Management Speak: Avenue Supermarts (Unrated) - Value Retail at its best!

We present key takeaways from our management interaction at Avenue Supermarts’ (DMART) analyst meet. DMART is India’s largest value retailer brand by revenue and profits. On a strong base of FY17, the company delivered 26%/38%/68% yoy sales/EBITDA/PAT growth, respectively, in FY18. This was the company’s first interaction post its IPO meet in March 2017, wherein management reiterated its strategy of driving value to the consumer through lowest prices. The management indicated that it would continue to entail strict cost management, which is hard to replicate for competition. Having added 24 stores in FY18, the company is targeting a measured but aggressive annual expansion plan, albeit in existing clusters. The company is more than satisfied with the current level of operating margins (9% in FY18) and expects to pass on any further cost or mix benefit to the consumer through lower prices. The stock trades at 43xFY20E EV/EBITDA based on consensus estimates. We do not have a rating on the stock.

Strong FY18 performance: DMART’s 26% revenue growth in FY18 at Rs150.3bn was led by 14.2% same store sales growth (SSSG) with the addition of 45 stores over FY16-18. Gross/EBITDA margin improved 60bp/80bp, respectively, led by GST adjustments and a superior mix, both from a category (higher growth in general merchandise and apparel) and geography (states where profitability was higher performed better) perspective.

20% SSSG not a given; store expansions to accelerate: Management is satisfied with its adjusted 16% SSSG performance in FY18 and reiterated that the 20% SSSG trend cannot be extrapolated, given the cannibalization effect with its new stores and a higher year 1 base for new stores. However, company is likely to accelerate store expansions, though it would prefer to own stores rather than lease; the company is open to leasing as well but on its terms.

Competitive intensity not a worry: While management agreed to intensifying competitive intensity in the discounting model, it maintained that the company’s cost proposition is unmatched and market opportunity is too large to worry about competition eating into its share.

E-Commerce foray still in test mode: In January 2018, DMART acquired the balance 50.79% stake in its associate, Avenue E-Commerce Ltd. Currently in investment mode, the company is increasing its e-commerce presence in Mumbai and now has 58 D’Mart Ready pick up points in the city for ‘click and collect’ service. Management pointed that the company would continue to expand this venture at a gradual pace without incurring significant losses.