Dmart JPMorgan

Completed 07 Apr 2017 04:07 AM HKT
Disseminated 07 Apr 2017 04:44 AM HKT

Asia Pacific Equity Research
07 April 2017
Initiation
Neutral
Avenue Supermarts Limited AVEU.BO, DMART IN
Price: Rs664.40
Value Retailer at Premium Multiples; Initiate with
Price Target: Rs635.00
Neutral
We initiate on Avenue Supermarts (ASL) with a Neutral rating and Mar-18 price India
target of Rs635. ASL (operates stores under D-Mart brand), with a strong Consumer, Retail, Media
execution track record, is a quality play on the Indian F&G retail sector in our AC
Latika Chopra, CFA
opinion, being the fastest-growing and most profitable retailer. We forecast
(91-22) 6157-3584
27%/34% revenue/EPS CAGR over FY17-20. However, significant gains post the latika.chopra@jpmorgan.com
listing (120% above the offer price) lead to current valuations of 55x/42x Bloomberg JPMA CHOPRA <GO>
FY18E/19E P/E, which fairly reflect the long-term growth opportunity in our J.P. Morgan India Private Limited
view. Any minor lapse near term (store opening, comps, and/or margins) and
Ebru Sener Kurumlu
substantial investments in E-Commerce (earnings dilutive) could strain valuation (852) 2800-8521
multiples. ebru.sener@jpmorgan.com
Much to like here. Food retailing is about format and execution and in our J.P. Morgan Securities (Asia Pacific) Limited
view ASL has been able to achieve this combination well. We like ASLs
execution capabilities, single format focus, best-in-class productivity metrics Price Performance
650
(sales densities ~2-3x peers), prudent store expansion strategy and strong focus
550
on customer satisfaction partly aided by its everyday low price positioning.
Despite its capital-intensive strategy of ownership (vs renting), its asset turns Rs 450
are similar to peers. We believe it is a relatively safe play on Indias 350
consumption growth story, given the non-cyclical nature of the food retail 250
Apr-16 Jul-16 Oct-16 Jan-17 Apr-17
business. Despite low gross margins (owing to low price positioning), ASL has AVEU.BO share price (Rs)
amongst the highest EBITDA margins (vs peers) owing to tight control on NIFTY (rebased)
operational costs (employee, SG&A) and high sales comps. YTD 1m 3m 12m
Abs 111.4 111.4 111.4 111.4
Growth drivers. 1) Significant headroom to gain share with prudent store % % % %
expansion (~2.1mn sq ft over FY18-20E), 2) Sustaining healthy average SSSG Rel 98.1% 108.0 99.4% 89.5%
%
momentum at ~18% over FY17-20E (vs 25% over FY12-16), 3) Inflation (for
HPC/Food has been rising) should aid comps, 4) Scope for margin
improvement exists with scale benefits, though we build stable margins, 5)
Private label growth and contribution from online over the medium term.
What are the risks? 1) E-Commerce threat upside risk to investments in the
online channel (global retailers have witnessed margin erosion with higher E-
commerce outlays), 2) High capex intensity: FCF to remain negative for the next
few years, and 3) Slower-than-expected network expansion and/or tepid SSSG.
Valuations are factoring in the growth opportunity. Post the bumper listing
(120%+ above offer price), valuations at 55x/42x FY18E/19E P/E leave little
room for disappointment we think. Our PT is based on a forward EV/EBITDA
multiple of 23x and P/E multiple of 40x, implying a PEG of 1.9x, which is in
line with the global/regional peer average. Analysis of early-stage P/E multiples
of global retailers (traded at 40-60x) justify the premium valuations we believe.
Avenue Supermarts Limited (Reuters: AVEU.BO, Bloomberg: DMART IN)
Rs in mn, year-end Mar FY15A FY16A FY17E FY18E FY19E Company Data
Revenue (Rs mn) 64,394 85,881 116,203 149,190 191,234 Shares O/S (mn) 562
Net Profit (Rs mn) 2,117 3,188 5,048 7,423 9,827 Market Cap (Rs mn) 373,089
EPS (Rs) 3.87 5.68 8.09 11.89 15.75 Market Cap ($ mn) 5,750
Revenue growth (%) 37.4% 33.4% 35.3% 28.4% 28.2% Price (Rs) 664.40
EPS growth (%) 30.7% 46.7% 42.5% 47.0% 32.4% Date Of Price 06 Apr 17
ROE 19.6% 23.5% 18.7% 17.4% 19.2% 3M - Avg daily vol (mn) -
P/E (x) 171.7 117.0 82.1 55.9 42.2 3M - Avg daily val ($ mn) -
EV/EBITDA (x) 83.2 58.0 36.5 27.9 21.6 NIFTY 9261.95
Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% Price Target End Date 31-Mar-18
Source: Company data, Bloomberg, J.P. Morgan estimates.
See page 47 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com
Latika Chopra, CFA Asia Pacific Equity Research
(91-22) 6157-3584 07 April 2017
latika.chopra@jpmorgan.com
Key catalysts for the stock price: Upside risks to our view: Downside Risks to our view:
1) SSSG comps, 2) Pace of store 1) Better-than-expected SSSG trends, 2) Higher 1) Weak SSSG comps, 2) Significant drag from new
addition and 3) Margin trends. inflation aiding comps, 3) Margin uptick from store losses, 3) Higher competitive intensity, 4)
increased cost optimization, 4) Faster-than- Significant losses from E-commerce and 5) Slower
estimated store additions and 5) Positive store expansion ramp up.
contribution from E-commerce.
Key financial metrics FY15 FY16 FY17E FY18E FY19E Valuation and price target basis
Revenues (Rs mn) 64,394 85,881 116,203 149,190 191,234 Our Mar-18 PT is Rs635. Our PT is based on a forward
Revenue growth (%) 37.4% 33.4% 35.3% 28.4% 28.2% EV/EBITDA multiple of 23x and P/E multiple of 40x, implying
EBITDA (Rs mn) 4,590 6,635 10,066 13,158 17,090 a PEG of 1.9x, which is in line with the global/regional peer
EBITDA margin (%) 7.1% 7.7% 8.7% 8.8% 8.9% average. Analysis of early-stage P/E multiples of global
Tax rate (%) 34.3% 34.9% 35.0% 35.0% 35.0% retailers (traded at 40-60x) justify the premium valuations we
Net Profit (Rs mn) 2,117 3,188 5,048 7,423 9,827 believe.
EPS (Rs) 3.9 5.7 8.1 11.9 15.7 LFL growth trends
EPS growth (%) 30.7% 46.7% 42.5% 47.0% 32.4%
DPS (Rs) - - - - -
BVPS (Rs) 22 27 62 74 90
Operating cash flow (Rs mn) 2,220 4,471 4,489 7,189 9,517
Free cash flow (Rs mn) (636) (1,038) (720) (2,519) (2,112)
Net margin (%) 3.3% 3.7% 4.3% 5.0% 5.1%
ROE (%) 19.6% 23.5% 18.7% 17.4% 19.2%
ROCE (%) 21.4% 24.2% 22.3% 22.1% 27.1%
Key model assumptions FY15 FY16 FY17E FY18E FY19E
Revenue/sqft(Rs) 26,388 28,136 32,909 37,699 40,598 .

Source: Bloomberg, Company data and J.P. Morgan
Retail space(mn sqft) 2.66 3.33 3.79 4.24 5.05 estimates
EBITDA margin (%) 7.1% 7.7% 8.7% 8.8% 8.9%
JPMe vs. consensus, change in estimates
Source: Bloomberg, Company data and J.P. Morgan estimates. EPS FY18E FY19E
JPMe old NA NA
Sensitivity analysis EBITDA EPS JPMe new 11.9 15.7
Sensitivity to FY18E FY18E % change NA NA
1 % change in revenue/sqft 1.5% 1.7% Consensus NA NA
Source: Bloomberg, Company data and J.P. Morgan
50bp change in EBITDA Margin 5.7% 6.6% estimates.
Source: Bloomberg, Company data and J.P. Morgan estimates.
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Table of Contents
Investment Summary ...............................................................4
Investment Positives................................................................4
#1 Focused Value retailing player with best in class productivity metrics and
enviable track record ...............................................................................................5
#2 Inflation aids comps.........................................................................................8
#3 Significant headroom to gain market share: Prudent store expansion strategy....9
#4 Good Store Economics: High Operating Efficiency and Lean Cost Structure ..10
#5 Healthy Return profile with opportunity to improve .......................................14
Investment Negatives.............................................................15
#1- FCF to remain negative in the short term .........................................................15
#2- Online Threat; Risk of increased outlay on E-commerce investment.................16
#3 High valuation versus international peers .......................................................19
Valuation Analysis..................................................................20
Price Target and Recommendation ........................................................................20
DCF Valuation......................................................................................................22
Risks to Price Target .............................................................................................23
Company Analysis .................................................................23
Overview ..............................................................................................................23
Store Network and Distribution/Packing Centers ...................................................24
Revenue Mix and Merchandising...........................................................................25
Subsidiaries and Associate ....................................................................................26
Management Details..............................................................................................26
Board of Directors.................................................................................................28
Shareholding Pattern .............................................................................................28
SWOT Analysis .......................................................................29
India Retail - Industry Overview ............................................30
Where does India Retail stand currently? ...............................................................30
Growth Prospects for Organized Retail ..................................................................32
Classification of Stores..........................................................................................33
Competitive Landscape .........................................................................................35
Financial Analysis ..................................................................36
Revenue growth outlook........................................................................................36
Margin Outlook.....................................................................................................38
Working Capital Trends ........................................................................................41
Capex and FCF Trends..........................................................................................41
Return Ratios ........................................................................................................42
Financials................................................................................43
Investment Thesis, Valuation and Risks ..............................45
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(91-22) 6157-3584 07 April 2017
You have to learn the rules of the game. And then you have to play better than
anyone elseAlbert Einstein.
Company Description Investment Summary

