DMart was started by Mr Radhakishan Damani to address the growing needs of retail in India. From the launch of its first store in Powai in 2002, DMart today has a well-established presence in 214+ locations across 12+ states in India. The supermarket chain of DMart stores is owned and operated by Avenue Supermarts Ltd. (ASL) which is headquartered in Mumbai.
The company’s shares have 52 weeks price band of INR 2560-1226 and a total market capitalization of INR 1.40 trillion which makes it a Large-Cap company. The shares have a P/E ratio of 111 and a dividend yield of 0%
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.
- Economic Moat
- Business Model and Management
- Growth Ratios
- Profitability Ratios
- Cash Flow Ratios
- Liquidity and Solvency Ratios
- Efficiency Ratios
- Valuation Ratios
- ROE (Du Pont Analysis)
- Future Prospects
(All units are INR Millions except ratios and per share data)
1.Economic Moat (★ ★ ★ ★ ☆)
The company operates in the organized retail industry in which market dominance is achieved through scale, distribution, the number of stores and low-cost structure.
On scale and distribution front, the company is still nascent as compared to other big retailers like Future Group and Reliance in India. The company has a retailing area of 7+ million sq ft and the business is driven by increasing private consumption.
It is also slowly expanding into the online model through its subsidiary Avenue E-Commerce.
The one advantage that the company has over its competitors is its low-cost structure. DMart is the cheapest retailer in food and grocery, apparel, footwear and furnishings along with many private label brands.
These segments are expected to drive the growth of retail in India by an average of 20% CAGR in the near future. Hence the company is well-positioned to take advantage of the upcoming market growth and increase its presence in the omnichannel retail. Therefore this category gets 4 stars in Avenue Supermarts fundamental analysis.
2. Business Model and Management (★ ★ ★ ★ ☆)
The business model of the company is of a low-cost structure and strategic presence in the market. DMart stores are located in regions where organized retail penetration is low especially in tier 2-3 cities in India.
The revenue breakup is such that about 51% comes from foods, 20% comes from FMCG and the rest 29% comes from general merchandise and apparels.
The company is also looking forward to accelerating its store openings per annum and thereby getting more retail space.
DMart’s core business is driven by value retailing and it has been very well received by the middle-class population in India. Also, the company has a steady footprint expansion along with high operating efficiency and lean cost structure. This overall gives them a competitive advantage in the market.
Mr Radhakishan Damani is the founder and promoter of Avenue Supermarts and is India’s second-richest person after Mr Mukesh Ambani of Reliance. Mr Ignatius Navil Noronha is the CEO and MD of the company.
He is the wealthiest non-promoter professional in India after Mr Aditya Puri of HDFC bank, according to a report by The Economic Times. Overall the company is tightly held by the promoter which can lead to a principal-agent conflict in the future. Therefore this category gets 4 stars in Avenue Supermarts fundamental analysis.
3. Growth Ratios (★ ★ ★ ★ ★)
The revenue has seen a 38% CAGR growth of over the last 8 years. The Operating Income and Net income has also increased by 46% and 47% CAGR respectively. This indicates improving operational efficiency and thereby the profitability of the company. The working capital growth has been flat and the Cap-Ex has also increased over the years. This indicates aggressive growth in the near future. Therefore this category gets 5 stars in Avenue Supermarts fundamental analysis.
4. Profitability Ratios (★ ★ ★ ★ ★)
The gross margin has almost remained flat which indicates that the company is able to pass down its inflation-related costs to the consumers.
The return on assets along with other margins has also improved considerably over the years. The profit margins are also expected to remain stable in the near future. Therefore this category gets 5 stars in Avenue Supermarts fundamental analysis.
5. Cash Flow Ratios (★ ★ ★ ★ ☆)
The net income margin and Cap-Ex as a percentage of sales have seen good improvement in recent years.
The free cash flow as a percentage of net income also has been fluctuating with the Cap-Ex cycles. Further, the operating and free cash flow growth rate has gone negative due to aggressive expansion.
