MOSL: AVENUE SUPERMARTS (DMART) | INITIATING COVERAGE-Delivering value-Expect PAT CAGR of 41% over FY17-21

​Avenue Supermarts (DMART) | initiating coverage: Delivering value; Expect PAT CAGR of 41% over FY17-21

(DMART IN, Mkt Cap USD7.9b, INR818, TP INR804, 2% Downside, Neutral)

• Size of India’s retail sector stands at USD616bn with share of organized brick and mortar retail at USD55bn (9%). While overall retail is expected to grow at a CAGR of 11.7% to USD960b by 2020, organized brick and mortar retail is expected to grow at a faster CAGR of 20.2% to USD115b (12%) thereby providing huge opportunity of growth for DMART.
• While food and grocery forms the largest share of organized brick and mortar retail in 2016 at 24%, penetration of food and grocery still stood at 3% in 2016 of total retail is expected to improve to 5% by 2020 which should provide significant opportunity for DMART given it derives 53.6% of its revenues from food and grocery segment.
• Additionally, DMART derives ~80% of its total revenues from Maharashtra and Gujarat which accounts for 21% of total retail spends in India. DMART intends to invest 75% of its profits in the existing clusters and plans to add 25 stores annually (83.5% increase in area to 7.5m sf by FY21) embellishing its growth potential.
• Focus on cluster-based approach towards store expansion, rich product assortment, owned store model, centralized sourcing and efficiency (40% of revenues), lower employee cost (below 2% of sales v/s >4.5% for peers), upfront payment to get cash discount have made DMART India’s only retail company to showcase consistent and profitable growth over last decade.