Research Challenge

Avenue Supermarts Ltd.

SELL Downside: 30%

Exchange — NSE/BSE Sector — Retail Industry — Department
Stores
Ticker Symbol — DMART CMP — INR 1485.7 Target Price — INR 1,038
(as on 4 - Dec - 2018)

Team FRAUS
Industry Overview
Sector drivers
 Demand side: Increase in household consumption. By 2020, it is expected to reach Competitive Positioning Porters Five Forces Analysis
USD 2000 billion from USD 1262 billion in 2016 at growth rate of c.12% per annum.
 Supply side:
 Lower penetration of Organized Brick & Mortar (B&M) retail - 9% of overall
retail (2016) - provides huge opportunity
 Organized B&M retail is expected to increase at CAGR 21-22% from FY16 to 60%
FY20 Competitve Rivalry
50% 5
 Share of Food & Grocery (F&G) in organized retail is expected to increase by 4

Gross Margin
CAGR 26% from 3% in 2016 to 5% in 2020 40% DMart 3
Threat of 2 Bargaining Power of
 Policy support: 30% Trent Substitutes 1 Suppliers
 Implementation of GST and e-way bill have further pushed the formalization of 0
20% Spencer
Indian retail industry
Sector Challenges 10% Future Retail
Bargaining Power of Threat of New
 Competition from e-retail esp. in F&G segment with growth rate of CAGR 65- 0% V-Mart Customers Entrant
70% from FY17 to FY20 0 10 20 30 40
 Decreasing share of merchandise expenditure in household expenditure - 62% Revenue/ Sq. ft. ('000 INR)
(2000), 49% (2016) and 48% (2020E) - due to Increasing consumer aware-
1 - Very Low to 5 - Very High
ness, rising aspirational needs and urbanization
 Increase in Service expenditure from 38% in 2000 to 51% in 2016. It is expected
to reach 52% by 2020 Source: Team Analysis Source: Team Analysis

Industry growth forecast F&G Segment Growth Household Expenditure

($ bn)

1200 14% 68% 6% Merchandise & Service Expenditure Trend

12% 67.5%
12% 68% 5% 100%
1000 67% 5%
9% 67% 4%
10% Overall Retail 80% 38%
800 47% 48% 51% 52%
67% 3% 3%
7% 8% 66%
60%
600 Organized B&M Retail 66% 2%
6% 1.5%
960 66% 1% 40%
400 Organized B&M Retail 62%
4% 65% 0% 53% 52%
616 as % of Overall Retail 20%
49% 48%
FY2012 FY2016 FY2020E
200 386 115 2%
27 55
F&G as a % of Retail 0%
0 0% FY2000 FY2005 FY2010 FY2016 FY2020E
FY2012 FY2016 FY2020E Organized F&G as a % of F&G
Source: Company, Team Analysis Source: Company, Team Analysis Source: Company, Team Analysis
Company Overview

Business Overview Revenue Breakdown Financials

Particulars 2018A 2019E 2020E 2021E
 Avenue Supermarts Limited is an emerging national supermarket
Revenue (INR mn) 150,332 193,928 248,713 317,109
chain, with a strong focus on value-retailing
EBITDA margin (%) 9.0% 9.4% 9.7% 9.9%
 Founded in 2000 by Mr. Radhakishan Damani, a successful equity
investor, espousing the qualities of simplicity, speed and agility EBIT margin (%) 7.9% 8.4% 8.6% 8.8%
General Merchandise & Apparel PAT margin (%) 5.4% 5.4% 5.5% 5.7%
 Retailing strategy is to provide basic daily use goods at low prices
28%
throughout the year – Every Day Low Price / Cost EPS 13 17 22 29

 It has grown from 10 stores in FY10 to 159 stores in Q1 FY19, an 52% Non-Foods 150 16000

average of c.19 stores per year

130 12000

 Focus on cluster based approach, c.75% of new stores to be 20% Foods

110 8000
opened in existing areas
90 4000
 D-Mart ready, the omni-channel platform which allows for home
delivery or pickup of goods that have been ordered on the app 70 0

