Avenue Supermarts Ltd Stock Analysis

Opportunities for Organised Retail Sector & Avenue Supermarts

Introduction

Avenue Supermarts primarily engaged in the business of organized retail and operates supermarkets under the brand name of D-Mart. D-Mart seeks to be a one-stop shopping destination for the entire family, meeting all their daily household needs. Let us also explore the future opportunities organised retail sector is possessing.

Avenue Supermarts Ltd – Stock Analysis

Retail Sector Overview

• Indian Retail sector has emerged as one of the most dynamic and fast-growing sectors due to entry of several new players in the recent times along with rising income levels, growing aspirations, favourable demographics and easy credit availability.
• Globally, India is fourth-largest global destination in the retail space after US, China and Japan.
• Current Valuation of Indian Retail sector is close to $1 Trillion ie. Rs.70 Lakh Crore in FY2019-20. And as per the estimations provide by Ministry of Commerce, retail sector would be around $1.1 Trillion by 2021.

Indian Retail Sector – Market Share

1. Unorganised Retail : Currently, the Indian retail market continues to be dominated by the unorganised retail (traditional kirana stores) accounting for about 88% of the total retail market.
2. Organised Retail : On the other hand, organised retail like Big Bazaar, D’Mart, Walmart, Malls, Showrooms etc, is contributing only about 9% of the total retail market.
3. Online Retail : Online retail players like Flipkart, Amazon, Big Basket etc, accounts for only 3% of the total retail market in India.

Future Growth for Organised Retail

• As per the the growth projections done by Ministry of Commerce, Organised retail market share is expected to rise to 18% in coming 2 years ie. by 2021.
• Private consumption expenditure is expected to grow at the rate of 10-11% YoY till 2021. So, the size of the Indian retail sector would be $1.1 Trillion by 2021. And out of this $1.1 Trillion, 18% market share would be contributed from organised retail.
• It means, 18% of $1.1 Trillion = $198 Billion corresponds to the total organised retail players. And here Avenue Supermarts is a big player in the organised retail segment.

Avenue Supermarts Ltd – Q2 FY2019-20 Results Update

D-Mart’s Store Count

D-Mart has shored up its store addition by adding 13 stores (8 in Q1 FY20 + 5 in Q2 FY20) of (0.6 mn sq.ft. addition) in first half of FY2019-20 (vs. 5 stores in H1:FY19 and 21 stores in FY19). Thus, the total store count is 189 stores spread across 6.5 mn sq.ft.

Future Earnings Visibility Outlook

• The Trailing 12 months revenue from these 189 stores is around $3 Billion.
• As per current numbers, size of total retail sector is $1 Trillion and 9% share is of organised retail. Means 9% of $1 Trillion= $90 Billion. And out of this $90 Billion, just $3 Billion is currently contributed by Avenue Supermarts. It indicates the how big opportunity is present for the company’s future growth.
• The market share projections of organised retail market is :
  • 2021 : 18%
  • 2025 : 30%
  • 2030 : 40%
• The entire retail sector is expected to grow close to $2.2 Trillion in next 10 years. And out this $2.2 Trillion valuation, 40% will go to the organised retail share. It means Organised retail market would be 40% of $2.2 Trillion = $880 Billion.
• Avenue Supermarts is expected to grow with a very high CAGR from current market contribution of $3 Billion to contribute in this $880 Billion market size by 2030. This also shows how big is the opportunity present for Avenue Supermarts and the other organised retail players in the coming 10 years to grow.
• Currently, Avenue Supermarts is tackling only the Tier-1 and Tier-2 cities. And according to its market study, the company may enter in the online retail business also in near future.
• Also, with the help of efficient supply chain management strategies employing, Avenue Supermarts is planning to open Mini D-Mart stores like small kirana stores to improve their presence and penetrate the unrealised market also.

We can get a clear idea of the earnings visibility of the company from the above projections and calculations.

Advantage of Need-based Consumption Business Model to Sustain Growth Trajectory

• Retail sector is basically a need-based sector. If any business is dependent on the need-based consumption, then the economic slowdown won’t affect much to the earnings growth of that business. So, in this case such business won’t find it much difficult to achieve a steady growth graph (economic growth + inflation growth).
• And due to this kind of strong earnings visibility, these stocks like Avenue Supermarts, Reliance Industries (due to Reliance Jio + reliance Retail) are trading at a premium valuation.
• These stocks are having a great advantage of need-based consumption business model to sustain growth trajectory.

Avenue Supermarts – Q2 FY2019-20 Results

• D-Mart reported strong revenue growth of 22% YoY to Rs.5,949, driven by healthy store addition pace in Q2 FY20. While the net profit increased by 47.34% YoY to Rs.333 Cr. Lower tax rates (22% vs 36%) boosted the PAT growth in spite of lower PBT in Q2 FY20.
• As per the management, revenue growth was slightly below its expectations. But, owing to a favourable product mix, gross margins improved.
• Higher operating expenses restricted profitability, due to which operating profit margin % has reduced to 8.7% in Q2 FY20 from 10% in last quarter Q1 FY20.
• The stock price has appreciated around 13% since the announcement of the recent corporate tax rate cut as the benefit of higher free cash flows probably can be passed on through price cuts to consumers
  to boost revenue growth.

Conclusion

• With the expansion in the market share of organised retail, Indian Retail sector will achieve the estimated projections in next 2-3 years.
• Improving economy, changing demographic profile, increasing disposable incomes in hands of the middle class, brand awareness and growing urbanization along with rising discretionary spends are the main growth drivers in the organized retail market in India.