 years). Given, India enjoys population 4x more than US; our assumption of EBITDA 16,422 21,221 16,398 30,950 39,781 DMART’s ability to grow revenue at 28% CAGR over next 25 years is conservative. EBITDA (%) 8.2 8.6 6.9 8.5 8.7 Inclusive-politics and creative-destruction are the only way to dominate retailing Adj. PAT 9,364 13,499 10,686 20,656 26,557 We understand DMART is highly inspired from Walmart; even the acronyms EDLP-EDLC EPS (Rs) 15.0 21.5 16.5 31.9 41.0 are similar in the annual reports of both the companies. We observe that; Walmart has EPS Growth (%) 19.3 43.3 (23.3) 93.3 28.6 religiously used inclusive politics (2 of its current CEOs joined the company as an PE (x) 207.9 145.1 189.1 97.8 76.1 Associate) and creative-destruction (destructed/converted 80% of the original Walmart Dividend Yield (%) - - - - - Discount Stores into large-size Supercenters) to out-perform/out-live competition. At DMART we see traces of (i) inclusive-politics; degree of democratization of EV/EBITDA (x) 118.7 92.3 123.1 65.3 50.6 power/responsibilities sharing is high and (ii) creative destruction; DMART following RoE (%) 18.3 16.1 9.2 15.6 17.0 footsteps of Walmart; adding large size stores, venturing into new categories etc. RoCE (%) 26.2 20.4 10.6 19.6 21.7 Source: Company; IDBI Capital Research Varun Singh | [email protected] | +91-22-2217 1727 | Upasana Madan | [email protected] | +91-22-2217 1860 March 18, 2021 Chaturya Aggarwal | [email protected] | +91-22-4322 1250 Avenue Supermarts | Company Update Key Highlights and Investment Rationale continued … Price disruption principles could be used to create/disrupt new categories We understand that Walmart at the age of 20 (1982, 330 store count) started venturing into new categories by using the same principles of price-disruption by being lowest cost retailer. More than retailing groceries and general merchandise, Walmart successfully created categories like; pharma otc, auto-ancillaries, bicycles, footwear etc in its stores. We expect DMART’s ability to venture into new margin-accretive categories will improve as they move to adding large size stores. However, currently, DMART is treading-waters cautiously while choosing new categories. We observe that DMART have ventured into categories like; footwear, innerwear, electronics, home appliances, school supplies, etc. over last few years. E-commerce; more an opportunity than a challenge Even though creating an e-commerce business is a different ball-game as it demands different distribution/cost structure, it is interesting to note that Walmart’s customer who got converted to shopping online (Walmart.com) from their physical stores spent 2x more money. We understand that; e-commerce not only improves basket-size of existing customers but also brings-in new-customers (customers who loves convenience and would not go to a physical store). Hence, despite all the challenges, e-commerce is also an attractive opportunity for physical-retailers. Online business can’t be mixed with offline stores; DMART Ready is a step in right direction Despite Walmart claims to have competitive edge in retail, as they have more number of touch-points through their physical stores in USA (90% US population finds a Walmart with-in 10 miles), it has not been able to compete with Amazon (Amazon e-com revenue is 6x of Walmart e-com revenue). Online retailing demands different value/cost network compared to offline retailing. We observe that; 75% of Wal-Mart’s e-commerce business comes from non- store inventory. Hence, as per evolutionary history; it would be tough to mix online and offline business. Therefore, given the compulsion (as per customer demand) of e-commerce presence, it would be wise to treat both the business differently. Hence, DMART using DMART Ready model is a right-full approach towards solving for convenience demand of customers. 2 Avenue Supermarts | Company Update DMART to become 100 bagger in next 25 years … compounding wealth at 20% CAGR We expect DMART to become a 100 bagger stock in next 25 years even from current price/valuation. This implies market cap growth at the rate of c. 20% CAGR while PAT growth of c.27% CAGR. We have done exhaustive study of last 49 years annual reports and transcripts of Walmart to get all possible insights into the evolution of the world’s most popular hard-discounter in USA. There has been lots of learning which we shall share in following notes. We discuss our 100 bagger thesis in two parts; the output (conclusion) and the math. The output (conclusion) In US Walmart became a 100 bagger story immediately after 13 year of its IPO. Interestingly; Walmart traded at c. 60x 1 year forward P/E post listing in 1971 while DMART in India traded at 48x 1 year forward P/E post at Rs 604/share. From issue price of Rs 299, DMART is already a 10x bagger. Over last c. 50 years Walmart has been able to formidably scale itself from 1 store to >10k stores. We expect DMART to reach 10k store mark in next 25 years in India. As per Walmart’s annual report; >90% of US population finds Walmart within 10 miles (c. 16km) of their home. Interestingly, population of India is 4x of USA while penetration of modern food and grocery retailing is only c. 6%. Hence, our assumption of DMART growing its revenue at 28% CAGR over next 25 years (to become a 100 bagger) is a conservative estimate. It would be close to impossible to match DMART price in regions where it has already acquired strength; as per our study; in grocery retailing regional economy of scale is critical. Walmart used the concept of “magic circle” (planting a new Walmart store within 350 mile radius of distribution center) while doing store expansions to become a formidable competition (w.r.t discount) in a particular region before moving to next. Similarly, we see DMART using cluster-based-expansion strategy (85-90% of new stores are always added in existing geographies) to become a formidable competition in its existing clusters. More number of stores in a particular cluster helps companies enjoy lower distribution cost (better capacity utilization of the distribution centers, lesser number of empty trucks). DMART’s value chain is more disruptive than Walmart. DMART has created a business model which delivers 5-6% PAT margin (vs 3-4% PAT margin of Walmart over last 50 years) while demanding a gross margin of 15% (vs 20-25% gross margin enjoyed by Walmart). Given the moat (which is expensive) and opportunity size, we expect DMART to compound its market capitalization at 20% CAGR over next 25 years even from current levels. It is a BAAP story (buy at any price). 3 Avenue Supermarts | Company Update Exhibit 1: After IPO Wal-Mart became 100 bagger in just Exhibit 2: We expect DMART to become 100 bagger in 13 years… next 25 years from current levels Walmart: 1973-1986 Particulars (Rs in bn) FY21 FY46E % CAGR 111x Net Profit 11 6,394 28% 68x 71x P/E multiple 189x 33x 13x Market Cap 2,073 2,10,990 20% Market Cap Revenue PAT No.