Reblog: Avenue Supermarts DMart IPO review

Issue Summary

Avenue Supermarts Ltd (ASL) is an emerging national supermarket chain (D mart) , with a focus on value-retailing. According to Technopak, in Fiscal 2016 ASL was one of the largest and the most profitable F&G retailer in India. It offers a wide range of products with a focus on the Foods, Non-Foods (FMCG) and General Merchandise & Apparel product categories. ASL opened its first store in Mumbai, Maharashtra in 2002. As of January 31, 2017, it had 118 stores with Retail Business Area of 3.59 million sq.ft, located across 45 cities in Maharashtra (59), Gujarat (27), Telangana (13), Karnataka (7), Andhra Pradesh (4), Madhya Pradesh (3), Chhattisgarh (1), NCR (1), Daman (1) and Rajasthan (2). At the end of the nine months period ended December 31, 2016 and Fiscals 2016, 2015 and 2014, the company had 117, 110, 89 and 75 stores with Retail Business Area of 3.57 million sq. ft., 3.33 million sq. ft., 2.66 million sq. ft. and 2.14 million sq. ft., respectively.

The company plans to deepen its store network in southern and western India and gradually expand network in other parts of India pursuant to its cluster-focused expansion strategy. For Fiscal 2016, Maharashtra contributed a majority of company’s Revenue from Sales (62.57%) followed by Gujarat (18.83%), Telangana (10.15%), Karnataka (6.14%) Andhra Pradesh (1.03%), Madhya Pradesh (0.85%) and Chhattisgarh (0.43%). For nine months period ended December 31, 2016, Maharashtra contributed a majority of its Revenue from Sales (58.84%) followed by Gujarat (18.08%), Telangana (11.45%), Karnataka (7.01%) Andhra Pradesh (2.52%), Madhya Pradesh (1.35%), Chhattisgarh (0.50%), NCR (0.12%), Daman (0.09%) and Rajasthan (0.05%). The company operates and manages all stores. ASL operates predominantly on an ownership model (including long-term lease arrangements, where lease period is more than 30 years and the building is owned by it) rather than on a rental model. It opens new stores using a cluster approach on the basis of adjacencies and focusing on an efficient supply chain, targeting densely-populated residential areas with a majority of lower-middle, middle and aspiring upper-middle class consumers. ASL also operates distribution centres and packing centres which form the backbone of its supply chain to support retail store network. As of January 31, 2017, the company had 22 distribution centres and six packing centres in Maharashtra, Gujarat, Telangana and Karnataka. Company’s business approach is to retail quality goods at competitive prices.

To part finance its debt repayment, NCD redemption and construction and purchases of fit outs for new stores along with raising general corpus fund, the company is coming out with a maiden IPO of approx 6.25 crore equity shares of Rs. 10 each via book building route with a price band of Rs. 295-299 to mobilize around Rs. 1870 crore (based on the upper price band). Issue opens on 08.03.17 and will close on 10.03.17.Minimum application is to be made for 50 shares and in multiples thereon, thereafter. Having allotted shares at par from 2000 to 2011, it issued further equity at a price ranging from Rs. 13 to Rs. 24 per share till 2015. Post issue, its current paid up equity capital of Rs. 561.54 crore will stand enhanced to about Rs. 624 crore.

On performance front, on a consolidated basis the company has posted turnover/net profits of Rs. 4702.33 cr. / Rs. 161.37 cr. (FY14), Rs. 6457.69 cr. / Rs. 211.67 cr. (FY15) and Rs. 8606.11 cr. / Rs. 318.76 cr. (FY16). For first nine months ended on 31.12.16 of the current fiscal, it has earned net profit of Rs. 387.47 crore on a turnover of Rs. 8803.22 crore. If we annualize these earnings and attribute to fully diluted equity post issue, then asking price is at a P/E of 36 against industry composite of 179. The company is having an edge over its peers on RoNW criteria with 21% against peers ranging from 1 to 5%.

BRLM (Book Running Lead Managers) are Kotak Mahindra Capital Co. Ltd, Axis Capital Ltd, Edelweiss Financial Services Ltd, HDFC Bank Ltd, ICICI Securities Ltd, Inga Capital Pvt Ltd, JM Financial Institutional Securities Ltd, Motilal Oswal Investment Advisors Pvt Ltd and SBI Capital Markets Ltd. Link Intime India Pvt Ltd is the registrar to the issue. Post allotment, shares will be listed on BSE and NSE.

On BRLM’s front, they have handled 48 public issues in last three fiscals till now out of which 13 issued closed below the issue price on the listing date.

Conclusion: D-mart is the most popular and preferred retail chain and performing well. Issue is reasonably priced. Investors may consider short to long term investment.