A retailer with a growth appetite
Avenue Supermarts Ltd (ASL), founded in 2002, is the owner of well established supermarket chain D-Mart. ASL is amongst the largest and the most profitable Food & Grocery retailer in India. It offers wide range of Food and non-food products. ASL operates total 118 stores in 9 states and 1 Union Territory.
Market sentiment moving in favour of organized sector to aid growth:
The Indian Retail industry is valued at US$616bn and is mainly dominated by the unorganized sector (accounting for 91% share). Industry reports indicate that the Retail sector is expected to grow at a CAGR of ~12% over FY2016-20E to ~US$960bn, within which, the organized segment is expected to grow at a faster pace than the unorganized segment. The share of organized players is expected to improve from 9% to ~12% in FY2020E, thus benefitting organised players like D-Mart.
Steady footprint expansion:
ASL has increased its store count from 45 in FY2011 to 118 in 9MFY2017 with total retail business area of ~3.9mn sq. ft in 45 cities. Further, the company has plans to increase total retail space by 2.1mn sq. ft by 2020, which will support its growth.
Huge potential for growth in F&G:
In the modern retail, Food & Grocery (F&G) has lower penetration compared to other categories like apparel & accessories, footwear, jewellery & watches, consumer electronics, etc. Going forward, we expect the penetration in this category to improve, which will benefit the organised players like D-Mart.
Track record of healthy financial performance:
ASL has reported revenue CAGR of ~40% over FY2012-16 on the back of (1) same store growth and (2) expansion of its business by adding new stores. On the bottom-line front, the company has reported CAGR of ~52% over FY2012-16 due to good business and gradual improvement in the operating margins. Return on equity has also improved from 9% in FY2012 to 32% in FY2016.
Outlook and Valuation:
At the upper end of the price band, the pre-issue P/E works out to be 32.5x its annualised 9MFY2017 earnings, which is lower compared to P/E multiple of its peers i.e. Trent - 73.9x, Shoppers Stop – 123.8x and Future Retail 36.5x. Better RoE profile, promoter’s strong background, strategically located stores, intense focus on maintaining lower costs and strong brand perception are the compelling factors indicating that ASL is a long term story that will unfold going ahead. Thus, we recommend a SUBSCRIBE on this issue.
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