Avenue Supermarts is a leading
supermarket chain with a focus Avenue Supermarts Limited (ASL) is an exciting play on the underpenetrated but
on value retailing and operates fast-growing organized retail industry (Food & Grocery) in India. We like the
its stores under the D-Mart companys execution capabilities, single format focus, sensible approach toward
brand. Having launched its first operating stores which offer healthy profit/return metrics, prudent store expansion
store in 2002 in Mumbai, the strategy and strong focus on customer satisfaction. It has been able to attract new
retail chain has expanded to 118 customers profitably (without having any loyalty programme) with its low price
stores spread across 3.59mn sqft positioning, sharper product assortment and efficient execution. Despite its
in 45 cities. capital intensive strategy of ownership (vs renting), its asset turns are similar to
peers. We estimate 27% revenue and 34% EPS CAGR over FY17-20 driven by a
Figure 1: Revenue breakup combination of store additions, healthy SSSG, inflation and modest margin
improvement.
The management summed up its philosophy aptly in the pre-IPO analyst meet,
stating Even if our balance sheet allows us to add a particular number of stores but
if we are not confident of operating so many stores well, we will not go ahead with
the expansion. Culture, people, processes are very important.
We acknowledge that the internet is changing the shape of F&G retail industry by
Source: Company reports. creating additional costs, creating additional invested capital requirements, bringing
price transparency and diluting the 'location' advantage. We note that globally
retailers have seen margins being adversely impacted with higher E-commerce
related outlays. However, we find that E-commerce is perhaps more disruptive for
Non-food plays vs Food to begin with. The obvious obstacle to rapid expansion of
online in Food Retail segment is expensive last mile delivery considering low ticket
sizes of products sold. Given lesser exposure of ASL to Non-Food and already
very competitive prices being offered at D-Mart stores, we expect it to be less
affected by the Internet. However we do welcome the companys move to enter this
channel (click and collect model) via an associate company as it is better to be
present in this channel than no presence.
This newly listed company in our view has significant medium- to long-term growth
potential. However, post a heady listing (stock is trading 120% above the offer
price), we think valuations (55x/42x FY18E/19E P/E) are pricing in the franchise
strengths to the fullest. From a 12-month perspective, we believe scope for absolute
returns is limited, even as long-term investors may continue to own this name given
low float and healthy long-term growth prospects. In our view, the market is
prepared to pay high multiples for growth and earnings visibility. ASL has a
sustainable business model (attractive low cost/price format which is less
cyclical) which will be rewarded with high multiples. Initiate with Neutral and
Mar-18 target price of Rs635.
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Investment Positives
#1 Focused value retailing player with best-in-class
productivity metrics and enviable track record
The biggest attraction for customers which drives them to D-Mart stores is the
competitive pricing across a wide variety of everyday products which form a
significant part of a consumers everyday purchase basket. Our channel checks
suggest that prices for key items in a consumer basket are notably lower than other
modern trade stores (refer to Table 1 below). The price differential varies between 5
and 10%. This price advantage resonates well with lower to mid middle class
consumers very well and allows for higher customer retention. Given that product
portfolio differentiation opportunity in a competitive Food & Grocery Retail business
is fairly limited, low pricing, appropriate store location and good servicing acts as
key competitive advantages for ASL.
During our visits to various food retailers, we noticed that most of the
hypermarkets/supermarket chains try to attract customer footfalls by offering some
products (particularly basic fresh products/staples) at very steep discounts (basically
selling at a loss). This strategy, however, fails to retain customers. D-Mart stores, on
the other hand, do not really follow this strategy as they try to offer the lowest price
across all product segments (and still not compromising on the profitability) on an
everyday basis and this has helped to retain and add new customers.
The company follows a targeted customer retention strategy with a focus on basic
essential products. Target customer segment is lower middle, middle and aspiring
upper middle income groups. Discretionary products form lower share of offerings in
the stores. This approach shields ASL from cyclicality on account of macro-
economic volatility and seasonality.
Over the past five years, ASL has registered 20%+ LFL growth on an average
despite much of this period witnessing subdued macro growth. Despite new store
additions, SSSG numbers have not seen any significant moderation, implying healthy
performance of the old stores. In the recent analyst meet, management noted that
their oldest store in Powai is registering 150-200bps above inflation SS growth rate.
We note that for LFL calculation, ASL considers stores which have completed 24
months of operations - this is conservative considering other retailers usually take
into account stores which have completed 12 months of operation for LFL
performance. Higher productivity per store has allowed the company to operate at
better margins (vs peers) and register healthy return ratios despite higher capital
intensity (ownership of stores largely).
ASL has a strong track record with improving productivity measures over the past
five years and healthy comps.
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Figure 2: ASL- Healthy LFL growth rate Figure 3: ASL - Steady revenue growth trends
% Rs/square feet
Source: Company reports. J.P. Morgan estimates. Source: Company reports. J.P. Morgan estimates.
Table 1: Comparison with peers - summary table

Avenue Supermarkets Future Retail Hypercity Spencers VMart Star Bazar
Time Period FY16 9MFY16 FY16 FY16 FY16 FY16
Store Count 110 794 17 118 123 24
Retail Space (Mn sq ft) 3.3 13.0 1.3 1.1 1.0 na
SSSG 21.5% 11.5% na na na 8.3%
Revenue CAGR(FY14-16) 35.4% nm 5.2% 13.2% 18.6% 0.0%
Food - 52.8%
Non Food(FMCG)- F&G - 64% Food items-60% Fashion-
Revenue Mix 19.6% Non Food - 65% Gen. Merchandise-20% Non-Food FMCG-17% 92% na
General Merchandise/ Fashion - 16% Others- 23% Kirana-8%
Apparel - 27.6%
Big Bazaar:9.5-10.5K
Hypermarket : 7-8K
Revenue/Sqft (Rs) 28-30K Food Bazaar:15-16K 7-8K 7.5-8.5K 11-13K
Supermarket:17.5-18.5K
EasyDay: 15-16K
Gross Margin 14.9% 24.8% 24.1% 19.8% 29.4% 20.4%
EBITDA Margin 7.7% 3.4% -2.6% -3.2% 7.7% -7.9%
Net Margin 3.7% 1.9% -9.5% -7.7% 3.4% -4.2%
Rent/Sales 0.2% 8.0% 5.5% 4.9% 4.9% 3.9%
Employee Cost/Sales 1.7% 4.7% 7.8% 7.4% 7.7% 7.7%
Other Expenses/Sales 5.2% 8.9% 18.8% 15.6% 14.0% 20.6%
Asset Turnover 2.8 nm 2.0 2.0 2.1 0.8
Source: Company reports, J.P. Morgan.
We note that number of bill cuts per store has risen at a CAGR of 7% over FY12-16
for ASL, which suggests good new customer traction. Bill size has also expanded
significantly.
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Figure 4: ASL - Number of bills cut per store is increasing Figure 5: Significant spike in average bill size
Rs '000 Rs
Source: Company reports. Source: Company reports.
Table 2: Price Comparison with MT retailers - D-Mart offers cheapest prices for most products
SKU D-Mart Big Bazaar Star India Bazaar Reliance Mart
Laundry
Rin Advanced 2kg 142 150 150 150
Surf Excel Easy wash 4kg 449 439 439 439
Tide Plus 6kg 480 510 530 530
Ariel 2kg 355 380 380 372
Soaps
Dove 3*100gm 165 142 174 167
Lux 3*100gm 67 76 70 74
Lifebuoy 125gm 25 26 26 25
Dettol 125gm 40 42 42 41
Shampoos
Sunsilk 340ml 145 197 195 193
Dove 340ml 180 243 235 238
Clinic Plus 340ml 150 190 192 188
Pantene 340ml 160 170 200 190
Heads & Shoulders 340ml 199 200 200 190
Garnier 340ml 180 200 200 196
L'Oreal 340ml 230 245 245 240
Toothpaste
Colgate Dental Cream 100gm 46 52 52 52
Colgate Maxfresh 150gm 86 95 95 93
Sensodyne 130gm 144 160 160 160
Hair Oil
Parachute 175ml 50 54 54 53
Dabur Amla 275ml 110 125 125 123
Bajaj Almond 200ml 108 115 115 113
Instant Noodles
Maggi 420gm 62 67 65 66
Yippee 280gm 40 41 40 40
Biscuits
Good Day 200gm 31 31 35 35
Parle G 800gm 54 56 60 60
Bourbon 150gm 22 27 27 26
Juices
Dabur Real (Mixed Fruit) 1L 69 75 89 84
Tropicana (Mixed Fruit) 1L 110 90 113 112
Paperboat (Aam Panna) 250ml 22 30 30 30
Household Insecticide
HIT 625ml 224 249 249 244
Good Knight Advanced 45ml 67 72 72 71
Beverages
Coca-Cola 1.75L 55 70 68 68
Pepsi 1.75L 55 70 68 67
Source: J.P. Morgan.
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What attracts consumers to D-Mart stores?

Based on our conversations with some shoppers and our own experiences, we list a
few reasons (from the lens of a consumer and not necessarily an analyst) which we
think attract consumers (across income strata) to D-Mart stores.
The first and foremost is the comfort of knowing that discounts will be available on
all 365 days of the year. Compared to peers, we find 10-20% discount on an average
bill. The bill mentions the discount availed by the customer and this knowledge adds
to the comfort value.
The second is freshness of the products. We find that similar packaged branded
products (across Food & HPC) at D-Mart store are from relatively recent production
batches versus other retailers in the neighborhood.
The third one is good quality of dry staples which mostly consist of own private
labels. Neatly packed the products are of good quality.
The fourth is wide range of daily essential products across Food, HPC and
Household supplies is available which helps to meet the requirements of the average
Indian household under one roof most of the time.
#2 Inflation aids comps

We believe inflation adds to average ticket size positively as retailers pass through
the cost inflation. Post a year of nearly no price hikes (deflation in some categories
like soaps, laundry), there is a reversal in the trend. We note that most FMCG
product segments are witnessing inflation (in response to higher raw material costs)
and this will support the SSSG comps for ASL. As the demand for most basic FMCG
products is inelastic, impact on volume offtake will likely be limited. Rather, we
would expect more price-conscious consumers to shift to value retail formats like D-
Mart. We expect SSSG rate at 20% in FY18E, moderating to 16% and 14% in
FY19E and FY20E, respectively.
Figure 6: ASL SSSG Trends Figure 7: Prices have been rising for key staples (Sugar, Milk, Rice)
Source: Company reports and J.P. Morgan estimates. Source: Company reports.
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Figure 8: Hindustan Unilever - Price growth trending up Figure 9: Britannia - Accelerating price growth
Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.
#3 Significant headroom to gain market share: prudent

store expansion strategy
ASL has significant room to expand its presence in the Indian retail arena. With 118
stores spread across 3.59mn sqft currently (vs 1 store in 2002) and 10 states/UTs, we
see ample room for deepening penetration in Western and Southern India (where a
majority of existing stores are located) and scaling up the franchise in rest of the
country. ASL has done well to identify suitable locations for store openings and the
success of their choices is evident from the fact that they have not witnessed any
store closures to date. Various factors considered for new store locations include
population density, customer/vehicle traffic, customer accessibility, potential growth
of local population, future development trends, estimated spending power of the
population, profitability/payback period and proximity & performance of competitors
in the surrounding area. ASL targets minimum ROIC of ~10% over a period of two
years to count it as a sustainable one.
ASLs cluster based expansion strategy allows focusing on an efficient supply chain
and helps target densely populated residential areas with a majority of target
consumer base being lower-middle, middle and aspiring upper middle class. ASL has
22 distribution centers and six packing centers which support its retail network
effectively. Benefits of cluster based expansion strategy ASL opens new stores
within a radius of a few kilometers of existing stores and distribution centers. This
ensures creation of a cluster of stores within a region which helps provide deeper
understanding of local needs/preferences in a particular catchment area and
customize the product offerings accordingly. This improves revenue and profit
predictability from new stores tremendously, as per management. Marketing and
advertising initiatives are also targeted accordingly in the particular region. Cost
efficiencies improve further owing to economies of scale.
ASL plans to add 2.1mn sqft over FY18-20, with the aim to enhance penetration
further in Maharashtra/Gujarat and expand store network in AP, Telangana, MP,
Karnataka, Chattisgarh and Northern India (opened new stores in NCR, Rajasthan in
FY17). This will be coupled by enhancing distribution center capability as well (from
22 currently). Nearly 70-75% of new stores will be located in existing markets with
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the rest being in the new markets. This is in line with the cluster-based strategy
which allows more efficiencies.
Figure 10: ASL - Rational store addition strategy Figure 11: ASL - Stable growth of total retail business area
units Mn sqft
Source: Company reports, J.P. Morgan estimates. Source: Company reports, J.P. Morgan estimates.
FMCG companies witnessing higher growth in Modern

Trade channel
Our conversations with the leading FMCG companies suggest that post a period of
consolidation over 2008-13, Modern Trade channels have started to witness
improved sales performance aided by new store additions, smarter marketing
strategies and attractive offers. Consumers benefit from wider product range,
comfortable/convenient shopping experience and good discounts. For the leading
FMCG companies share of Modern Trade channel has risen from 4-5% a decade ago
to 10-15% now and continues to trend up. Modern stores also accelerate the pace of
premiumization and facilitate higher impulse purchases.
Figure 12: Marico - Sales growth for Modern Trade channel has been ahead of general trade
%
Source: Company reports.
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#4 Good Store Economics: High Operating Efficiency and