But, this will only drive the revenue and growth in the coming years. Therefore this category gets 4 stars in Avenue Supermarts fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ★ ★ ★)
The company has slowly removed long term debt from its capital structure after 2016 to boost profitability. Hence the financial leverage has flattened and the debt to equity ratio has gone down to almost zero.
This indicates good solvency for the company. The current ratio is well above the minimum threshold but the quick ratio has taken a dip due to increased inventory. This, however, is the nature of the business as it expands. Therefore this category gets 5 stars in Avenue Supermarts fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ★ ★)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
Overall the business efficiency has not deteriorated with increased scale for the company. This also indicates a good operational efficiency and control over the supply chains.
The inventory days, payable period and receivable days all have remained almost constant. The cash conversion cycle has been positive due to the nature of the business.
However, there can be a slight deterioration in the near future as the competition gets aggressive and the company expands further into omnichannel retail. Therefore this category gets 5 stars in Avenue Supermarts fundamental analysis.
8. Valuation Ratios (★ ★ ★ ★ ★)
The company has been trading at almost constant multiples since it was listed on the stock exchange.
The P/E ratio, however, has seen a sharp increase as the company continues aggressive expansion. The multiples are also supported by some fundamental factors like increasing population and private consumption, rising disposable income and declining saving rate in the country.
The company also has good growth prospects to justify its current valuation. Therefore this category gets 5 stars in Avenue Supermarts fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ★ ★ ★)
The leverage ratio has declined as the company removed long term debt from its capital structure. As a result of this, the asset turnover has seen a sharp improvement along with the interest burden ratio. The tax efficiency has remained stable along with the operating margin for the company.
This overall indicates a stable return on equity due to reduced interest payments. Therefore this category gets 5 stars in Avenue Supermarts fundamental analysis.
10. Future Prospects (★ ★ ★ ★ ★)
Some insights for the coming years from the analysis, management discussions and con calls are as follows.
- The effect of Covid-19 will only be of temporary revenue loss due to inventory built up and disrupted supply chains. The company will continue with its aggressive expansion into new cities as the situation clears. There will be some extraordinary expenses during FY 2021 which will significantly reduce profit margins.
- The management expects significant EBITDA declines due to low turnover, declining gross margin, higher cost of logistics etc due to hardship allowance to frontline staff during the lockdown and higher personal hygiene and store sanitation costs.
- There are some headwinds to the company’s growth potential in the near future due to low inflation, lower store throughput, the revival of Kirana stores and acceleration in online competition from other E-commerce companies like Amazon, Big Basket, Flipkart etc.
- The company is not looking to cut back on its expansion plans until now. The management raised INR 4,098 crore from QIP (Qualified Institutional Placement) in February 2020 by allotting 2 crore shares at an issue price of INR 2,049. Lone Cypress acquired 11.97% of the shares on offer while the Government of Singapore picked 8.48% in the total offer.
The company has solid fundamentals, good profitability and a low-cost structure. The management has also indicated aggressive expansion plans for the near future which will drive the growth for the company. Therefore this category gets 5 stars in Avenue Supermarts fundamental analysis.
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
AVENUE SUPERMARTS SHARES (4.7/5)
Therefore it is a 5-star stock
★ ★ ★ ★ ★
|Avenue Supermarts Shares|
|Economic Moat||★ ★ ★ ★ ☆|
|Business & Management||★ ★ ★ ★ ☆|
|Growth Ratios||★ ★ ★ ★ ★|
|Profitability Ratios||★ ★ ★ ★ ★|
|Cash Flow Ratios||★ ★ ★ ★ ☆|
|Liquidity & Solvency||★ ★ ★ ★ ★|
|Efficiency Ratios||★ ★ ★ ★ ★|
|Valuation Ratios||★ ★ ★ ★ ★|
|ROE (Du Pont Analysis)||★ ★ ★ ★ ★|
|Future Prospects||★ ★ ★ ★ ★|
|Overall Fundamental Rating||★ ★ ★ ★ ★|