 Target customer group is lower-middle, middle, and upper middle

class. Source: Company Volume (in thousand) DMart rebased Nifty rebased

SWOT No. of stores and revenue / sq. ft. Shareholding Pattern

Strengths Opportunities
• Competitive pricing • Increasing disposable 32719 7% 3% Promoters
31120
• Good brand image income 28136 155
• Store at prime locations • Rapid urbanization 30000 26388 150 8%
• Company strategy of long term • Integrating technology 23419 131
25000 125
gains in retail experience 110 Institutions
20000 100
• Private label represents 89
opportunity 15000 75 75
Weaknesses
• Standalone stores 10000 50 82%
• Sustainability of low price Threats Employees
5000 25
differentiator questionable • Competition from retail
• Restricted focus on Western giants 0 0
states • Increasing e-retail in 2014 2015 2016 2017 2018
foods segment Others
• Huge unorganised Revenue from Sales per sq. ft. (in INR) Cumulative Stores
sector (c. 91%)
Source: Company Source: Company
Investment Rationale

Decline in same-store sales growth (SSSG) from D Mart Ready to skew sales towards low margin Lower FCF due to high capex
21.2% in FY17 to 14.2% in FY18 FMCG products

 Due to cannibalization from new stores in the existing cluster as  Impulse purchase and utility helps D Mart to also sell high margin  Ownership model leads to higher capex requirements, the
well as deflation in staples general merchandise and apparel higher capex drags free cash flow (FCF) lower
 SSSG at inflation rate will take care of the increase in variable Free Cash Flow
(INR mn)
cost but not be good enough to increase margins Gross Margin Benchmarks Industry Average
12000
26.10% Food and Grocery* 12-25% 9528
9000
22.40% 21.50% 21.20% Apparel* 30-50%
6000 4799
14.20% Non-Food FMCG* 12-35%
3000 1972
General Merchandise 25-30% 977
FY16 FY17 FY18
0
Others 23-27% FY19E FY20E FY21E FY22E
FY14 FY15 FY16 FY17 FY18 -1401
Note: * indicates brand and private label mix Source: Company -3000 -1765 Source: Company, Team Analysis
Source: Company -2230

Higher gestation periods for stores Trading at premium to its peers Low push to private label

 Gestation period for a store is 24-30 months post land title  Even at its peak growth rate Walmart was trading at 35x earnings, but  Grocery and non-grocery firms like Big Basket are pushing
clearance, thus hindering fast expansion. the stark difference in this scenario is the emergence of e-commerce, towards high margin private label
 Availability of commercially viable real estate could be an which could hurt revenue growth  Due to change in consumption pattern, where consumers
impediment in the growth story were no longer only price specific but also wanted quality
100 products
81.2
80  Private label products are lower priced and thus providing
61.7 similar quality will pull customers
60 48  Avenue Supermarts is facing difficulty because of
40.4
40 unavailability of trustworthy vendor ecosystem to procure
19.1 20.7 products at reasonable costs
20 4.4 1.0 4.2
0
EV/EBITDA EV/Sales P/E
Avenue Supermarts Future Retail Trent
Source: NHAI Source: Team Analysis
Investment Risks

Risks

 Low Float (R1)  Unavailability of real estate for expansion (R4)

 Low market float of shares (10.54%) leads to poor price discovery  Scarcity of commercially and strategically viable real estate could affect
expansion
 Rising crude oil prices (R2)  Leasing model could adversely affect EBITDA
• Higher fuel prices impact margins due to higher fuel costs for distribution and supply chain
logistics.  Shift in demographics leading to increasing revenue of e-commerce (R5)
• EIA estimates crude price to reach $85.7/bbl by 2025 and $106/bbl by 2040  Fast mobile adoption and younger population allow e-retailing to grow at a fast
pace
90 8000 180%
85 7000 160%
80 6000 140%
75 120%
5000
70 100%
4000
65 80%
60 3000 60%
55 2000 40%
50 1000 20%
45 0 0%
40