Lean Cost Structure
The underlying operating principle for ASL is to retail quality goods at competitive
prices. It follows every day low price (EDLP) strategy enabled by every day low cost
(EDLC) principle. This mirrors the low price positioning strategy followed by
Walmart. Competitive prices are ensured by sharp/optimal product assortment, better
understanding of local market knowledge (consumer spending patterns, new product
launches depending on local customer needs) and supply chain efficiencies.
Cluster-based store expansion strategy has further allowed higher cost efficiency due
to economies of scale in supply chain/inventory management and concentrated brand
visibility due to focused implementation of marketing initiatives. Lower prices are
funded by 1) Lower operating costs (e.g., minimize rentals, lower inventory
days/WC needs), 2) Direct goods procurement from manufacturers, 3) Efficient
logistics and distribution system, and 4) Smarter product merchandising/assortment.
ASL follows pre dominantly an ownership model (as seen in the case of successful
retailers globally including Walmart, IKEA, Costco) which has helped to control
operational costs and offers long term competitive advantages. Other players pay ~5-
6% of sales as rental expenses which is almost negligible in the case of ASL. On
EBITDAR basis (EBITDA before rent) ASL scores well above the peers and this
margin differential is further enhanced with lower rental payout (Refer Table 3
below).
Table 3: ASL has better operating margins due to higher sales productivity and low rental expense
Gross EBITDAR EBITDA Employee Cost Employee Cost Other Opex excl. Other Opex excl.
Value Retail/Hypermarket
Margin margin Margin / sqft /Sales rentals /sqft rentals/Sales
Future Retail* 24.8% 11.4% 3.4% 455 4.7% 860 8.9%
Hypercity 24.1% 3.0% -2.6% 610 7.8% 1,030 13.2%
Spencers 19.8% 1.7% -3.2% 1,249 7.4% 1,816 10.7%
V Mart 29.4% 12.6% 7.7% 614 7.7% 727 9.1%
Avenue Supermarts (D-Mart) 14.9% 8.0% 7.7% 902 3.5% 889 3.4%
Trent Hypermarkets (Star Bazaar) 20.4% -4.1% -7.9% na 7.7% na 16.8%
Source: Company reports, J.P. Morgan. *9MFY17 numbers
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Figure 13: ASL has lowest rental costs owing to ownership model Figure 14: Employee/Sales is amongst the lowest for ASL given high
Rental costs/Sales sales productivity
%
Source: Company reports, J.P. Morgan

Source: Company reports, J.P. Morgan estimates.
Figure 15: ASL - Gross margins to be sustained at ~15% levels Figure 16: ASL Post a significant increase in FY17 we forecast
% stable EBITDA margins thereafter given higher proportion of new
stores
%
9%
8%
7%
6%
5%
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
In order to lower procurement costs, ASL maintains an extensive network of

vendors/suppliers to source products from regions where they are widely available or
manufactured to minimize the costs. Most of the products are procured on a purchase
order basis to ensure flexible competitive prices. ASLs procurement team conducts
detailed research on an ongoing basis to locate best product sources to ensure best
quality and price. ASL creditor days are low as it prefers to pay suppliers on time to
avail discounts which further helps to keep product prices low.
ASL has leveraged advanced IT infrastructure (SAP) to streamline many functions

including procurement, sales, supply chain and inventory control processes which
helps to meet fast changing consumer preferences/needs, minimize the stock out ratio
and ensure higher inventory turns.
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Table 4: Key initiatives aiding better operating efficiencies

Initiative Description
Efficient racking system Deploying higher racks for storage and lower racks for display.
Staffing requirements Based on store space and footfall intensity.
SCM Computerized inventory management system which tracks the movement of an SKU on a daily basis. Inventory systems
synchronized with distribution centers to ensure better control.
Optimal inventory Conservative procurement approach to minimize expired products. Orders placed based on current, forecasted and
historical sales data. Ensure freshness by adopting first in first out policy for all the merchandise.
Higher proportion of contract employees Based on business needs, contract employees are hired which provides flexibility to run business effectively.
Performance linked employee incentives ESOP policy. Emphasis on in-house training to improve customer service standards.
Pictures below (from our retail store visits) indicate how ASL is maximizing the
usage of retail space to its benefit. While there are narrow passageways and no-frills
appearance of the store versus peers, we believe value-seeking consumers are willing
to overlook these and appreciate the price proposition and efficient service
capabilities more. Another key positive which we noticed in the D-Mart stores was
that manufacturing dates on packaged products was more recent (vs neighboring
stores) which can be attributed to higher inventory turns registered by the company.
Figure 17: ASL - Top racks filled with cartons (wholesale store look) Figure 18: ASL Dry staples products tacked in narrow racks
and narrow pathways to optimize space allocation
Source: J.P. Morgan. Source: J.P. Morgan.
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Figure 19: ASL Pseudo Private label plays Figure 20: ASL - Cashier counters stacked for faster billing process
Source: J.P. Morgan. Source: J.P. Morgan.
Opportunity for modest margin enhancement exists

We see opportunity for margin expansion on the back of operating leverage even as
we assume gross margin to remain broadly flat given ASLs strong focus on low
price positioning. Post 100bps EBITDA margin expansion in FY17E, we build in
stable margins over FY17-20E, leading to 28% EBITDA CAGR.
Figure 21: ASL - Consolidated EBITDA margin trends Figure 22: ASL - Consolidated EBITDA and growth trends
% %
24,000 70%
9% 56% 59%
52% 60%
18,000 45%
50%
8% 34%
31% 30% 40%
12,000 24%
30%
7%
6,000 20%
10%
6% - 0%
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
5%
FY17E
FY18E
FY19E
FY20E
FY12
FY13
FY14
FY15
FY16
EBITDA % growth

#5 Healthy Return profile with opportunity to improve

Higher productivity/sales metrics drive healthy return ratios for ASL despite higher
capex intensity of the business model. Working capital intensity is also higher versus
peers due to low creditor days (ASL pays suppliers early to avail more discounts
versus peers). ROIC stands at a healthy 16%. Management follows a tight focus on
return metrics for new store investments. It targets a minimum of 10% ROIC for any
new store over two years (2x asset turns and 5% EBIT margin). The company
intends every store to operate at least at a minimum threshold of 15% ROIC.
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We expect return ratios to improve with better margins and lower debt levels over the
coming years.
Debt Reduction
ASL will use the IPO proceeds to pay down debt, which will result in lower interest
costs and support EPS growth further (we estimate EPS CAGR of 34% over FY17-
20E). As per the Offer document, ASL intends to repay Rs11bn of debt (as of Dec'16
company had total borrowings of Rs14bn).
Table 5: WC cycle Comparison across peers

Trent Avenue
Hypercity Spencers V-Mart
Hypermarkets Supermarts
Inventory Days 62 38 33 92 29
Debtor Days 4 6 7 na 1
Creditor Days 37 43 33 43 8
Figure 23: ASL Healthy return ratios

%
30%
27%
24%
21%
18%
15%
12%
FY17E
FY18E
FY19E
FY20E
FY13
FY14
FY15
FY16
ROE ROCE
Investment Negatives
#1- FCF to remain negative in the short term
Given the ownership model which ASL follows predominantly, capex requirements
are higher versus peers. This will remain a drag on free cash flows even as operating
cash flows are positive for the company. We envisage that ASL is unlikely to turn
FCF positive over the next three years, given the significant store expansion plans
assuming these new stores will be largely owned by the company. The capex needs
will be partly funded from recent equity issuance.
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Figure 24: ASL - Capex trends are rising in line with space addition Figure 25: ASL - Negative FCF to continue
Rs mn Rs mn
14,000 -
12,000 (500)
10,000
(1,000)
8,000
(1,500)
6,000
(2,000)
4,000
2,000 (2,500)
- (3,000)
FY17E
FY18E
FY19E
FY20E
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
FY12
FY13
FY14
FY15
FY16
#2- Online threat; risk of increased outlay on e-commerce

investment
We acknowledge that the internet is changing the shape of F&G retail industry by
creating additional costs, creating additional invested capital requirements, bringing
price transparency and breaking the 'location' advantage. However, we find that E-
commerce is perhaps more disruptive for non-food plays vs food at this point.
Increased competitive pricing, including from online-only players, could adversely
impact both sales and merchandise margins.
Emergence of E-commerce channel has adversely affected the growth rates for brick-
and-mortar retailers in key geographies like the USA and China. In these countries, a
shift to E-commerce has accelerated in recent years. The US has witnessed mid-teens
E-commerce growth in 2015 as brick-and-mortar growth slowed sharply to 1.4%.
Share of Consumer Packaged Goods (CPG) in overall online pie was ~8.4% in the
US in 2015.
In India, while the penetration of E-commerce remains low at ~2% currently, it is

expected to grow rapidly and reach 8-9% penetration levels by 2025. Categories
which will likely see faster adoption of online include Electronics, Books and
Apparel/Fashion. The penetration of online channel in Food & Grocery segment is
quite low at 0.03% and is expected to move to 0.2-0.5% by 2020 as per industry
estimates. The business models are still evolving as perishability of the product,
coupled with timely delivery for a low-margin category, needs to be looked into
carefully. Currently the E-tail market (for F&G) is concentrated in Top 8-10 cities for
now led by Amazon, Bigbasket and Grofers. However, we expect E-tail penetration
for F&G segment to expand across more cities over the medium term.
There have been significant investments being made by brick-n-mortar retailers

overseas (US, Europe and China in particular) to operate an omni-channel model and
these investments have weighed on the financial metrics of the hardline retailers.
ASL too has taken note of this fast-evolving change and has forayed into E-tailing
(Click and Collect model) in Dec 2016 via its associate company Avenue E-
Commerce Limited (AECL) whereby ASL owns a 49.21% stake. AECL started
operations in Dec 2016 in some locations in Mumbai. The controlling stake in this
company is owned by ASL's promoters. While it is a positive that D-Mart is
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engaging in E-commerce, we note there is upside risk with respect to E-commerce

investments.
Figure 26: D-Mart has recently launched its Omni-channel platform - Order online and Pick up
service
Source: J.P. Morgan.
Amazon and Big Basket are scaling up presence in India

F&G online retail space
Inventory based models seem to work the best for FMCG Big Basket and Amazon
are fast gaining traction. Our discussions with various industry participants suggest
that inventory-based models have been relatively more successful offering better
customer experience (quality and reliability) and shorter duration for delivery. This
model allows the operators to have better control over quality, lower procurement
costs and negotiate better terms with suppliers. Given Grocery retail is a low-margin
business, E-tailers need to have a good grasp of warehousing, logistics, supply chain,
tie-ups with sellers and merchandising. Big Basket and Amazon are scaling up their
presence meaningfully in the FMCG space.
Amazon has emerged as a significant online player in Indian FMCG space with
enhanced focus on this segment over the past two years, launching many initiatives
like Amazon Now (express delivery two hours) and Amazon Pantry (bulk
purchases). Amazon Now, app-based 2-hour delivery service for essential household
items was launched early in 2016 (now available in Bengaluru, Mumbai, Delhi, and
Hyderabad) and supplies products across 16 categories from local stores like
Hypercity, Spar, Modern Bazaar, Easy Day, Big Bazaar, SRS etc. Amazon Pantry, a
global program (promises next day delivery and targeted at once/twice in a month
bulk shopping) was launched in July16 and is available in Tier 1 cities like
Bengaluru, Delhi, Gurgaon, Faridabad, Mumbai, Pune, Chennai and Mysore.
Amazon has two other formats Super Value Day where consumers get cash
back/promotions on the first and second day of every month on their FMCG
purchases, and Subscribe and Save which allows customers to subscribe to a
product for regular purchase and get additional discount for it. Globally Amazon
offers Amazon Fresh (free same day/next day grocery delivery for Prime members)
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and Amazon Dash Button (reorders a product with the press of a button) services
which may potentially be introduced in India over time.
BigBasket*, founded in 2011, today has 4mn+ registered users (2.5mn transacting
customers) and monthly sales of Rs1.5bn. They follow the inventory-based model
operating across 25 cities with the near term plans of deepening penetration within
these cities. Average ticket size is ~Rs1500 for full scale and Rs650 for express
delivery (express delivery business was created post acquisition of Delyver in 2015).
The company does ~50K orders per day and the revenue mix is skewed towards
staples and fresh fruit/vegetables which account for 50%+ share and FMCG
contributing ~40-45% share. The number of SKUs offered are ~22K which is
significantly higher than a brick-n-mortar hypermarket/supermarket. It intends to
close FY17 with ~Rs18bn revenue (FY16 estimated revenue: ~Rs6bn) and is
targeting sales of US$1bn by 2020. BB has invested significantly behind supply
chain infrastructure. With scale it has formed contracts with leading FMCG
companies. Private labels is a focus area for the company as it helps to deliver
margin growth (own labels have 5-15% higher margins).
* Details from media articles (TOI, ET, FE)
European Food Retail - Rising share of online and

