Shoppers and pedestrians walk past a D-Mart supermarket operated by Avenue Supermarts Ltd. (Photographer: Dhiraj Singh/Bloomberg)

How D-Mart Stacks Up Against Peers

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  • Avenue Supermarts Ltd. is all set to become the second initial public offering (IPO) to hit the primary markets in 2017. It is also being touted as the biggest IPO from the retail sector since 2007.

    The supermarket chain, founded and promoted by well-known investor Radhakishan Damani, plans to raise as much as Rs 1,870 crore from the primary market, by diluting 10 percent of its post-issue equity share capital, pegging its total market capitalisation at Rs 18,700 crore. Majority of the funds raised will be used to repay debt, with the remaining being used for maintenance and new stores, according to the company’s draft red herring prospectus (DRHP).

    The plan is to cut debt by more than a Rs 1,000 crore to Rs 421 crore, while Rs 367 crore will be used to develop new stores adding a total of 2.1 million square feet and construct new buildings.

    Business Model

    D-Mart is one of the largest and the most profitable retailers in India, with stores spread across eight states, with a majority of them in Maharashtra. The company has 112 stores, as of September 2016, with a total retail space of 3.4 million square feet, located across 41 cities. 63 percent of its revenue came from Maharashtra, followed by Gujarat which contributed 19 percent, while the remaining came from all other geographies.

    Avenue Supermarts owns all its properties which eliminates rental cost. Rental costs typically account for three to eight percent of total expenses of its peer group retailers.

    In the last 15 years, Avenue Supermarts has opened 112 stores based on a cluster approach, according to its DRHP. It opens new stores within a few kilometre radius of its existing stores and distribution centres targeting densely-populated residential areas with a majority of lower-middle, middle and aspiring upper-middle class consumers. This helps the company reduce the distribution cost and to understand local/regional needs.

    Revenue Sources

    53 percent of D-Mart’s revenue comes from the foods category which includes staples, groceries, fruits and vegetables, snacks and processed foods, dairy and frozen products, beverages and confectionery. Non-foods fast moving consumer goods accounts for 21 percent while general merchandise and apparels make up the rest of its revenue.

    Peer Comparison

    Avenue Supermarts will have to compete against established players like Future Retail Ltd., V-Mart Retail Ltd., Trent Ltd., Shoppers Stop Ltd., and Aditya Birla Fashion and Retail Ltd. in the listed retail space.

    The company also has other unlisted retailers like Hypercity Retail (India) Ltd. and Spencer’s Retail Ltd. to compete with.

    Higher revenue and net profit per square feet does give D-Mart an edge over its peers as the absence of rental costs helps the company deliver higher operating margins. Spencer’s and Hypercity had losses at operating and net profit level in the financial year 2015-16.

    Avenue Supermarts revenue has grown at a compounded annual growth rate (CAGR) of 40 percent, while the net profit has grown at CAGR of 52 percent.

    Avenue Supermarts balance sheet is stable with lower debt-to-equity ratio and higher return on equity.

    Owning all its properties helps the retailer have an asset turnover ratio which puts it third on the list of peers. It also has an edge in inventory turnover ratio which is driven by higher sales.

    Asset turnover ratio indicates the efficiency with which a company is using its assets in generating revenue while inventory turnover ratio measures how fast a company is selling its inventory.

    Global Peers

    Wal-Mart Stores and Costco Wholesale are the largest listed retail supermarket chains by market capitalisation. Avenue Supermarts beats the world’s two largest listed retailers on all parameters, except for debt-to-equity.

    D-Mart’s average bill value and number of bills generated have been consistently growing over the last five years, while the sales growth from same stores has been around 24 percent.

    D-Mart’s valuation is expected to be 1.5 times its revenue, while the stock is expected to trade close to 38 times its financial year 2016-2017 earnings. Ahead of D-Mart’s IPO, the other listed retailers—Future Retail, Trent, Aditya Birla Fashion and Retail and Shoppers Stop -- have seen a run-up after struggling in the last two quarters of FY17.

    The story was updated after Future Retail requested BloombergQuint to consider its nine-month FY17 numbers citing structural changes in the group in financial year 2015-16. Subsequently, Future Retail and V-Mart’s numbers have been calculated by annualising its nine-month numbers ending December 2016.

    BloombergQuint