Retail Value RSP excl Sales Tax (INR bn) % Y-o-Y Growth

Source: Bloomberg Source: Euromonitor, Team Analysis

 Stiff competition from e-commerce (R3) Risk Matrix
 F&G segment faces stiff competition from e-commerce players like, Big Basket, Amazon
Pantry, Flipkart - Walmart and Reliance Retail

2% 4%
100% 7% 9% 12%
80%
60%
40% 93% 89% 84%
20%
0%
2012 2016 2020(P)

Unorganized Retail Org anized B&M Retail E-com merce

Source: Team Analysis
Source: Company, Team Analysis
Corporate Governance and Reporting Quality

Corporate Governance Financial Reporting Quality

Corporate Governance  Nomination cum Remuneration

M Score Variables
Committee
Independent Chairperson Yes • There are 3 members and 2 out of Days Receivable Index (DSRI) 1.621  Beneish M- Score
these members are independent • Avenue Supermarts has a score of
Independent Lead Director No Gross Margin Index (GMI) 0.957
directors. Nominates directors and –2.03 (i.e. less than -1.78) for 8
% of Non-Executive Directors on Board 16.7% senior management, carry out Asset Quality Index (AQI) -1.127 variable M-score and a score of –
every director’s appraisal, Sales Growth Index (SGI) 1.264 3.51 (i.e. less than -2.2) for the 5
% of Independent Directors on Board 33.3%
recommend or review variable model.
Depreciation Index (DEPI) 1.033
% of Women on Board 16.7% remuneration of the managing • Company has a LOW likelihood of
director and executive directors. SG&A Expense Index (SGAI) 0.921 manipulated earnings.
% of Independent Directors on Board on
66.7% Leverage index (LVGI) 0.499
Audit Committee  Stakeholders Relationship Total Accruals to Total Assets
Committee 0.072
% of Independent Directors on Board on (TATA)
0.0% • None of the 2 members are
Risk Committee independent directors. The main Source: Team Analysis
objective of the committee is to  Altman Z Score
% of Independent Directors on
monitor and resolve stakeholders’ • According to z-score of 54.89 for
Nomination cum Remuneration 66.7% grievances. FY18 and 15.92 for FY17 (which
Committee are far greater than 3.0), it is highly
 Corporate Social and Business unlikely for the firm to go bankrupt.
% of Independent Directors on
0.0% Responsibility Committee
Stakeholders Relationship Committee • The 4 member committee consists Piotroski F Score Score
of 2 non-executive independent
CSR/ Sustainability Committee Yes X1: Net Income 1
directors, 1 non-executive non-
Dual Class Unequal Voting Rights – independent director and 1 X2: Return on Assets 1
No executive director. Its main X3: Operating Cash flow 1  Piotroski F Score
Common Shares
objective is to recommend the • Piotroski F score, which is 6 out of
X4: Quality of Earning 0
Source: Company, Team Analysis amount of expenditure on CSR 9 for the company states that it is a
activities. X5: Long Term Debt 1 reasonable value stock which may
X6: Current Ratio 0 not provide expected returns in
X7: Lack of Dilution 1 immediate term.
X8: Gross Margin 1
X9: Asset turnover ratio 0
Output 6
Source: Team Analysis
Avenue Supermarts: Financial Projections and Analysis

Revenue Growth EBITDA Margin

• The company grew at a CAGR of 35%
from FY13-18 driven by new store
35% 16.0% additions and SSSG.
29.0% 28.3% 14.1% • We expect the company to grow at c.27%
30% 27.5% 26.8%
26.4% 26.0% 14.0% from FY19-24 owing to aggressive store
12.7% expansion by the company.
25%
12.0%
20%
16.0% 10.1% 10.3%
9.7% 9.9% • The major costs for the company are
15% 10.0% 9.4%
9.0% COGS and Employee benefit expenses
(c.85%).
10%
6.0% 8.0% • We expect the gross margins to improve
marginally (c.1%)
5%
• The company may also increase its sales
0% 6.0% in the high margin apparel segment.