Discounters
Excerpts from a Note by Borja Olcese, European Food Retail Analyst at J.P. Morgan
Online now cannibalized vs incremental before - Our main conclusion is that the
structural shift to online and discount is ongoing and should be accelerated by the
entry of Amazon.
The online grocery market in the UK has grown by a c20% CAGR over the last three
years to 10.5bn in 2016, and is expected to grow at a CAGR of c11% in the next 5
years to 18bn by 2021. This would imply online penetration reaching c12% vs c6%
in 2011. Tesco is the market leader in online with revenue of c3bn in 2015/16. Its
market share currently amounts to c30%, down from its c50% peak back in 2012.
Sainsbury and Ocado hold a c10% market share each, with operations in excess of
1bn.
Tesco launched its online offer over a decade ago, which we believe proved to be an
economically and strategically wise decision. Being the first one to offer the service,
a significant part of its online sales (more than half) were incremental and they were
achieved with little incremental capex (as picking SKUs was done in the store).
All major food retailers have an online offer and therefore the growth of online sales
will mostly come from self-cannibalization at the retailer level as it is 100%
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cannibalized at the industry level. The bricks and mortar incumbents therefore barely
benefit from any extra sales but they duplicate capex and incur additional costs. This
is often the case until they start closing stores which is a complicated process and
they will only be willing to do so when individual stores become loss making.
The higher costs were, for long time, funded by an increase in background prices
(higher gross margin to offset the higher opex). In other words, store customers were
subsidizing the bricks and mortar higher costs. We believe it is no longer an option
given the increased price competition in the market and the entry of Amazon to the
market.
Return to peak margins largely unlikely

In the table below we compare the evolution of sales densities and EBITDAR ex fuel
margins for the listed grocers, in the context of the growth seen at the discounters and
within online. We note that the sales densities are still 10-20% lower than at the peak
(the sales density decline is steeper in food only terms and significantly larger in real
terms), when the discounters are now 3x bigger and online 100% is cannibalized at
the industry level vs incremental a decade ago. The discounters have almost tripled
their share of the market in less than 5 years, which is unprecedented in any other
market we monitor. The price gap between the market leader (Tesco) and the price
setter (Aldi) is the widest among the markets we monitor at c20% (the norm in the
industry is below 10%). The structural shift to online and discount is ongoing and
should accelerate with the entry of Amazon into the market.
#3 High valuation versus international peers

ASL listed at a significant premium (100%+) to its offer price given heightened
growth expectations from this well-run company and limited options to invest in the
fast emerging Indian F&G retailing space.
ASL is trading on a one-year forward P/E multiple of 55x, which is significantly

higher than global and regional peers (which trade at an average P/E of 20x). On
EV/EBITDA basis, ASL is trading at 31x versus average global/regional peers at
10x. We reckon that valuation premium is justified considering the significantly
higher growth potential (vs peers) in an under-penetrated Indian market, coupled
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with scarcity premium (very limited listed retail stocks) and superior execution
capabilities. This premium adequately factors in ASLs franchise strength which
should drive 34% EPS CAGR over FY17E-20E. Given limited catalysts for earnings
surprise, we do not find room for further re-rating. Rather, we highlight potential
risks on the downside related to delay in store openings, soft comps growth and/or
increased investments in E-Commerce.
The global/regional retail players are trading at a PEG of 1.5-2.5x, with average
being ~1.9x. Based on our estimates, ASL is trading at PEG of 2x, which is broadly
in line.
Refer to Table 6 in the valuation section for details of various valuation comps for
Global/Regional peers.
Key Risks
1) Weak consumer spend/sentiment, which affects the overall retail spending

growth in the country
2) Cost to err is high related to identifying store locations. Given the

ownership model, there is less flexibility to close stores that are
margin/return dilutive
3) FDI being enhanced in F&G Retail leading to higher competitive intensity
Valuation Analysis
Price Target and Recommendation
P/E, EV/EBITDA and DCF are among the preferred approaches for estimating the
fair value for retail stocks. But considering organized Food & Grocery Retail is still
in its early stages in India, and it would be difficult to forecast with significant
accuracy the industry structure and penetration rates over the very long term, we
prefer to use the P/E approach.
ASL has witnessed healthy revenue trends (40% CAGR over the past four years). We
estimate healthy growth rates over the next three years (27% CAGR over FY17-20E)
owing to the store expansion plans of the company, improving consumption trends,
and growing shift to the modern retail formats.
We initiate coverage on the stock with a Neutral rating and a March 2018 target price
of Rs635. Our price target is based on a forward EV/EBITDA multiple of 23x and
P/E multiple of 40x, which is supported by earnings CAGR of 34% over FY17-20E.
We apply a higher target multiples to ASL than the trading multiple of its regional
and global peers (avg P/E of 20x and avg EV/EBITDA of 10x) to denote the high
growth story in the organized retail industry in India, given its penetration levels are
fairly low. Our target price implies a PEG of 1.9x, which is in line with the
global/regional average.
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Figure 27: P/E vs EPS CAGR comparison

40%
Avenue
V Mart Trent
Tesco
30%
EPS CAGR - FY17-19E
Yonghui
Magnit
20%
Big C Supercenter
Carrefour BIM Siam Makro
Costco
10% PureGold
E-Mart
SunArt
Ahold Delhaize
Sainsbury Walmart
0%
Jernimo Martins
Morrison
-10% Target
-20%
0 5 10 15 20 25 30 35 40 45 50
P/E - FY18E
Source: Bloomberg estimates, J.P. Morgan.
The figure below suggests that the premium valuations commanded by ASL are
justified as it has almost 3-4x EPS CAGR than the global/regional peers.
Figure 28: ASL has amongst the highest EPS growth rates (FY17-19E) 2-3x of Global/Regional peers
%
Source: Bloomberg estimates, J.P. Morgan.
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Table 6: Global/Regional/Domestic Retailer Comps

Company Name Price Mcap P/E EV/EBITDA P/B ROE EPS CAGR
CY17/ CY18/ CY17/ CY18/ CY17/ CY18/ CY17/ CY18
LC US$ Mn CY17-19E
FY18 FY19 FY18 FY19 FY18 FY19 FY18 /FY19
American & European Retailers
Walmart 72 217,315 16.6 15.8 7.9 7.8 2.8 2.7 16.8 17.5 7%
Costco 167 73,303 26.0 23.5 12.5 11.3 4.8 4.2 19.6 19.0 11%
Target 53 29,154 13.2 13.1 6.2 6.3 2.8 2.8 20.2 20.3 3%
Sainsbury 3 6,896 12.8 11.7 5.4 5.0 0.8 0.8 6.7 7.1 19%
Carrefour 22 17,377 13.2 11.8 5.4 5.0 1.4 1.3 10.9 11.2 10%
Ahold Delhaize 19 26,399 14.5 12.7 6.3 5.8 1.5 1.4 10.3 11.4 12%
Jernimo Martins 17 11,251 24.4 22.0 11.5 10.4 5.7 5.2 23.9 24.7 10%
BIM 56 4,572 22.3 18.9 14.2 11.8 7.2 6.0 35.3 35.2 17%
Morrison 2 6,736 18.7 17.5 7.0 6.6 1.3 1.2 6.7 7.0 6%
Magnit 9,581 16,089 13.7 11.9 8.3 7.2 3.9 3.3 30.6 29.3 9%
Asian Retailers
SunArt 8 9,552 26.7 24.5 7.8 7.0 2.9 2.7 12.6 13.0 9%
Yonghui 6 8,060 39.8 32.1 18.8 15.7 2.8 2.7 7.3 8.2 24%
PureGold 44 2,419 19.5 17.3 10.9 9.4 2.5 2.3 13.7 13.8 12%
Big C Supercenter 219 5,229 23.6 21.4 13.3 12.0 3.2 2.9 13.9 13.9 10%
Siam Makro 34 4,688 26.2 22.8 16.5 14.5 9.4 8.3 37.2 38.6 15%
E-Mart 214,500 5,287 14.5 12.8 9.3 8.5 0.8 0.7 5.2 5.6 16%
Indian Retailers
Trent 269 1,383 44.4 32.6 28.0 21.5 6.1 5.4 12.8 15.4 34%
V Mart 909 254 34.6 25.9 17.8 14.2 5.3 4.4 na na 34%
Shoppers Stop 371 479 81.2 41.9 14.2 10.9 6.0 5.5 5.4 12.5 nm
Avenue 664 6,419 55.9 42.2 31.1 24.1 8.9 7.4 17.4 19.2 28%
Source: Bloomberg estimates. J.P. Morgan.
The analysis of the early stage P/E multiples of some of the major retailers also
corroborates our view. Several US retailers such as Walmart, Costco and Home
Depot have traded at 40-60x P/E multiples in the past. Considering this pattern, we
believe that ASL's premium valuations can be sustained.
Figure 29: Walmart - EPS growth vs one-year forward P/E Figure 30: Costco - EPS growth vs one-year forward P/E
Source: Bloomberg, J.P. Morgan. Source: Bloomberg, J.P. Morgan.
DCF Valuation
There is high sensitivity of FCF forecasts to assumptions on SSSG growth, new store
additions, WC/Capex intensity and margins, which could influence the DCF
valuation significantly. We present DCF as one of the scenarios here. Our DCF
assumptions are: a) 16% Revenue CAGR and 17% EBITDA CAGR over FY20-30E,
b) WACC of 11.3%, and c) Terminal growth rate of 5%. We forecast the company to
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turn FCF positive by FY21. We arrive at DCF valuation of Rs600. Our DCF
valuation corresponds to 50x FY18E and 38x FY19E earnings.
Table 7: Avenue Supermarts DCF Valuation

WACC 11.3%
Terminal growth 5%
Sales growth over FY17-30E 19%
EBITDA growth over FY17-30E 20%
EV (Rs mn) 331,764
Net debt (Rs mn) -5,919
Equity value (Rs mn) 337,683
Per share (Rs) 601
Source: J.P. Morgan estimates.
We also analyze the sensitivity of the DCF value to long-term margins. Our current
DCF model assumes sustainable margins of 9.5% over FY26-30E. Our sensitivity
analysis suggests that 50bp reduction in the margins leads to a 7% decline in DCF
valuation for the stock.
Table 8: DCF Sensitivity to WACC and terminal growth

Terminal Growth
3.0% 4.0% 5.0% 6.0% 7.0%
10.0% 630 707 815 976 1,246
10.5% 572 635 721 846 1,041
WACC 11.0% 522 574 644 742 888
11.5% 479 522 579 657 770
12.0% 440 477 525 588 676
Source: J.P. Morgan estimates.
Risks to Price Target

