AVENUE SUPERMARTS

25/09/2018
CMP: Rs. 1420
AVENUE SUPERMARTS

At Stallion Asset we have a consistent investment

philosophy of buying high growing companies
backed by quality management.

About the company

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Avenue Supermart is a Mumbai Based Supermarket
STOCK DATA chain running under the Brand Name ‘D-Mart’ having
155 stores as on 31st March 2018 across the country

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Market Cap(Rs. cr) 88608 with the Retail Business area of 4.9 million sq ft. It
has grown its sales and EBITDA at healthy CAGR rate
Debt 253

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of 33% and 44% respectively in last 5 years.
Cash 560 gm
Enterprise Value 88301 Why Avenue Supermart?
Promoters Holding 81.20 %
52 week high/low 1682/1022.40 • Lowest cost retailer
62.40 • Strongest Balance sheet
Shares outstanding
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• Fastest Growing retailer organically

• Massive opportunity size
KEY FINANCIALS (Rs. in Cr) • Sustainable business Model
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Y/E March 2015 2016 2017 2018 D-Mart has scaled its business without straining the
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Revenue 6891 9177 12758 16505 balance sheet. It has strengthened its store network
Operating exp 6415 8496 11761 15064 from 55 stores in FY2012 to 155 stores in FY2018 i.e.
EBITDA 476 681 997 1441 a growth of 20% CAGR whereas revenue’. Given the
huge opportunity size as 90% of the retail industry is
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Depreciation 82 98 128 159

Interest Expense 72 91 122 60 still unorganized, we believe that the D- mart can
sustain its earnings growth momentum for many
PBT 322 488 747 1222
years to come.
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Taxes 112 171 268 416

PAT 210 319 474 793
The game is played in the absolutely the same way
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globally and the lowest cost retailer wins all the time.
Lower cost would mean you can sell cheap, which
VALUATION increases footfalls, which then results in higher the
inventory turnover and better is the efficiency. D-
Valuation is not an easy task in D-mart, it’s not mart has lowest operational costs in the industry of
cheap (110x PE multiple TTM), it’s a great business only 8% compared to peers (23-27%) due to its
with massive opportunity size and a proven business model. It follows the business model of
business model with high barriers to entry . owning most of its stores which results in lower
Organized retail is long 10-20 year story, we need rental cost and higher profitability. It therefore enjoys
higher Ebitda Margins 8% vs 4% for peers.
to buy the leader and stick with it for the next
many years.

Investors are advised to refer through important disclosures made at the last page of the Research Report.
 AVENUE SUPERMARTS
Our D-Mart Report is divided in 3 Parts

1) Opportunity
2) Execution
3) Competition

Retail Industry and the Opportunity Size

Indian Retail Market ranks 5th globally having market size of 47 lakh crore out of which only 10% is in form of
organized retail. Food and Grocery has highest share of 24% in the organized segment where D-mart caters to and
51% of D-mart’s revenue comes from foods and grocery. Retail industry in India annually grows at 12%.

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Total supermarkets in India which were only 500 in 2006 have now reached 8500 in 2016. This figure is still small
compared to 37000 grocery or supermarket stores in USA which has population of 32 crores vs 130 cr population

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in India. There are three main retailers (i.e. Reliance, Future retail and D-Mart )comprising the majority chunk of
organized food retail market in India which is still a very small numbers and we see huge potential for all the players

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to become 3-5 x in next decade.

Retail Business – It’s a volume Game

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As Warren Buffett Says, Retail is a very difficult business to be in. But the recipe for a running a retail business on a
large scale successfully is same everywhere in the world. Lets look at how Walmart become so big in USA and has
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now made a mark around the globe. The formula is very simple, “Master the art of doing the same thing again
and again”.
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Walmart opened its first store in 1962 in US and took 10 years to reach 51 stores in 1972. In the next 8 years its
store count reached from 51 to 276 in 1980 and in next 3 years it reached 551 stores. Between 1972 and 1983
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Walmart was growing its sales at 35% plus. During the same period the net margins of Walmart hovered around
3.5% (Low Profit margin are a Moat in this business as long as you have the lowest cost). This was a high growth
period with massive opportunity size lying ahead of him. The only way to grow in the business is volume wise
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with little or no scope of margin expansion.

Any large business idea can only exists if as we at Stallion often call it “solving a problem”. The only motto of Sam
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Walton was to sell daily need fast moving items a cheapest prices in the town. It solved a problem by making
people save money on their daily grocery bills. Initially it started buying goods from American companies but soon
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Walton realised that in long term it will not be able to remain a low cost provider hence started outsourcing goods
of a predefined quality from developing nations to take advantage of cheaper labour and other costs.