• The working capital needs for the company

COGS and SG&A Expenses (as % revenue) Capex (as % revenue) is higher than that of peers like Star Bazar
and Spencers.
• We expect the working capital needs to
90.0% 8.0% remain stable going forward
84.1% 84.1% 83.8% 83.6% 83.4% 83.2% 14.0% 6.1%
82.0% 81.2% 5.4%
85.0% 6.0% 4.9%
12.0% 4.3%
80.0% 10.0% 3.6%
4.0% 3.1%
75.0% 8.0%
70.0% 1.4% • The company has been generating positive
6.0% 2.0% 0.7%
6.9% 6.5%
cash flows from operations. However, the
65.0% 6.5% 6.5% 6.5% 6.5%
5.3% 4.0% FCF is negative due to significant capex
4.7% 0.0%
60.0% 2.0% primarily because of the ownership based
approach.

COGS SG&A Expenses Source: Company, Team Analysis

Avenue Supermarts: DCF and WACC

FY Mar (INR mn) 2018A 2019E 2020E 2021E 2022E 2023E 2029E 2033E Risk free rate 6.1%

NOPAT 7,879 10,708 14,077 18,387 23,976 30,906 121,582 194,629 Equity Risk Premium 6.0%
Add: D&A 1,590 2,099 2,693 3,433 4,177 5,263 11,972 13,869 Average Unlevered Beta 1.1
Less: Capex (9,156) (10,497) (12,117) (13,732) (14,621) (15,790) (20,951) (15,256)
Cash/Firm Value 0.7%
Less: Change in NCWC (1,714) (1,332) (2,681) (3,289) (4,005) (4,839) (8,313) (3,106)
Avg unlevered beta adjusted for cash 1.1

Unlevered Free Cash Gross Debt (INR mn) 4,393

(1,401) 977 1,972 4,799 9,528 15,540 104,290 190,136
Flows
Current Mkt Cap (INR mn) 826,766
Terminal Value (Terminal growth rate: 4.5%) 2,443,159
Total Unlevered Free Gross Debt/Current Mkt Cap 0.5%
(1,401) 977 1,972 4,799 9,528 15,540 104,290 2,633,295
cash flows Target Capital Structure (D/E) 5.0%

Tax Rate 34%

Time factor (mid-year
0.5 1.5 2.5 3.5 4.5 10.5 14.5
convention) Levered Beta 1.2
discount factor 0.94 0.84 0.74 0.66 0.59 0.29 0.18
Cost of Equity 13.0%

Cost of Debt 8.7%

PV of Unlevered FCF 921 1,650 3,565 6,283 9,098 29,907 469,213
Enterprise Value 718,894 WACC 12.6%

Enterprise Value (INR mn) 718,894 Share Price • The risk free rate has been taken as 10-year
WACC
(INR)
Less: Market Value of Debt (4,393) G-Sec yield (8.00%) - country default spread
10.6% 11.6% 12.6% 13.6% 14.6% (1.95%).
Add: Cash 5,602
2.5% 1,132 1,057 998 949 908 • The unlevered beta has been sourced from
Add: Investments 2,044
Aswath Damodaran’s beta table for emerging
Less: Minority Interest (6) 3.5% 1,235 1,139 1,063 1,003 954 markets and for the construction materials
Market Value of Equity 722,141 Terminal industry. It has been adjusted for cash as cash
4.5% 1,372 1,243 1,145 1,069 1,008 does not contain any risk .
Growth Rate
# of outstanding shares (mn) 632.084
5.5% 1,563 1,381 1,250 1,152 1,075 • The equity risk premium has been calculated
as Mature market premium (3.92%) + Country
Target Share Price (INR) 1,142 6.5% 1,846 1,573 1,390 1,258 1,158 risk premium adjusted for inflation (2.08%).
• More than 70% debt of the company is foreign
denominated
Avenue Supermarts: Trading Comparables

