AMBIT INSIGHTS

Avenue Supermarts SELL

Revenues impress, margins compress
Avenue Supermarts’ revenue grew by an impressive 39% YoY to Rs48.7bn,
Result Update
11% above our estimate. The top-line growth was led by price cuts across Stock Information
categories, resulting in 180bps YoY GM decline to 14.3% (vs expectation of
Bloomberg Code: DMART IN
16%). Hence EBITDA margin declined 110bps YoY to 8%; absolute EBITDA was
3% below our estimate. Throughput grew 14% YoY, indicating ramp-up of CMP (Rs): 1,412
new stores along with same-store growth. 1H balance sheet implies capex of TP (Rs): 1,021
Rs7bn (including CWIP), indicating higher store additions in 2HFY19 vs 5 in Mcap (Rs bn/US$ mn): 881/11,967
1H. The company added 3 stores in 2Q, taking the store count to 160 spread 3M ADV (Rs mn/US$ mn): 793/11
across 5.1mn sq. ft. PAT grew 18% YoY to Rs2.3bn, below our estimate of Source: Bloomberg, Ambit Capital research
Rs2.5bn given lower EBITDA and higher depreciation, finance costs and tax.
We increase our top-line estimates by 5% but reduce GM estimate by 1%. Stock Performance (%)
Hence, our earnings estimate decrease by 3% for FY19E. We remain SELLers
1M 3M 12M YTD
given expensive valuation of 63x FY20E EPS; store addition remains a key risk
to our stance. Absolute (7) (11) 11 20
Rel. to Sensex 1 (6) 3 18
Source: Bloomberg, Ambit Capital research
Highlights of results:
 Employee expenses increased by 21% YoY to Rs842mn and formed 1.7% of sales
vs 2% in 2QFY18. Ambit Estimates (Rs bn)
FY18 FY19 FY20
 Other expenses as a percentage of sales reduced from 5.1% in 2QFY18 to 4.6%
Revenues 150 203 261
in 2QFY19 due to operating leverage.
EBITDA 13.3 17.2 22.3
Revision of estimates
EPS (Rs) 12.6 16.3 22.3
In light of the beat in topline due to expected increase in volumes to account for price Source: Company, Ambit Capital research
cuts, we increase our topline estimates by 5%. However, we reduce our EBITDA and
EPS estimates by 1% to account for the miss in margins due to price cuts.
Exhibit 1: Revision of estimates
FY19E FY20E
Rs mn, unless
specified Change in Change in
Old New Old New
estimates estimates
Revenue 194,100 203,400 5% 249,440 260,713 5%
Gross margin (%) 15.8% 14.7% 16.0% 15.0%
EBITDA 17,355 17,188 -1% 22,506 22,346 -1%
EBITDA margin (%) 8.9% 8.5% 9.0% 8.6%
PAT 10,517 10,183 -3% 13,996 13,914 -1%
EPS (Rs) 16.9 16.3 -3% 22.4 22.3 -1%
Source: Ambit Capital research

Valuations
Revenue CAGR of 24% over the next decade, 100bps margin expansion and improved
working capital from scale are factored into valuation of 63x FY20E EPS. To achieve
such growth, DMart needs to hike store rollout by 4x (80 annually) by FY30, which is
tough given the own-store model. Even Walmart, which witnessed an exhilarating
36% CAGR over FY68-98, never enjoyed such rich valuations. Key risks: Increase in
gross margins led by improvement in product mix. Research Analysts
Abhishek Ranganathan, CFA
abhishek.r@ambit.co
Tel: +91 22 3043 3085
Mayank Porwal
mayank.porwal@ambit.co
Tel: +91 22 3043 3214