We believe the main downside risks to our thesis and target price are: (1) any
slowdown in consumer spending and adverse impact on comps; (2) significant
deflation; (3) slower retail space expansion; (4) sharp increase in competitive
intensity (from B&M and/or E-tailers), and (5) significant investments in E-tail
venture and losses on account of the same. The upside risks include: 1) significant
improvement in demand (more than expected), 2) significant inflation, and 3) faster-
than-expected profitable store additions.
Company Analysis
Overview
Avenue Supermarts Limited (ASL) is a leading supermarket chain with a focus on
value retailing and operates its stores under the D-Mart brand. ASL was founded by
Mr. Radhakishan Damani. The first store was launched in 2002 in Mumbai and since
then the retail chain has expanded to 118 stores spread across 3.59mn sq ft. product
portfolio comprises of Foods (53% share), Non Foods FMCG (21% share) and
General Merchandise & Apparel (26% share, includes apparel, plastic goods, home
furnishing, toys, etc.). As of Dec-16, ASL had 4738 full-time employees. The
company also employs a significant number of contract employees depending on
business needs.
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Store Network and Distribution/Packing Centers

ASL operates 118 stores in 45 cities (spread across 3.59mn sqft) in the states of
Maharashtra, Gujarat, Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh,
Chhatisgarh, NCR, Daman and Rajasthan. The presence is skewed toward West India
with states of Maharashtra and Gujarat accounting for ~77% of ASL's sales. ASL
operates largely on a land ownership model, which includes buying or entering into
long-term leases (30 years+) versus a rental model.
Figure 31: ASL States where D-Mart is present account for ~48% of total retail spend
Source: Company reports. As on 31st Jan 2017.
Figure 32: Break-up of retail spending by state Figure 33: Growth in retail spending across D-Mart states (2012-2016
USD bn CAGR)
%
15%
12%
9%
6%
Maharashtra
Telangana
Karnataka
Rajasthan
MP
Delhi
Gujarat
AP/

Source: Company reports
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Table 9: ASL - State wise network of stores

State FY12 FY13 FY14 FY15 FY16 As on Jan'17
Maharashtra 34 40 46 50 58 59
Gujarat 14 14 17 22 26 27
Telangana* 4 5 7 9 13 13
Karnataka 3 3 5 5 6 7
Andhra Pradesh - - - 1 3 4
Madhya Pradesh - - - 1 3 3
Chattisgarh - - - 1 1 1
NCR - - - - - 1
Daman - - - - - 1
Rajasthan - - - - - 2
Total 55 62 75 89 110 118
ASLs store network is supported by supplies from own distribution centers or

through direct procurement from suppliers. This helps to reduce out of stock products
and optimize transportation/logistics costs. This also aids improving merchandise
collection at the stores. ASL has 22 distribution centers across four states as detailed
in the below table. ASL also operates six packaging centers to support certain
distribution centers.
Table 10: ASL - State wise network of distribution centers

State Number of Distribution Centers
Maharashtra 16
Gujarat 3
Telangana 2
Karnataka 1
Revenue Mix and Merchandising; Targeted Assortment

ASL focuses on everyday basic needs of consumers with limited contribution from
discretionary product segments. Target customer base belongs to lower middle,
middle and aspiring upper middle class income groups. It works on an optimal
product assortment leveraging learnings on local consumer needs/preferences. Foods
form the largest proportion of revenue mix at 53% followed by General Merchandise
& Apparel at 26% and Non-Foods at 21%.
Figure 34: ASL - Food and grocery accounts for more than half of total revenues
%
100%
26.0% 25.8% 25.2% 25.9% 26.4%
75%
21.0% 21.2% 21.5% 21.2% 20.6%
50%
25% 53.0% 53.0% 53.3% 52.8% 53.1%
0%
FY12 FY13 FY14 FY15 FY16
Foods Non-Foods (FMCG) General Merchandise & Apparel
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ASL procures much of its food products directly from manufacturers or FMCG
companies and also through their network of suppliers in the wholesale market. They
offer local food products (varies by region and customer preferences) and private
labels form a significant part of the food and staples categories (which are bought in
bulk and packaged after quality checks). Non-foods FMCG products are usually
directly sourced from the FMCG companies.
State wise revenue mix

Maharashtra accounts for 59% revenue share followed by Gujarat at 18%. Below
table summarizes the revenue and store mix for the states.
Table 11: ASL - State wise revenue mix and number of stores
Revenues % Share of total revenues No. of stores
Maharashtra and Daman 51,667 59% 60
Gujrat 15,847 18% 27
Andhra Pradesh and Telangana 12,242 14% 17
Karnataka 6,144 7% 7
Madhya Pradesh and Chattisgarh 1,622 2% 4
NCR and Rajasthan 149 0.2% 2
Subsidiaries and Associate

ASL has the following three subsidiaries:
1) Avenue Food Plaza Private Limited (AFPPL), which operates food stalls in
the ASL stores.
2) Align Retail Trades Private Limited (ARTPL), which is involved in

inspecting and packing of private label goods including staples and
groceries.
3) Nahar Seth & Jogani Developers Private Limited (NSJDPL), which is

involved in development of land and construction. This company owns the
real estate underlying the companys store in Versova, Mumbai.
ASL also has an associate company - Avenue E-Commerce Limited (AECL),

whereby ASL owns a .21% stake. AECL started operations in Dec 2016 in some
locations in Mumbai. It is involved in E-tailing of food products and groceries. The
controlling stake in this company is owned by ASL's promoters.
Table 12: ASL - Financial Summary of Subsidiaries

Net profit (Rs mn) FY12 FY13 FY14 FY15 FY16 9MFY17
Avenue Food Plaza Pvt. Ltd. 5.8 7.4 8.2 7.5 14.8 27.8
Align Retail Trades Pvt. Ltd. 6.0 6.3 8.6 6.1 5.0 43.0
Nahar Seth & Jogani Developers Pvt. Ltd. - - (0.0) 4.4 4.5 3.4
Management Details
Radhakishan Damani, Promoter
Mr. Radhakishan Damani is the founder and promoter of Avenue Supermarts
Limited. Having begun his career in the ball bearings business and thereafter moving
to stock trading business, Mr. Damani has over 25 years of experience in the
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securities market. He provides strategic guidance and consumer insights to grow the
business.
Ramesh S. Damani, Chairman

Mr. Ramesh Damani is the Chairman of the company and has been a Director since
Sep'09. He has over 18 years of experience in securities market and prior to joining
the company, he founded Ramesh S Damani Finance Private Limited.
Ignatius Navil Noronha, Managing Director

Mr. Ignatius Noronha has an experience of over 20 years in the consumer goods
industry. Prior to joining the company in 2004 as Head-Operations, he worked with
Hindustan Unilever for eight years in the field of market research, sales and modern
trade. He was appointed as CEO in 2007 and MD in 2011 and has been a director
since 2006.
Ramakant Baheti, CFO

Mr. Ramakant Baheti was appointed CFO in 2014 and has been a director since 2006.
Prior to joining the company, he was Manager-Finance of Bright Star. He has
experience of 19 years in finance and is currently responsible for the formulation and
execution of finance and legal strategy of the company.
Elvin Machado, Wholetime Director

Mr. Elvin Machado was appointed as Wholetime Director of the company in 2015.
Prior to joining the company, he had worked with HUL for 18 years. He has over 28
years of experience in sales and marketing and currently he is responsible for real
estate acquisition and coordination/liasoning with government agencies and local
bodies.
Udaya Bhaskar Yarlagadda, COO - Retail

Mr. Udaya Bhaskar Yarlagadda has over 18 years of experience in sales and business
development having worked for P&G and Health Care Limited prior to joining the
company. His functions include managing and leading store operations,
merchandising, private labels, marketing and store maintenance.
Narayanan Bhaskaran, COO- Supply Chain Management and Production

Mr. Narayanan Bhaskaran joined the company in 2008 as Vice President - HR and is
presently in charge of supply chain management, corporate legal functions and
staples business. Prior to his stint at Avenue Supermarts, he has worked with TCL
India Holdings and Birla Sun Life Distribution.
Dheeraj Kampani, VP Buying and Merchandising

Mr. Dheeraj Kampani has over 15 years of experience in sales and retail store
management having worked at HUL and Great Wholesale Club prior to his stint at
Avenue Supermarts. Currently, he heads the buying and merchandising function of
the company.
Hitesh Shah, Associate VP Operations

Mr. Hitesh Shah has over 21 years of experience in sales, marketing and retail store
management and currently looks at day to day operational management of the stores
and compliances. Prior to joining the company in 2007, he has worked with HUL.
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Ashu Gupta, Company Secretary

Ms. Ashu Gupta is an associate member of the Institute of Company Secretaries of
India and has over 10 years of experience in corporate, legal and secretarial functions.
Prior to joining the company, she has worked as a Company Secretary with NAM
Securities Limited.
Board of Directors
Table 13: Avenue Supermarts - Board of Directors
Name
Ramesh S. Damani Chairman
Ignatius Navil Noronha Managing Director, Executive
Ramakant Baheti CFO , Executive
Manjri Chandak Non-Executive
Elvin Machado Executive
Chandrashekhar B. Bhave Independent
Shareholding Pattern
Pre-IPO, the promoters owned 91.3% of the company. Directors owned another
3.1%. Post IPO in Mar17, promoter shareholding has come down to 82.2%, with
directors owning another 2.8% (CEO holds 2.2%). FIIs and DIIs own 2.7% and 2.3%
share, respectively.
Figure 35: Avenue Supermarts - Shareholding Pattern

%
FII Others
2.7% 13.2%
Financial Institutions/
Banks
0.4%
Insurance
Companies
0.2%
Promoter
82.2%
Mutual Funds
1.3%
Source: Company reports. As on 20th March 2017.
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SWOT Analysis
Strengths Opportunity
1. Focused value retailing player offering everyday low prices with prudent store 1. Significant headroom to gain market share by expanding across existing and new
opening strategy geographies given low penetration of modern trade in F&G segment
2. Best in class productivity in F&G retail space 2. Improvement in product mix provides margin improvement opportunity
3. Store ownership model shields from rental rate fluctuations 3. Higher salience of private labels
4. Efficient and Scalable Supply Chain Infrastructure 4. Further cost optimization
5. Lean cost structure aided by cluster based expansion strategy 5. Success of E-commerce venture
6. Direct procurement of goods from manufacturers with good bargaining power
Weakness Threats
1. Limited national presence 1. Increased competition by entry of more organized retailers
2. Low gross margin profile (owing to higher food & FMCG share) 2.Faster Growth of E-commerce
3. Limited contribution of private label 3. Risk of overexpansion/choice of wrong locations
4. High exit costs given store ownership model 4. Weak consumer sentiment/spends
5. Increase in property prices can slow down expansion plans
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India Retail - Industry Overview

Where does India Retail stand currently?
Total Retail market forms around ~30% of the country's GDP (and 50% of private
consumption) and is worth US$616bn as of FY16. Of this, organized retail is pegged
at US$55bn, which translates into ~9% share of the overall retail market. As per
Technopak estimates, overall retail market is expected to grow at a CAGR of 12%
with organized formats to grow at a CAGR of 20%+ taking up the share to 12% by
FY20. Share of urban in retail, which is currently at 49% is expected to grow to 52%
by 2020 on account of increasing urbanization, higher increase in urban household
income, and increasing penetration of organized retail in urban centers.
Figure 36: Distribution of Merchandise Consumer Spending in India
Figure 37: India is a consumption-led economy with private consumption forming ~60% of the
GDP
USD tn
16 13.9
Private Consumption (USD tn)
12.3
12 10
4 2 2.4 2.1
1.8 1.8 1.3 1.5
1.1 1.1 1.7 1.1 1.1
NA
0
India US China Brazil Germany UK France Italy
2015 2020P
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Food & Groceries account for lions share at 67%

