Published on 9/03/2017 3:28:49 PM | Source: SPA Securities Ltd

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Avenue Supermarts Ltd. (ASL) is an emerging national supermarket chain, with a focus on value retailing. ASL opened its first store in Mumbai in 2002. As of January 31, 2017, ASL had 118 stores with Retail Business Area of 3.59 million sq.ft, located across 45 cities in Maharashtra, Gujarat, Telangana, Karnataka, Andhra Pradesh, Madhya Pradesh, Chattisgarh and NCR.ASL operate distribution centres and packing centres which form the backbone of their supply chain to support retail store network. As of January 31, 2017, ASL had 22 distribution centres and six packing centres in Maharashtra, Gujarat, Telangana and Karnataka.


Investment Rationale

Value retailing to a well-defined target consumer base

ASLs business model is based offering value retailing using the EDLC/EDLP strategy. TheEDLC/EDLP strategy is offering low prices on daily basis with low procurement and operations cost. ASLstargets at lower-middle, middle and aspiring upper-middle incomeconsumers. ASL believes that getting value for money is the most compelling factor in decision-making forthese income groups. Majority of the products stocked by ASL are essential products forming part of basic rather thandiscretionary spending, hence business is not materially affected by seasonality or temporarilydepressed macro-economic conditions.


Steady footprint expansion using a distinct store acquisition strategy and ownership model

ASL's business has grown through expansion of store network from 1 store in 2002 to 118 stores in January 2017 across 9 states in India. ASL hasexpanded their footprint using a cluster-based approach. They have strengthened theirexisting presence in certain regions by opening new stores within a radius of existingstores and distribution centres. Such clusters have led to increased penetration, higher cost efficiency due to economies of scale and greater and brand visibility.Owning real estate and entering into long-term lease arrangements has helped ASL to control fixed costs per store,other than the rental savings, which is partially offset by higher capital and capital servicing costs.


High operating efficiency and lean cost structures through stringent inventory management using IT systems

ASL use IT systems for procurement, salesand inventory management which enables them to identify and quickly react to changes in customer preferences by adjustingproducts available, brands carried, stock levels and pricing in each of stores.ASLs IT systems are built with a wide range of data management tools specific to business needs and support key aspectsof business on a daily basis. ASLs IT systems run onERP applications and are robust and scalable.With supply chain management systems and internal controls to minimise product shortage, ASL is able to operate efficiently and productively with minimaldisruptions to day to day operations.


Outlook & Valuation

Revenue of ASLhas grown at a CAGR of 40% during FY12-16 compared to growth of 30% for V-mart, 28% for Trent and 20% for Future Consumer in the same period. PAT of ASLhas grown at a CAGR of 52% during FY12-16 compared to growth of 27% for Vmart and 7% for Trent in the same period. Higher revenue and net profit per square feet does give ASL an edge over its peers as the absence of rental costs helps the company deliver higher operating margins. RoNW for ASL stands at 23.4% in FY16 compared to 3.6% for Trent and 12.7% for V-Mart. Considering supernatural growth and significantly higher ROE, we believe ASL deserves premium over its peers. Trent and V-Mart are currently trading at 50.9x and 37x their FY17E EPS. At upper band of INR 299, ASL is valued at 36.1x its annualized EPS of FY17. We recommend SUBSCRIBE to the issue with long term perspective.


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