Today Walmart has over 4700 stores across the globe today and has become a branded franchise in the retail chain
segment. Walmart this year did a sales of 500 Billion Dollars v/s 2Billion$ for Dmart.

Investors are advised to refer through important disclosures made at the last page of the Research Report.
 AVENUE SUPERMARTS

Reading Fortune 500 gives

you a good understanding
of proven scalable business
models which can create a
lot of value in the long
term. Walmart tops the list
with revenues of 500 Billion

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Dollars.

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Walmart during 1982-1992 grew its sales $2.4 billion to $43.9 billion which translates to 34% Cagr growth in
topline and 35% growth cagr in profits. D-Mart’s sales is currently $2 billion but can it do a repeat of Walmart?
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D-mart has all the following qualities to become a much larger franchisee in the next decade –

• Lowest prices everyday

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• Best cost efficiency

• Lowest inventory days
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D- Mart‘s Journey

D-Mart a retail chain started its Journey in 2000 by Radhakrishna Damani with a single store in Maharashtra. D-
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Mart took 8 years to reach 10 stores. They Grew from 10 stores in 2009 to 75 Stores by 2014. In last 5 years they
grew their stores from 75 in 2014 to 155 in 2018 with a total retail space of 4.94 million sq. ft. The sales of D-Mart
comes from 3 main segments i.e. Food (53%), Non-Food (FMCG) (20%) and General Merchandise & Apparel (27%).
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The margins in apparel business are the highest but the management does not intend to increase exposure to this
business as they believe that it takes 2-3 years to give higher returns.
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D-Mart has started D-Mart ready store on pilot basis (A Small 200 Sq Feet Grocery store like Seven Eleven. These
stores are small format stores where you get your order delivered and you just have to go there and pick up or get
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it delivered to your home at 30 Rps per parcel. In this model the upfront costs are extremely less, they can cover
more pin codes and they will save a lot on logistics cost. D-Mart Ready is in Pilot project mode and they are just
getting started here.

Investors are advised to refer through important disclosures made at the last page of the Research Report.
 AVENUE SUPERMARTS

D- Mart is well placed among the peers –

D- Mart’s revenue per Square feet is Rs 32,700 and Ebitda per sq ft. of Rs 3010 which is best in the Industry. D-Mart
is smallest in size in terms of no. of stores and we believe that it can easily double its store count in next 4-5 years.
The company has guided to open 50-60 New Large Format stores in next 2 years i.e. 20% New Store growth.

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What works for D-mart?
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Lowest cost Producer
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D- Mart gets the highest valuation compared to other retail companies in the country for a reason. The only
competitive advantage a retailer has is its cost. Lower the operational cost of the company, higher the efficiency
and hence the profitability as the only problem that they are solving is “COST SAVINGS”. D-Mart has a business
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model where it owns 87% of its stores and hence have large savings on the rentals unlike peers thus increasing the
profitability and longevity of the store.
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D-Mart’s operational cost as % of sales is far below its peers at 8% vs

industry average of 27%. They enjoy the highest operational margins
of 9% vs industry average of 4-5%.
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D-Mart has one of the strongest balance sheet in the Industry while
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generating free cash flows to fund the future expansion plans hence
we believe that these operational efficiencies is sustainable and wont
detoriate at the cost of their future expansion plans.

How does he manage to remain low cost?

There are 3 main components of operating costs which as discussed below which works well for D-Mart –

1) Savings in rental costs

2) Centralized outsourcing
3) Employee cost as % of sales

Investors are advised to refer through important disclosures made at the last page of the Research Report.
 AVENUE SUPERMARTS
1) Savings in rental costs –

D- Mart’s business model of owning all the stores may be an obstacle to grow aggressively but has worked really
well for them. Unlike other peers who typically have 7-8% of revenues as rental cost, D-mart’s doesn’t have to pay
that. This helps D- Mart to give larger discounts on its products compared to its peers. On the flip side, this makes
D-mart an asset heavy business but we believe that as far as it generates strong cash flows and fund its expansion
via internal accruals, its expansion targets of 30 stores per year for next 2 years can be easily done.