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 AMBIT INSIGHTS

Exhibit 2: Quarterly performance

Rs mn, unless specified 2QFY18 1QFY19 2QFY19 2QFY19E
Revenue from Operations 35,069 45,594 48,725 43,934
YoY 26.2% 26.7% 38.9% 25.3%
QoQ -2.5% 19.7% 6.9% -3.6%
Gross Profit 5,660 7,121 6,983 7,029
Gross margin (%) 16.1% 15.6% 14.3% 16.0%
YoY 34% 28% 23% -0.9%
QoQ 2% 26% -2% 2.4%
Employee benefit expenses 697 770 842 782
As a % of sales 2.0% 1.7% 1.7% 1.8%
YoY 57% 20% 21% -11.0%
QoQ 9% 6% 9% 4.9%
Other expenses 1,784 2,124 2,245 2,211
As a % of sales 5.1% 4.7% 4.6% 5.0%
YoY 23% 12% 26% -1.1%
QoQ -6% 6% 6% 8.0%
EBITDA 3,179 4,227 3,896 4,037
EBITDA margin (%) 9.1% 9.3% 8.0% 9.2%
YoY 37% 39% 23% 1.3%
QoQ 5% 44% -8% -0.9%
EBIT 2,828 3,824 3,453 3,627
EBIT margin (%) 8.1% 8.4% 7.1% 8.3%
YoY 40% 42% 22% 2.4%
QoQ 5% 54% -10% -1.6%
Other Income 212 143 139 129
QoQ -7% -4% -3% -6.4%
Finance Costs 109 100 101 60
PBT 2,931 3,866 3,491 3,696
PBT margin (%) 8.4% 8.5% 7.2% 8.1%
YoY 65% 44% 19% -3.7%
Tax 1,020 1,360 1,233 1,174
Tax rate 35% 35% 35% 33%
PAT 1,910 2,506 2,257 2,522
PAT margin (%) 5.4% 5.5% 4.6% 5.4%
EPS (Rs) 3.06 4.02 3.62 4.04
Source: Company, Ambit Capital research

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 AMBIT INSIGHTS

Balance Sheet
Year to March (Rs mn, unless specified) FY17 FY18 FY19E FY20E
Total net worth 38,370 46,427 56,610 70,524
Loan funds 14,811 4,393 2,653 -
Total liabilities 53,866 51,291 59,734 70,995
Gross block
Net block 25,215 32,398 36,879 42,646
CWIP 1,529 1,471 1,471 1,471
Inventories 9,332 11,470 13,793 17,607
Loans & Advances 1,285 1,417 1,920 2,461
Creditors 2,668 3,159 4,756 6,679
Other current liabilities 1,322 1,276 1,526 1,966
Total assets 53,866 51,291 59,734 70,995
Source: Company, Ambit Capital research

Income Statement
Year to March (Rs mn, unless specified) FY17 FY18 FY19E FY20E
Net Sales 118,811 150,089 203,400 260,713
Gross Profit 17,851 23,600 29,798 39,107
Other expenses 6,320 7,461 9,327 12,329
EBITDA 9,636 13,374 17,188 22,346
Depreciation 1,260 1,547 1,768 2,085
EBIT 8,376 11,827 15,420 20,260
Tax expenses 2,645 4,112 5,364 6,853
Adjusted PAT 4,826 7,847 10,183 13,914
Source: Company, Ambit Capital research

Cash flow statement

Year to March (Rs mn, unless specified) FY17 FY18 FY19E FY20E
PBT 7,471 11,959 15,547 20,767
(Increase)/Decrease in working capital (2,645) (1,884) (1,178) (2,514)
Cash flow from operating activities 4,487 7,230 10,646 12,979
Capex (6,422) (8,968) (6,249) (7,852)
Cash flow from investing activities (24,746) 4,325 (5,754) (7,213)
Net borrowings 3,039 (10,419) (1,740) (2,653)
Cash flow from financing activities 20,243 (11,217) (2,108) (2,785)
Free cash flow (2,031) (1,807) 4,397 5,127
Source: Company, Ambit Capital research

Ratio analysis/Valuation parameters

Year to March FY17 FY18 FY19E FY20E
RoCE (%) 13.5% 14.9% 18.4% 20.9%
ROE (%) 18.0% 18.5% 19.8% 21.9%
P/E (x) 165.0 112.3 86.5 63.3
P/B (x) 23.0 19.0 15.6 12.5
EV/EBITDA (x) 90.1 64.9 50.1 38.1
EV/Sales (x) 7.3 5.8 4.2 3.3
Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd 15 October 2018

 AMBIT INSIGHTS

Avenue Supermarts Ltd (DMART IN, SELL)

1,800
1,600
1,400
1,200
1,000
800
600
400
200
0

Apr-18
Apr-17

Mar-18
Mar-17

Dec-17

Jul-18
Jul-17

Jan-18

Aug-18
Aug-17

Sep-18
Sep-17

Jun-18
Jun-17
May-17

Oct-17

Nov-17

Feb-18

May-18
Avenue Supermarts Ltd

Source: Bloomberg, Ambit Capital research

Ambit Capital Pvt Ltd 15 October 2018

 AMBIT INSIGHTS

Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
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NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
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