Food & groceries constitute a majority share of the retail market (67%), followed by
apparel and accessories at 8% and consumer electronics at 6%. This category share is
expected to remain broadly unchanged in the short to medium term (Refer to table
below) as per industry experts.
Table 14: Retail Consumption across categories F&G has dominant share
Categories 2012 2016 2020E
Total Retail (USD bn) 386 616 960
Food & Grocery 67.5% 67.0% 66.0%
Apparel & Accessories 8.3% 8.0% 7.8%
Footwear 1.2% 1.2% 1.2%
Jewellery & Watches 7.3% 7.6% 8.1%
Pharmacy & Wellness 2.8% 2.9% 3.0%
Consumer Electronics 5.2% 5.7% 6.6%
Home & Living 4.2% 4.3% 4.4%
Others 3.7% 3.3% 3.1%
Total 100.0% 100.0% 100.0%
Significant geographic divergence in retail spending trends

Nearly 85% of total retail spends are contributed by 16 states, with Maharashtra
commanding the highest share (19%). The three southern states of Karnataka,
Telangana and Andhra Pradesh contribute ~$100bn to total retail spend.
Table 15: State-wise Retail Spending Significant divergence

USD bn Retail Spending - 2012 Retail Spending - 2016 2012-2016 CAGR
Maharashtra 65 94 9.7%
UP 30 44 10.0%
AP 32 25 -6.0%
Telangana - 24 nm
Tamil Nadu 32 49 11.2%
West Bengal 20 29 9.7%
Gujarat 26 39 10.7%
Karnataka 24 40 13.6%
Rajasthan 18 26 9.6%
Kerala 16 23 9.5%
MP 12 19 12.2%
Delhi 16 26 12.9%
Haryana 14 23 13.2%
Bihar 8 16 18.9%
Punjab 11 16 9.8%
Orissa 7 11 12.0%
Looking at city centric trends, we note that Delhi and Mumbai clusters alone account
for ~9% of total retail spends in India. The Top 24 cites account for 29% of total
retail spends in India, of which the Top 8 account for ~20% of the total spends.
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Figure 38: Share of retail consumer spending in cities - Top 24 cities account for 29% of spends
700
600
500
400 381
300
200 57
57
100 64
57
0
Top 2 cities Next 6 Next 16 Next 50 Rest of India
Growth Prospects for Organized Retail

Contribution of organized retail to overall retail is fairly low at 9% (USD 55bn) as
this industry had to combat various challenges (scarcity of quality real estate, high
rentals, poor working capital management, lack of FDI and emergence of online)
over the past decade and a half which slowed the pace of expansion by key players.
Modern retail in India has been in India for over two decades now. It witnessed rapid
expansion till 2006 as many new players entered this business across various
categories and cities. However, after 2008, pace of growth moderated due to impact
of the global financial crisis. Share of organized retail moved up modestly to 9% in
2016 from 7% in 2012. It is expected to grow to 12% by 2020. In the past few years,
this industry has gone through a period of consolidation even as many stores/malls
had to shut down. Now with economic recovery setting in, the industry is again
starting to look upwards. We see a new wave of confidence and better operating
models from existing retailers who are looking to add more retail space.
Figure 39: Retail Market Split Organized retail expected to grow at a CAGR of 20% in 2016-
2020E
$ Bn
Source: Company reports. Number in box is penetration level for organized retail.
Penetration levels vary significantly across categories F&G has the lowest
penetration
Despite being the largest retail category by spends, Food & grocery has the lowest
penetration of modern trade at just 3%. Footwear has the highest penetration levels at
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40%, followed by Jewelry, Consumer Durables/IT and Apparel & Accessories at

27%, 25% and 22%, respectively.
The penetration levels are expected to improve across all the product segments. F&G
should see 5% penetration of organized channels by 2020.
Table 16: Category-wise penetration in Organized Retail F&G scores the lowest
Retail Size % of Organized Organized Market
FY16 (USD bn) Share of Retail Key Retailers
(USD bn) Retail Size (USD bn)
Food & Grocery 67% 413 3% 13 D-mart, Reliance Fresh, More, Big Bazaar
Apparel & Accessories 8% 49 22% 11 Shoppers Stop, Lifestyle, Westside
Jewellery & Watches 8% 47 27% 13 Kalyan Jewellers, Tanishq, Malabar
CDIT 6% 35 25% 9 Croma, Reliance Digital, eZone
Home & Living 4% 27 10% 3 Home Centre, Home Stop, Home Town
Pharmacy & Wellness 3% 18 10% 2 Apollo
Footwear 2% 7 40% 3 MedPlus
Others 1% 20 12% 2 Bata India, Metro Shoes, Adidas
Total 100% 616 9% 55
Figure 40: Modern retail penetration to trend up across categories

%
Classification of Stores
Modern Retail stores can be classified into various categories based on store size and
product category assortments. Modern convenience stores account for over half of
the organized stores, followed by supermarket share at 40% and 7% for
hypermarkets.
Hypermarkets
With store size ranging from 30,000-60,000 sqft, these are the largest format stores
with focus category assortment as follows: F&G 30-35%, Non Food (FMCG)
15-20% and others 45-55%. Some big hypermarket players are EasyDay, Big
Bazaar and Spencers among others.
Gross margins in hypermarkets are higher than supermarkets because of category

mix (fashion & apparel, non-food FMCG and accessories are margin accretive
categories). Low-margin products are used for increasing footfalls and throughput,
whereas other categories help improve profitability.
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Supermarkets
Store size for supermarkets ranges from 3,000-6000 sqft and F&G comprise of 60-
65% of total assortment. Non Food (FMCG) 20-25% and Others 10-20% form a
relatively smaller part of the assortment. EasyDay, Food Bazaar and Spencer's are
some of the key retailers operating in this segment.
Supermarkets have the highest level of productivity among general merchandise

focused formats (~20-25% highest than that of hypermarkets). Higher contribution
from F&G category results in lower margins. Profitability of this format is
attributable to high efficiencies.
Modern Convenience Stores

These are the smallest format stores in organized B&M retail with average store size
ranging from 1500-2500sqft. The focus category assortment is as follows: F&G 65-
70%, Non Food (FMCG) 20-25% and others 5-15%. These stores account for
more than half of the total organized B&M retail. Retailers in this segment include
Nilgiri's, M.K. Retail and Ratandeep.
Hybrid Supermarkets
These are smaller than hypermarkets but larger than a typical supermarket with an
average store size of 20,000-30,000 sqft. These have higher sales per sqft as
compared to hypermarkets (~2x) and provide more variety to consumers as
compared to supermarkets. Focus is on competitive pricing. Focus category
assortment is: F&G 45-50%, Non Food (FMCG) 20-25% and others 25-35%.
Key retailers in this segment include D-Mart and QMart.
Figure 41: Format-wise Split (number of stores) - Supermarkets to Figure 42: Productivity comparison Hybrid supermarkets have the
gain prominence highest Sales/sq ft (2x of hypermarket)
%
Hypermarkets
2020 8%
Modern
Convenience
Stores
49% Supermarkets
43%

Table 17: Category-wise Gross Margin for Retailers

Gross Margin Benchmarks Industry Average
Food and Grocery 12-25%
Apparel 30-50%
Non-Food FMCG 12-35%
General Merchandise 25-30%
Accessories 20-45%
Furniture and furnishing 30-40%
Footwear 30-55%
Smart Electronics 7-16%
Others 23-27%
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Figure 43: Supermarket - Sales and Margin mix Figure 44: Hypermarket - Sales and Margin mix
Source: Company reports. Source: Company reports.
Competitive Landscape
Organized players currently occupy 40-45mn sqft area and this is estimated to grow
to 60-65mn sqft by 2020. Various national players have followed a multi-city, multi-
format store strategy. Regional retailers have focused on key clusters on the other
hand. Productivity of regional retailers is higher than pan-India retailers (~15-20%
higher) due to better understanding of neighborhood, simpler supply chain and leaner
decision-making process. National retailers too are trying to follow a similar model
of staying focused and not spreading across categories to improve their productivity.
Table 18: Productivity (Sales/sqft) comparison of key players ASL has the highest sales density
Hypermarkets Supermarkets Regional Players
Sales/Sqft Sales/Sqft. Sales/Sqft Sales/Sqft. Sales/Sqft Sales/Sqft.
Player Player Player
(Rs).-2012 (Rs)-2016 (Rs).-2012 (Rs)-2016 (Rs).-2012 (Rs)-2016
Reliance
5,000-6,000 8,500-9,500 D-Mart 12,000-12,500 28,000-30,000 Regional Player 8,500-9,500 17,000-17,500
Mart
11,000- Reliance
Star Bazaar 6,500-7,500 9,000-10,000 17,500-18,500
13,000 Fresh
Big Bazaar 5,500-6,500 9,500-10,500 Food Bazaar 7,500-8,500 15,000-15,500
Spencer - 16,000- Spencer -
6,000-7,000 7,000-8,000 17,500-18,500
Hypermarket 17,000 Supermarket
More-
4,500-5,500 8,500-9,500 More 5,000-6,000 8,000-9,000
Megastore
Hypercity 5,000-6,000 7,000-8,000 EasyDay 7,500-8,500 15,000-16,000
Figure 45: Productivity (Supermarkets)- National vs Emerging National vs Regional Players (2016)
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In the $14bn organized F&G market, key pan-India retailers currently hold 37%
share, down from 49% in 2012 due to emergence of regional retailers and increase in
number of modern convenience stores. Future group at 13% share is the leader and is
closely followed by D-Mart at 10% and Reliance Retail at 8%.
Figure 46: Market Share of key Players in Organized F&G retail (2012) Figure 47: Market Share of key Players in Organized F&G retail (2016)
% %

Table 19: Category mix for key retailers (FY16)

Category Mix- Supermarkets Gross Margin Mix- Supermarkets
Food & Grocery Non Food- HPC Others Food & Grocery Non Food- HPC Others
D-Mart 52% 21% 27% NA NA NA
Reliance Fresh 58% 39% 3% 55% 42% 3%
More 66% 28% 6% 60% 33% 7%
EasyDay (Future Group) 72% 26% 2% 70% 27% 3%
Nilgiri's (Future Group) 70% 26% 4% 65% 30% 5%
KB's Conveniently Yours (Future Group) 63% 34% 3% 62% 35% 3%
Spencer's Supermarket 59% 38% 3% 54% 43% 3%
Food Bazaar (Future Group) 61% 32% 7% 59% 31% 10%
Star Market 64% 32% 4% 63% 33% 4%
Key Regional Players 58% 40% 2% 56% 42% 3%
Financial Analysis
Revenue growth outlook
ASL has grown at a healthy revenue CAGR of 40% over the past four years (FY12-
16) driven by a mix of robust same-store sales growth and store expansion. We
forecast 27% revenue CAGR over FY17-20 led by new store additions and healthy
SSS growth rates. Over this time frame, we estimate ASL to add 2.56mn sq ft of new
retail space spread across 73 new stores. Store expansion will get a boost post the
recent equity issuance. Over 9MFY17 period, ASL had opened 7 new stores spread
across 240k sqft.
In terms of geographical presence, Maharashtra accounts for a majority share of

revenues at 59%, followed by Gujarat at 18%. ASL follows a cluster-based store
expansion strategy and intends to add more stores in these regions besides expanding
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into other states including Andhra Pradesh, Telangana, Tamil Nadu, Chattisgarh,
Madhya Pradesh and Northern states.
Figure 48: ASL Retail business area Figure 49: ASL - Rational store addition strategy
Sq. ft units
We forecast SSS growth to moderate from an average of 25% witnessed over the past
four years to 18% over the next four years (refer to chart below for our year wise
estimates). Part of the healthy SSS trends will be supported by inflation, which has
been rising for the CPG segment in recent months.
Figure 50: ASL - Sustained double digit SSSG growth Figure 51: ASL Sales per sq.ft. has increased as stores mature
% Rs

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Figure 52: ASL - Revenue and Revenue growth trends

