Should you opt for Avenue Supermarts IPO? What brokerages have to say
Initial public offer (IPO) of Avenue Supermarts that operates supermarket chain, D-Mart, hits the markets today. It plans to raise Rs 1,870 crore through a fresh issue of equity shares in the price band of Rs 295-299. The fresh issue will constitute around 10% of the post-issue paid-up equity share capital of the company, assuming the issue is subscribed at the upper end of the price band.
Avenue Supermarts recently allotted 18,762,541 equity shares at Rs 299 per share (including share premium of Rs 289 per share) aggregating to Rs 561 crore (approximately) to 35 anchor investors that include Smallcap World Fund, New World Fund, Fidelity, Government of Singapore, JP Morgan, T Rowe Price, HDFC MF, Reliance MF, ICICI Prudential MF and SBI MF.
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Its business has grown rapidly in recent years, primarily through expansion of its store network from one store in 2002 to 118 stores as of January 31, 2017 across eight states in India, concentrated in western and southern India.
The D-Mart business model is based on the concept of offering value retailing to the customers using the Every Day Low Cost/ Every Day Low Price (EDLC/EDLP) strategy, which offers low prices on an everyday basis by achieving low procurement and operations cost.
The company's net profits have grown in each of the last five financial years since FY12. If one were to annualise the reported net profit for nine months of FY17, it is well on its way to topping the Rs 500-crore mark for the financial year. CLICK HERE FOR THE FULL STORY
So should you subscribe to the issue? Here is what leading brokerages and research houses suggest.
Avenue Supermarts has a well-established business model given: (i) strong execution history; stores up from 32 in FY10 to 110 in FY16 with 24% RoE, (ii) cost control; and (iii) high inventory turn of 12x. Business catering to all socio-economic classes in the $400bn Indian food/grocery market presents a long growth ramp. Nearly half its stores are less than four years old, implying strong SSG for next three – four years.
Moreover, RoIC of new stores in smaller towns is unlikely to be dilutive as lower sales density will be offset by modest capex. The above attributes combined with a strong balance sheet (net-debt-to-equity: 0.7x) make valuation at 36x FY17E annualised EPS and 18x FY17E EV/annualised EBITDA seem inexpensive; Future Retail trades at 64x FY17E EPS and 26x FY17E EV/annualised EBITDA with RoE of 1%.
Avenue Supermarts has delivered strong performance in the past few years with average Same Store Sales (SSS) growth of 24.4% from FY12-16 along with four-fold growth in revenues and more than five-fold growth in net profit during the same period. Based on annualised 9MFY17 numbers, the stock is available at an attractive valuation of 1.6x sales and 36.3x earnings. Considering the strong management bandwidth, high operating efficiency and superior financial performance coupled with attractive valuations, we strongly recommend SUBSCRIBE to the issue.
Avenue Supermarts’ unique blend of offbeat, efficient and effective business model has resulted into revenue CAGR of 40% and PAT CAGR of 52% over FY12-16 with operating margin of 7.7% in FY16. ROE/ROCE stood at 23.5%/25.3% during FY16. Post utilisation of IPO proceeds, total debt of Rs 1240 crore at the end of 9M FY17 is expected to come down by Rs 1080 crore over FY18-20. The largely diminished debt burden will in turn reduce finance expenses and improve return ratios. Despite subdued growth and modest operating margins, its peers Trent and V-Mart are trading at 49.4x and 38x FY17E P/E respectively whereas at the upper end of price band, Avenue Supermarts is valued at 36.1x FY17E (ann.) P/E. We are upbeat on the IPO and recommend ‘subscribe’.
Store ownership, use of contract labour and focus on efficiencies has resulted in EBITDA margin uptick of 250 basis points (bps) over FY12-9MFY17 to 8.8%. Consequently profits have grown by 52% CAGR FY12-16. On annualised 9MFY17 financials, the stock demands an EV/Sales of 1.7x, EV/EBITDA of 19.5x, and P/E of 35.6x. We assign a SUBSCRIBE rating to the IPO.
At the upper end of the price band, the pre-issue P/E works out to be 32.5x its annualised 9MFY2017 earnings, which is lower compared to P/E multiple of its peers i.e. Trent - 73.9x, Shoppers Stop – 123.8x and Future Retail 36.5x. Better return on equity (RoE) profile, promoter’s strong background, strategically located stores, intense focus on maintaining lower costs and strong brand perception are the compelling factors indicating that ASL is a long term story that will unfold going ahead. Thus, we recommend a SUBSCRIBE on this issue.
K R CHOKSEY SECURITIES
Avenue Super marts are considered as one of the most prominent player in the F&G market with a presence among 41 cities. We believe that although the company has been following different business model such as ownership (higher capex against lease model) vis-à-vis rental by other large players like Future retail and Trent, the key ratios such as average ROE & ROCE has been lingering higher at 15% & 10% between FY12-16 against industry average of 7% & 5% respectively.
We believe that stock is valued at reasonable valuations given the listed peers such as Future Retail and Trent trading at 37x FY17 & 50x FY17 respectively. Further, strong financial performance (topline CAGR 40% against industry average CAGR: around 10-15%, average OPM: 7.3% against industry average: 5-7% and bottom-line CAGR 52% over the period FY12-16) could also provide more opportunities to demand higher valuations in the coming time. We have a SUBSCRIBE rating on the issue.