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2) Centralized Sourcing –

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D-Mart uses its supply chain services very efficiently. It gets a good deal from the logistics partner i.e. cheaper services
than others mainly because they deal with large volumes. So their cost per km for transportation is very cheap. They
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source directly from the primary vendors directly, In fact their strategy of expanding its store count is very different.
They focus on first penetrating in the existing market before entering into new geographies so that they can take
complete advantage of centralized warehouses in the existing geographies to reduce the cost of logistics. (Cluster
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Based Approach)
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3) Employees Cost as % of revenue

Employee Expense for D-Mart is only 1.80%

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compared to 8% for listed peers V-mart and 5% for

future retail. Trent (Westside) which is not directly
comparable to D- Mart as it is in fashion retail also
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has as high as 10%.D- Mart therefore has EBITDA

margins of around 8% highest in the industry.
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Consistence performance
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Consistence performance is as important as the future growth is. D-Mart has consistently grown over the last 5
years as their revenues grew by 33% cagr and ebitda grew at 44% cagr. D- Mart has followed clustered based
approach for expansion. D-Mart has never shut a store after opening it till date. For Instance, when we met the
management with a group of analyst one analyst asked “why there is no D- Mart in South Mumbai?”, The
management said that it doesn’t make any business sense to open a store their due to high land costs instead
they would prefer to open D-mart ready (Smaller stores) stores to reach people in that area.

Hence we believe that D-Mart’s strategy unlike others (i.e. via inorganic growth to grow fast) will ensure
consistence growth performance and the growth will continue to come in as there is ample opportunity size for the
entire organised retail basket to grow.

Investors are advised to refer through important disclosures made at the last page of the Research Report.
 AVENUE SUPERMARTS

Strong Balance Sheet –

Out of 155 stores, 135 stores are owned by the company and 20 are leased out. It has a very strong balance sheet

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with higher return ratios and strong operating cash flows. It has repaid its majority debt and brought down its debt
to equity from 0.5 to 0.05 in FY18.D-Mart has higher ROCE than its peers in spite of having asset heavy model.

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Strong Operational Performance
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Company has strong operational cash flows and most of its expansion is funded by the internal accruals.

In Cr. FY14 FY15 FY16 FY17 FY18

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Purchase of tangible/intangible assets 272 477 648 645 915

Net Profit 160 210 319 474 793
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Operating Cash Flows 223 297 424 620 934

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Competition –

Warren buffet called Retail a very difficult business especially grocery retail. This is very true in Indian context as well,
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lately Samara capital with amazon acquired Aditya birla’s more. We were surprised to see that to reach a revenue of
4200 Crores in FY2017, they lost about 6000 Crores of Equity. The story was not different with Future Retail till 2014
(before the demerger), even they weren’t able to fund the business without dilution. Even Bharti tried his hands in retail
with Easy day stores but he had to give up as net loss surged to 300 Crores+ with 2000 Crores of sales in FY2014. Bharti
ended up merging itself with future group and focussed on the core telecom business. Reliance has also joined the Retail
bandwagon though their focus is more on the fashion side of the business rather than the grocery part.

Grocery selling clearly isn’t a simple business, even Star Bazaar which is owned by Tata’s is struggling and they have
decided to cut store count. Star Bazaar like other has been consistently losing money and yet to turn profitable.
Even Hypercity which is owned by the Raheja group got acquired by future retail as it couldn’t make any money
after years of gestation. Spencers which is owner by the CESC Group has also failed to turn it around and now it is
focussing on fashion business rather than the original grocery business.

Investors are advised to refer through important disclosures made at the last page of the Research Report.
 AVENUE SUPERMARTS
Retail isn’t an easy business, every large business house has tried and failed miserably.

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Risks –

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1) Aggressive expansion not possible – Management has guided for 30 stores/year addition for next 2 years,
it has added 24 more stores in FY2018. For instance, Future retail is expanding aggressively via inorganic
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route by recently acquiring easy day stores (small format stores) which will replace the traditional kirana
stores in the long term. Future group has D-Mart requires higher upfront capital to buy the land at the right
location hence cannot grow at a fast pace like future retail.
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2) Competition intensified – We do not really see any major threat coming from e-commerce players as most
of them are still in losses after many years of operations. A company cannot burn cash for a very long time
and longevity of business becomes a question mark. Eventually it either has to wind up its business or
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becomes a takeover target of a larger company. Flipkart and Amazon, India’s two major e-tailers have
reported losses of 4586 Cr and 5015 Cr. for FY17 respectively.
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3) Declining SSG- Same Stores Sales growth has fallen from 26% in FY14 to 14% to FY18. As the mature stores
will increase and if the new store expansion slows down then the ssg will go down further. New stores have
ssg of 20% approx.
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4) Retail Space in India Heating up with recent acquisition – There is no denial of the fact that E-Commerce has
changed the way of shopping and is the way forward but at the same time Brick and Motor stores is also
important as it gives a shopping experience (touch, feel of the product) which online players cannot give. The
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larger retailers have clearly found a middle way out by having a right combo of brick and motor and online
presence. For instance Lenskart, Nykaa etc are examples which initially started on online platform and later
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shifted to offline model as well and on other side Offline players like Future Retail, Dmart, Walmart, Trent etc
have come on the online platform and tied up with online players to sell their products.
Recently Walmart bought Flipkart at massive $20 billion valuation to enter Indian Market and More (Aditya
Birla company) which is loss making is acquired Jointly by Samara Capital and Amazon at enterprise value of
4200 Cr.

