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.