Rs mn, %
Margin Outlook
COGS and employee costs (including contract labor charges) are the key cost
components for ASL and accounted for 85.1% and 3.5% of the revenue, respectively,
during FY16. Unlike most of their peers, rental costs are negligible (0.2% of
revenue) as ASL follows ownership model for its retail properties to a large extent.
Figure 53: ASL - Operational Costs Breakup (FY16)

%
Table 20: ASL - Annual breakdown of costs (Consolidated)

FY12 FY13 FY14 FY15 FY16
COGS 85.3% 85.5% 85.0% 85.2% 85.1%
Employee benefit expenses 2.1% 2.1% 1.9% 2.1% 1.7%
Contract Labor Charges 1.8% 1.8% 2.0% 1.8% 1.8%
General Cleaning Expenses 0.2% 0.2% 0.2% 0.2% 0.2%
Rent 0.2% 0.2% 0.2% 0.2% 0.2%
Electricity & Fuel Charges 1.0% 1.0% 1.0% 0.9% 0.9%
Security Charges 0.5% 0.5% 0.5% 0.5% 0.5%
Other Expenses 2.6% 2.2% 2.0% 2.0% 1.9%
COGS account for 85% of sales

For ASL, gross margins have been in a tight band of 14-15% over the past five years.
Since it is a value-focused retailer which works on Every Day Low Price concept,
gross margins have little scope to improve in our view unless the product mix
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changes dramatically, again a possibility to which we ascribe little probability as of

now. ASL derives 53% of revenue from food & grocery and 21% from non-food
FMCG, both of which offer lower gross margins versus most other product
categories (refer to table below) and hence overall gross margins tend to be lower
versus peers. A significant part of Foods segment for ASL is driven by own/private
labels which offer higher margins.
We have factored in nearly flat gross margin of 15% over FY18-20. Although we
note that scale benefits and mix shift toward higher-margin categories/private labels
may pose upside risk to our forecasts.
Table 21: F&G category has one of the lowest gross margins
Gross Margin Benchmarks Industry Average
Food and Grocery 12-25%
Apparel 30-50%
Non-Food FMCG 12-35%
General Merchandise 25-30%
Accessories 20-45%
Furniture and furnishing 30-40%
Footwear 30-55%
Smart Electronics 7-16%
Others 23-27%
Figure 54: ASL - Gross margin trends

%
Wage expense is another key cost for ASL. The full-time employee strength as of
Dec 2016 was 4,738. However, ASL also employs a significant number of contract
employees depending on business needs. Full-time employee costs and contract labor
charges accounted for ~1.7% of sales each during FY16. We build in a marginal
(10bps) improvement for these cost heads over the next three years, keeping in mind
wage inflation trends.
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Figure 55: ASL - Employee cost/sales under tight control Figure 56: ASL - Contract labor charges/sales is almost constant
% %
Other key costs - Electricity & Fuel and Selling & Distribution
Electricity costs have been around 1% of sales for the past four years and should
moderate going forward (as % of sales) owing to the scale benefits. Selling &
distribution expenses which includes transport costs, packing costs, costs associated
with usage of credit/debit cards (the proportion has been rising) have been fairly
stable at 0.8% of sales over the past four years and we forecast similar trends over
the next three years as well.
Historical Margins and Forecasts

ASLs EBITDA margin has gradually expanded from 6% in FY12 to 7.7% in FY16
and 8.6% in 9MFY17. This expansion was driven partly by improved gross margins
and partly by operating leverage. Over 9MFY17 period, EBITDA margin could have
benefited from a richer product mix and consumer rush post demonetization in
Q3FY17. We forecast EBITDA margin of 8.7%-8.9% over FY17-20E (vs 7.7% in
FY16) led by operating leverage. We expect margins to be supported to some extent
by better sourcing discounts, which may result from increasing economies of scale.
Key upside risks to our margin assumptions are better-than-expected product mix
(led by private label, general merchandise) and significant fixed cost optimization.
Key downside risk is significant drag from new store-related losses.
Figure 57: ASL - EBITDA margin improvement led by operating leverage

%
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Working Capital Trends

Working capital intensity for ASL is higher versus peers like Spencers and Star
Bazaar, though better than Hypercity (which has higher inventory days). For ASL,
the payable days are much lower (have trended down further in recent years) as the
company prefers to get higher discounts from its suppliers with prompt payments.
Inventory days for ASL are lower versus the peers and these have moderated in the
recent years. We forecast stable working capital days going forward.
Table 22: ASL - Lean working capital cycle is one of the biggest positives
Working Capital FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Inventory days 32 30 29 31 29 28 28 28
Debtor days 1 1 1 0 0 1 1 1
Creditor days 11 10 10 7 8 8 8 8
WC days 23 21 21 24 21 21 21 21
Table 23: Ability of ASL to repay creditors on time helps it get higher discounts; Lowest
Inventory days given high productivity
Avenue Supermarts Hypercity Spencers V-Mart Star Bazaar
Inventory Days 29 62 38 92 33
Debtor Days 0 4 5 NA 7
Creditor Days 8 37 43 43 33
Capex and FCF Trends

Even though ASL has been generating positive operating cash flows, it has been
making negative free cash flows as it has been engaged in significant expansion. This
deficit has been funded through debt which the company aims to repay post the
recent equity issuance. We do not expect the company to turn FCF positive until
FY21E as it aims to add more stores over the next three years. It took ASL 14 years
to reach 3.6mn sqft and it plans to add 2.1mn sq ft over FY18-20E. Given the
company follows the ownership model (vs rental model), capex requirements remain
fairly high for the company. We estimate capex needs of Rs7bn, Rs11bn and Rs13bn
over FY18, FY19 and FY20, respectively, assuming it will follow ownership model
for new store additions.
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Figure 58: ASL - Capex needs to rise as space addition accelerates Figure 59: ASL - Negative FCF to continue for the next few years
Rs mn Rs mn
Return Ratios
ASL has witnessed gradual improvement in key return ratios over FY12-16. ROE
have risen from 9% in FY12 to 21% in FY16 led by significant improvement in
margins, better asset turnover and leverage. With equity raising, we expect
ROE/ROCE levels to compress in FY17 before starting to improve in the
forthcoming period as the debt levels reduce and operating margin expands.
Figure 60: Avenue Supermarts - ROE/ROCE expected to improve post dip in FY17
%
Table 24: ASL Du Pont Analysis

FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E
Profit margin 2.8% 3.4% 3.3% 3.7% 4.3% 5.0% 5.1% 5.1%
Asset turnover 2.5 2.8 3.1 3.1 2.6 2.5 3.0 3.2
Assets to equity 1.8 1.9 1.9 2.0 1.7 1.4 1.2 1.2
ROE 12.8% 18.5% 19.6% 23.5% 18.7% 17.4% 19.2% 19.6%
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Financials
Table 25: Avenue Supermarts - Consolidated P&L
Rs mn, March ending fiscal FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Total Revenue from Operations 22,086 33,409 46,865 64,394 85,881 116,203 149,190 191,234
% Y/Y 51% 40% 37% 33% 35% 28% 28%
EBITDA 1,380 2,150 3,418 4,590 6,635 10,066 13,158 17,090

EBITDA Margin 6.2% 6.4% 7.3% 7.1% 7.7% 8.7% 8.8% 8.9%
Other income 133 139 147 178 174 208 229 252
Depreciation & Amortization 375 458 570 815 984 1,245 1,516 1,918
EBIT 1,138 1,831 2,995 3,952 5,824 9,029 11,872 15,424

EBIT Margin 5.2% 5.5% 6.4% 6.1% 6.8% 7.8% 8.0% 8.1%
PBT 884 1,409 2,449 3,233 4,922 7,898 11,605 15,349
Tax 282 472 835 1,109 1,716 2,764 4,062 5,372
PAT 602 937 1,614 2,124 3,206 5,133 7,543 9,977

MI/Associate 3 2 (1) (8) (18) (85) (120) (150)
Net Profit 604 939 1,614 2,117 3,188 5,048 7,423 9,827
EPS 1.2 1.7 3.0 3.9 5.7 8.1 11.9 15.7

% Y/Y 46.1% 69.7% 30.7% 46.7% 42.5% 47.0% 32.4%
Table 26: Avenue Supermarts - Consolidated Balance Sheet

Share Capital 5,335 5,441 5,468 5,615 5,615 6,241 6,241 6,241
Reserves and Surplus 1,481 2,455 4,088 6,376 9,564 32,687 40,110 49,937
Total Shareholder's Equity 6,817 7,895 9,556 11,992 15,180 38,928 46,351 56,178
Minority Interest 3 3 0 1 1 1 1 1
Long-term Borrowings 2,643 3,712 4,568 7,138 9,085 12,085 5,835 2,635
Other non-current liabilities 243 335 390 467 562 562 562 562
Total Non-Current Liabilities 2,886 4,047 4,959 7,605 9,647 12,647 6,397 3,197
Trade Payables 644 944 1,226 1,185 1,918 2,547 3,270 4,191
Short Term Borrowings 1,164 1,549 1,840 1,905 2,850 2,850 1,350 1,350
Other current liability 395 483 496 861 1,385 1,859 2,387 3,060
Total Current Liability 2,203 2,976 3,562 3,951 6,153 7,256 7,007 8,601
Total Liability 5,089 7,022 8,521 11,556 15,800 19,903 13,404 11,798
Net Block (Fixed Asset) 7,791 9,247 11,717 15,281 20,935 25,195 30,185 39,645
Capital work-in progress 849 1,181 888 981 817 817 817 817
Long Term Loans & Advances 355 526 426 802 1,074 1,074 1,074 1,074
Other Non-Current Assets 138 160 152 148 257 457 1,457 1,957
Total Non-Current Assets 9,133 11,114 13,183 17,211 23,082 27,542 33,532 43,492
Inventories 1,957 2,762 3,783 5,396 6,717 8,856 11,409 14,661
Trade Receivables 56 133 95 71 84 414 531 681
Cash & Bank Balances 479 616 554 380 351 20,835 12,769 7,209
Short Term Loans & Advances 180 295 455 481 724 1,162 1,492 1,912
Other Current Assets 103 1 6 8 23 23 23 23
Total Current Assets 2,776 3,807 4,893 6,337 7,899 31,290 26,224 24,486
Total Assets 11,909 14,921 18,076 23,548 30,981 58,832 59,756 67,977
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Table 27: Avenue Supermarts - Consolidated Cash Flow Statement

PBT 887 1,411 2,449 3,226 4,926 7,898 11,605 15,349
Depreciation & Amortisation 375 458 570 815 984 1,245 1,516 1,918
Interest Income (6) (3) (11) (5) (6) - - -
Interest Expense 260 426 557 724 908 - - -
Others (1) (1) (6) (20) (17) (85) (120) (150)
(Increase)/Decrease in Inventories (728) (805) (1,021) (1,613) (1,321) (2,139) (2,553) (3,252)
(Increase)/Decrease in Trade Receivables (31) (77) 37 25 (13) (330) (117) (150)
(Increase)/Decrease in Loans & Advance & Other Assets (7) (132) (187) (55) (324) (438) (330) (420)
Increase/(Decrease) in Trade Payables 198 297 284 (39) 734 629 723 922
Increase/(Decrease) in Liabilities & Provisions (8) 64 59 162 239 474 528 673
Cash generated from operations 939 1,638 2,732 3,220 6,109 7,253 11,251 14,889
Tax paid 285 367 750 1,000 1,637 2,764 4,062 5,372
Net cash flow from operations 654 1,271 1,981 2,220 4,471 4,489 7,189 9,517
Purchase of Fixed Assets (1,833) (2,394) (2,717) (4,774) (6,481) (5,505) (6,506) (11,378)
Others 544 86 15 35 (103) (200) (1,000) (500)
Net cash flow from investing activities (1,289) (2,309) (2,702) (4,739) (6,583) (5,705) (7,506) (11,878)
Repayment of Loans/Borrowings (467) (735) (1,301) (2,316) (1,474) - - -
Proceed from Borrowings/NCDs issued 1,286 2,189 2,449 4,950 4,366 3,000 (7,750) (3,200)
Net Interest Paid (243) (418) (541) (616) (810) - - -
Others 358 140 46 326 - 18,700 - -
Net cash flow from financing 935 1,175 652 2,345 2,082 21,700 (7,750) (3,200)
Net change in cash and cash equivalents 299 137 (68) (174) (30) 20,484 (8,066) (5,561)
Cash at beginning of year 177 477 614 546 372 342 20,826 12,760
Cash at end of year 477 614 546 372 342 20,826 12,760 7,200
Other Cash (2) (2) (8) (8) (9) (9) (9) (9)
Balance sheet Cash 479 616 554 380 351 20,835 12,769 7,209
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Investment Thesis, Valuation and Risks