Investors are advised to refer through important disclosures made at the last page of the Research Report.
 AVENUE SUPERMARTS

Valuation – Valuation is not an easy task in D-mart, it’s not cheap (110x PE multiple TTM), it’s a great business with
massive opportunity size and a proven business model with high barriers to entry. Institutional investors have seen
how Walmart has created wealth, they have seen how Tesco in the UK has created wealth, and they have seen how
Costco has created. The Sales of D-Mart is 2 Billion$ V/S 500 Billion$ for Walmart (Opportunity Size), the
competitors are not able to get their business model right (Barrier to Entry), their customers love them (Revenue
per square feet), D-mart is asset heavy and can consistently invest capital at high returns of capital employed.

Conclusion – Organized retail is long 10-20 year story, we need to buy the leader and stick with it for the next many

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years. Even though our buy price here very high PE multiple, we believe that the Profit of D-Mart can go up multiple
times in the next few years and even though it has a high PE multiple, it would still be a great compounder for us.

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Explanation of Stallion Assets Investment Ratings:

Buy(B): Describes securities that we expect to provide a total return (price appreciation plus dividend yield) in
excess of CNX Midcap 100 over the next 12-Month period.
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Hold(H): Describes securities that we expect to provide a total return (price appreciation plus dividend yield)
equal to CNX Midcap 100 over the next 12-Month period.

Exit(E): Describes securities that we expect to provide a total return (price appreciation plus dividend yield)
which is less than CNX Midcap 100 over the next 12-Month period and also implies that we have suspended
coverage on the security.

Investors are advised to refer through important disclosures made at the last page of the Research Report.
 AVENUE SUPERMARTS
Disclosures and Disclaimer for Research Report
Stallion Asset Private Limited is a Research Analyst, registered under SEBI (Research Analyst) Regulations 2014, Registration No.
INH000007270 and a Portfolio Manager, registered under SEBI (Portfolio Managers) Regulations, 1993, Registration No. INP000006129.
Both the services are rendered under two separate divisions and operate independently of each other. Stallion Asset Private Limited’s
both business divisions have independent research teams separated by Chinese walls, and therefore may, at times, have different or
contrary views on stocks and markets.

This Report was prepared by Stallion Asset proprietor Amit Jeswani, Third Party (SEBI – INH000002582). Stallion Asset Private limited
acquired the Clients & Data of Stallion Asset proprietor Amit Jeswani on 2nd September 2019. This Report has been reviewed by RA
Ankush Agrawal of Stallion Asset Private Limited (INH000007270).

Research Analyst Details:

Name: Amit Jeswani

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Email Id: [email protected]
Contact No: 022-68680250 Analyst Ownership of Stock: No

Analyst Certification:

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The Analyst certify (ies) that he complies with Qualification and Certification requirements of Regulation 7 of SEBI (Research Analyst)
Regulations 2014; that are required to be complied with by the individuals employed as Research Analysts by an Entity (Stallion Asset;
Registration No. INH000002582) registered as Research Analyst under SEBI (Research Analysts) Regulations 2014.

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Further, The Analyst certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security
(ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific
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recommendation(s) or views contained in this research report.

Disclosure under SEBI (Research Analyst) Regulations 2014 (Self Certified by Amit Jeswani Proprietor Stallion Asset (INH000002582)
Whether the research analyst or research entity or its associates or his relative has any financial interest in the subject company and the
nature of such financial interest- No
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Whether the research analyst or research entity or its associates or relatives, have actual/beneficial ownership of one per cent or more
securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date
of the public appearance - No
Whether the research analyst or research entity or his Associate or his relative, has any other material conflict of interest at the time of
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publication of the research report or at the time of public appearance - No

Whether it or its associates have received any compensation from the subject company in the past twelve months- No
Whether it or its associates have managed or co-managed public offering of securities for the subject company in the past twelve
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months- No
Whether it or its associates have received any compensation for investment banking or merchant banking or brokerage services from the
subject company in the past twelve months- No
Whether it or its associates have received any compensation for products or services other than investment banking or merchant banking
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or brokerage services from the subject company in the past twelve months- No
Whether it or its associates have received any compensation or other benefits from the Subject Company or third party in connection
with the research report. - No
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Whether the research analyst has served as an officer, director or employee of the subject company - No
Whether the research analyst or research entity has been engaged in market making activity for the subject company – No
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Disclaimer:
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advice to you. Stallion Asset is not soliciting any action based upon it. This report is not for public distribution and has been furnished to
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Investors are advised to refer through important disclosures made at the last page of the Research Report
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