D-Mart’s Rs 1,870-Crore IPO Opens: Here’s What You Need To Know 

Avenue Supermarts Ltd., the owner of D-Mart supermarkets, has defied the retail sector’s asset-light model to build the country’s most profitable retail chain.

The retailer owns most of its stores or follows a long lease model while its rivals almost entirely take properties on lease. This implies a higher capital investment but zero or lower and stable rental costs.

This is one of the main reasons Avenue Supermarts has seen its operating margins expand, broking house Emkay Global Financial Services said in a note it released ahead of the retailer’s initial public offering (IPO) on Wednesday.

The retailer’s EBITDA (earnings before interest, tax, depreciation and amortisation) margin has increased by 250 basis points in the last 57 months till December 31 to 8.8 percent, according to data from Emkay.

“Although D-Mart has spent Rs 2,300 crore on land and buildings, it has been more than compensated as its rental cost is only Rs 18.9 crore or 0.2 percent of sales as against 8 percent for Future Retail,” another broking house Prabhudas Lilladher said in a recent report. Future Retail Ltd. runs retail chains including Big Bazaar, Food Bazaar, and Easyday.

But there’s a flip side to its ownership model. The retailer’s asset turnover ratio – which indicates the efficiency with which a company is using its assets in generating revenue – is far lower than that of Future Retail.

Avenue Supermarts has borrowed Wal-Mart Stores Inc.'s cluster-based expansion approach that helps keep a check on distribution costs. The retailer first identified its geographies and then chose to open stores in close proximity.

This “focused expansion approach” is the other reason the company has been ahead of its rivals, Prashant Agarwal, joint managing directors at retail consultancy Wazir Advisors, said over the phone.

D-Mart had 118 stores as on January 2017 spread across eight states and two union territories. Maharashtra accounted for 52.7 percent of stores and 62.6 percent of sales while Gujarat accounted for 23.6 percent of stores and 18.8 percent of sales, according to Prabhudas Lilladher. The company plans to stick to the same strategy with 75 percent stores in existing strong territories, the brokerage house added.

The company operates in tier 2 and tier 3 markets, where competition is very low or non-existent. And higher sales per store give the company an edge.

Also Read: How D-Mart Stacks Up Against Peers

IPO To Help Pare Debt, Open More Stores

Of the Rs 1,870 crore that the company intends to raise through its IPO, Rs 367 crore will be used to open more stores in south and central India. A bulk of it – Rs 1,000 crore – will be used to pare debt. Avenue Supermarts’ debt-to-equity ratio is roughly the same as that of Future Retail. The rest of the proceeds will go toward general corporate purposes, according to information in its red herring prospectus.

It is divesting a 10 percent stake through the offer, which opens on Wednesday and closes on March 10. The price band for the offer has been set at Rs 295-299 per share. The company has earmarked 35 percent of the shares on offer for retail investors, 50 percent to qualified institutional buyers (QIBs) and 15 percent to non-institutional bidders on a proportionate basis.' On Tuesday, it raised nearly Rs 561 crore from anchor investors at the upper end of the price band.

Strong Financials

The consolidated networth of Avenue Supermarts stood at Rs 1,905.6 crore, as on December 31, 2016. Its revenue has been compounding at an annual growth rate of 40 percent in the last five years, while the net profit grew at compounded annual growth rate of 52 percent. For the first nine-months of financial year 2016-17, the company posted a revenue of Rs 8,803.2 crore and net profit stood at Rs 387.5 crore.

What about valuations? At the upper end of the price band, D-Mart’s post-issue implied a market capitalization is Rs 18,700 crore, and this translates to a forward price-to-earnings ratio of 36. Ahead of D-Mart’s IPO, Future Retail’s shares have jumped more than 100 percent year-to-date, leading to an expansion in valuation multiple to 37 times forward price-to-earnings.

'Subscribe’, Say Analysts

Avenue Supermarts dwarfs most of its listed peers both domestic and international, according to Emkay Global. The brokerage has a subscribe rating on the offer based on the company's "robust business model and focus on low costs" which it says "will enable the company to report not only a strong profitable growth but also turn free cash positive in the near future".

Prabhudas Lilladher also recommends subscribing to the offer on reasonable valuations, "given strong growth outlook, solid business model and healthy return ratios".