Avenue Supermarts Limited (Neutral; Price Target: Rs635.00)
Investment Thesis
Avenue Supermarts Limited (ASL) is an exciting play on the underpenetrated but
fast-growing organized retail industry (Food & Grocery) in India. We like the
companys execution capabilities, single format focus, sensible approach toward
operating stores which offer healthy profit/return metrics, prudent store expansion
strategy and strong focus on customer satisfaction. It has been able to attract new
customers profitably (without having any loyalty programme) with its low price
positioning, sharper product assortment and efficient execution. Despite its capital-
intensive strategy of ownership (vs renting), its asset turns are similar to peers. We
estimate 27% revenue and 34% EPS CAGR over FY17-20 driven by a combination
of store additions, healthy SSSG, inflation and modest margin improvement.
Valuation
Post the bumper listing (trading 120%+ above offer price), valuations at 55x/42x
FY18/19E P/E leave little room for disappointment we think. Our PT is based on a
forward EV/EBITDA multiple of 23x and P/E multiple of 40x, implying a PEG of
1.9x, which is in line with the global/regional peer average. Analysis of early stage
P/E multiples of global retailers (traded at 40-60x) justify the premium valuations.
Risks to Rating and Price Target

We believe the main downside risks to our thesis and target price are: (1) any
slowdown in consumer spending and adverse impact on comps; (2) significant
deflation; (3) slower retail space expansion; (4) sharp increase in competitive
intensity (from B&M and/or E-tailers), and (5) significant investments in E-tail
venture and losses on account of the same. The upside risks include: 1) Significant
improvement in demand (more than expected), 2) Significant inflation and 3) Faster-
than-expected profitable store additions.
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Avenue Supermarts Limited: Summary of Financials

Income Statement Cash flow statement
Rs in millions, year end Mar FY15 FY16 FY17E FY18E FY19E Rs in millions, year end Mar FY15 FY16 FY17E FY18E FY19E
Revenues 64,394 85,881 116,203 149,190 191,234 EBIT 3,775 5,651 8,821 11,643 15,172
% change Y/Y 37.4% 33.4% 35.3% 28.4% 28.2% Depr. & amortization 815 984 1,245 1,516 1,918
EBITDA 4,590 6,635 10,066 13,158 17,090 Change in working capital (1,520) (686) (1,804) (1,749) (2,228)
% change Y/Y 34.3% 44.6% 51.7% 30.7% 29.9% Taxes 1,000 1,637 2,764 4,062 5,372
EBIT 3,775 5,651 8,821 11,643 15,172 Cash flow from operations 2,220 4,471 4,489 7,189 9,517
% change Y/Y 32.5% 49.7% 56.1% 32.0% 30.3%
EBIT Margin 5.9% 6.6% 7.6% 7.8% 7.9% Capex (4,774) (6,481) (5,505) (6,506) (11,378)
Net Interest (719) (902) (1,132) (267) (74) Disposal/(purchase) - - - - -
Earnings before tax 3,233 4,922 7,898 11,605 15,349 Net Interest (719) (902) (1,132) (267) (74)
% change Y/Y 32.0% 52.2% 60.4% 46.9% 32.3% Other 35 (103) (200) (1,000) (500)
Tax (1,116) (1,712) (2,764) (4,062) (5,372) Free cash flow (2,084) (1,421) (280) 858 (1,812)
as % of EBT 34.5% 34.8% 35.0% 35.0% 35.0%
Net income (reported) 2,117 3,188 5,048 7,423 9,827 Equity raised/(repaid) 326 0 18,700 0 0
% change Y/Y 31.2% 50.6% 58.4% 47.0% 32.4% Debt raised/(repaid) 2,634 2,892 3,000 (7,750) (3,200)
Shares outstanding 547 562 624 624 624 Other (616) (810) 0 0 0
EPS (reported) 3.87 5.68 8.09 11.89 15.75 Dividends paid 0 0 0 0 0
% change Y/Y 30.7% 46.7% 42.5% 47.0% 32.4% Beginning cash 546 372 342 20,826 12,760
Ending cash 372 342 20,826 12,760 7,200
DPS 0.00 0.00 0.00 0.00 0.00
Balance sheet Ratio Analysis
Rs in millions, year end Mar FY15 FY16 FY17E FY18E FY19E Rs in millions, year end Mar FY15 FY16 FY17E FY18E FY19E
Cash and cash equivalents 380 351 20,835 12,769 7,209 EBITDA margin 7.1% 7.7% 8.7% 8.8% 8.9%
Accounts receivable 71 84 414 531 681 Operating margin 5.9% 6.6% 7.6% 7.8% 7.9%
Inventories 5,396 6,717 8,856 11,409 14,661 Net margin 3.3% 3.7% 4.3% 5.0% 5.1%
Others 483 728 1,166 1,496 1,916
Current assets 6,337 7,899 31,290 26,224 24,486
Sales per share growth 36.9% 29.9% 21.7% 28.4% 28.2%
LT investments 146 254 454 1,454 1,954 Sales growth 37.4% 33.4% 35.3% 28.4% 28.2%
Net fixed assets 16,262 21,752 26,012 31,002 40,461 Net profit growth 31.2% 50.6% 58.4% 47.0% 32.4%
Total Assets 23,548 30,981 58,832 59,756 67,977 EPS growth 30.7% 46.7% 42.5% 47.0% 32.4%
Liabilities Interest coverage (x) 6.4 7.4 8.9 49.2 229.7
Short-term loans 1,905 2,850 2,850 1,350 1,350
Payables 1,185 1,918 2,547 3,270 4,191 Net debt to equity 72.2% 76.3% (15.2%) (12.0%) (5.7%)
Others 861 1,385 1,859 2,387 3,060 Sales/assets 3.1 3.1 2.6 2.5 3.0
Total current liabilities 3,951 6,153 7,256 7,007 8,601 Assets/equity 193.2% 200.7% 166.0% 139.1% 124.6%
Long-term debt 7,138 9,085 12,085 5,835 2,635 ROE 19.6% 23.5% 18.7% 17.4% 19.2%
Other liabilities 466 561 561 561 561 ROCE 13.4% 15.3% 14.2% 14.1% 17.3%
Total Liabilities 11,556 15,800 19,903 13,404 11,798
Shareholder's equity 11,992 15,181 38,929 46,352 56,179
BVPS (Rs) 21.92 27.03 62.38 74.27 90.02
Source: Company reports and J.P. Morgan estimates.
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Important Disclosures
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securities issued by Avenue Supermarts Limited.
Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of Avenue
Supermarts Limited.
Debt Position: J.P. Morgan may own a position in the debt securities of Avenue Supermarts Limited.
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Avenue Supermarts Limited (AVEU.BO, DMART IN) Price Chart
1,001
858
715
Price(Rs) 572
429
286
143
0
Mar Mar Mar Apr Apr Apr
17 17 17 17 17 17
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
47
(91-22) 6157-3584 07 April 2017
the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
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Coverage Universe: Chopra, Latika: Asian Paints Limited (ASPN.NS), Britannia Industries Limited (BRIT.NS), Colgate-Palmolive
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Consumer Products Limited (GOCP.BO), Hindustan Unilever Limited (HLL.BO), ITC Limited (ITC.BO), Jubilant Foodworks Ltd
(JUBI.BO), Marico Ltd (MRCO.NS), Nestl India Limited (NEST.BO), Titan Company Limited (TITN.BO), United Spirits Limited
(UNSP.BO), Zee Entertainment Enterprises (ZEE.BO)
J.P. Morgan Equity Research Ratings Distribution, as of April 03, 2017

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(buy) (hold) (sell)
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Completed 07 Apr 2017 04:07 AM HKT

Disseminated 07 Apr 2017 04:44 AM HKT

are similar to peers. We believe it is a relatively safe play on Indias 350

Key model assumptions FY15 FY16 FY17E FY18E FY19E

Revenue/sqft(Rs) 26,388 28,136 32,909 37,699 40,598 .

Company Description Investment Summary

Table 1: Comparison with peers - summary table

Source: Company reports. Source: Company reports.

What attracts consumers to D-Mart stores?

#2 Inflation aids comps

#3 Significant headroom to gain market share: prudent

FMCG companies witnessing higher growth in Modern

Source: Company reports.

#4 Good Store Economics: High Operating Efficiency and

Source: Company reports, J.P. Morgan

Source: Company reports, J.P. Morgan estimates.

In order to lower procurement costs, ASL maintains an extensive network of

ASL has leveraged advanced IT infrastructure (SAP) to streamline many functions

Table 4: Key initiatives aiding better operating efficiencies

Source: J.P. Morgan. Source: J.P. Morgan.

Source: J.P. Morgan. Source: J.P. Morgan.

Opportunity for modest margin enhancement exists

Source: Company reports, J.P. Morgan estimates.

#5 Healthy Return profile with opportunity to improve

Table 5: WC cycle Comparison across peers

Figure 23: ASL Healthy return ratios

Source: Company reports, J.P. Morgan estimates.

#2- Online threat; risk of increased outlay on e-commerce

In India, while the penetration of E-commerce remains low at ~2% currently, it is

There have been significant investments being made by brick-n-mortar retailers

engaging in E-commerce, we note there is upside risk with respect to E-commerce

Source: J.P. Morgan.

Amazon and Big Basket are scaling up presence in India

European Food Retail - Rising share of online and

Return to peak margins largely unlikely

#3 High valuation versus international peers

ASL is trading on a one-year forward P/E multiple of 55x, which is significantly

1) Weak consumer spend/sentiment, which affects the overall retail spending

2) Cost to err is high related to identifying store locations. Given the

3) FDI being enhanced in F&G Retail leading to higher competitive intensity

Figure 27: P/E vs EPS CAGR comparison

Source: Bloomberg estimates, J.P. Morgan.

Table 6: Global/Regional/Domestic Retailer Comps

Source: Bloomberg, J.P. Morgan. Source: Bloomberg, J.P. Morgan.

Table 7: Avenue Supermarts DCF Valuation

Table 8: DCF Sensitivity to WACC and terminal growth

Risks to Price Target

Store Network and Distribution/Packing Centers

Source: Company reports. As on 31st Jan 2017.

Source: Company reports.

Table 9: ASL - State wise network of stores

ASLs store network is supported by supplies from own distribution centers or

Table 10: ASL - State wise network of distribution centers

Revenue Mix and Merchandising; Targeted Assortment

25% 53.0% 53.0% 53.3% 52.8% 53.1%

Source: Company reports.

State wise revenue mix

Subsidiaries and Associate

2) Align Retail Trades Private Limited (ARTPL), which is involved in

3) Nahar Seth & Jogani Developers Private Limited (NSJDPL), which is

ASL also has an associate company - Avenue E-Commerce Limited (AECL),

Table 12: ASL - Financial Summary of Subsidiaries

Ramesh S. Damani, Chairman

Ignatius Navil Noronha, Managing Director