Name EV (INR mn) EV/Sales19E EV/Sales20E EV/EBITDA19E EV/EBITDA20E

Bucket 1 - Indian Peers • We have divided the peers into 3
Trent 107,310 4.1x 3.4x 40.4x 31.3x buckets namely Indian, Asian and
VMart 49,534 3.2x 2.6x 27.8x 21.2x Global.
Future Retail 218,770 1.0x 0.9x 19.0x 15.3x • The classification was done
Spencers 22,958 1.0x 0.9x primarily on the basis of the
industry they are operating in,
business and Geographical
Bucket 2 - Asian peers
location.
Yonghui Superstores co ltd 819,800 1.0x 0.8x 26.9x 19.7x
• The peer list was collated from
Siam Makro 356,860 0.9x 0.8x 16.8x 15.4x
Bloomberg based on the Global
Industrial Classification Standards
Bucket 3 - Global peers (GICS) after considering the
Costco 7,280,000 0.8x 0.8x 15.3x 14.6x aforementioned parameters.
Walmart 21,090,000 0.6x 0.6x 9.8x 9.8x

Average 1.9x 1.6x 26.0x 20.6x

EV (INR mn) 366,557 398,401 475,883 493,653

Enterprise Value (INR mn) 433,624 Dupont Analysis FY18 FY17

Less: Market Value of Debt (4,393)
Tax Impact NI/PBT 0.66 0.64
Add: Cash 5,602 Capital Structure
PBT/EBIT 1.02 0.88
Add: Investments 2,044 impact
Less: Minority Interest (6) Operating Margin EBIT/Sales 0.08 0.07
Market Value of Equity 436,870 Asset Turnover Sales/Assets 2.66 2.04
# of outstanding shares (mn) 632.084 Leverage Assets/Equity 1.21 1.51

Target Share Price (INR) 691 RoE 17.3% 12.5%

Avenue Supermarts: Transaction Comparables

Announcement Date Target Acquirer EV (INR mn) EV/Sales

3-Sep-18 More Amazon & Samara Capital 85,714 2.0x

5-Oct-17 Hypercity Future Retail 13,388 1.1x

Average 1.6x

Enterprise Value (INR mn) 252,974

LTM Sales (INR mn)

Q2FY18-19 Q1FY18-19 Q4FY17-18 Q3FY17-18 LTM Values

Net Revenue 45,594 38,100 40,939 35,083 159,715

Enterprise Value (INR mn) 252,974

Less: Market Value of Debt (4,393) • The selection of transaction was done primarily on the basis of
Add: Cash
the industry in which the transaction was done , geographical
5,602
location, the business of the target company.
Add: Investments 2,044
• The multiples was calculated as on the announcement date of
Less: Minority Interest (6)
the deal and then the LTM sales were calculate for them.
Market Value of Equity 256,221
• The multiple used for transaction comparable was EV/ Sales.
# of outstanding shares (mn) 632.084

Target Share Price (INR) 405

Avenue Supermarts: Valuation & Recommendation

Premium/Discount
Multiple Firm Value (INR mn)
to CMP
DCF 1142 - 718,894 (23%)

52 Week High Low 1060.1 1680 - 666,825 – 1,058,654 (29%) - 13%

EV / EBITDA 19E 758 26.0x 475,883 (49%)

EV / Sales 19E 585 1.9x 366,557 (61%)

EV/EBITDA 20E 786 20.6x 493,653 (47%)

EV / Sales 20E 635 1.6x 398,401 (57%)

EV / LTM EBITDA 405 1.6x 252,974 (73%)

Target Share Price Current Market Price

Methodology Stock Price Weight assigned

DCF

Trading Comparable
1,142

691
80%

15%
SELL
Transaction Comparable 405 5%

Downside: 30%
Target Price 1,038 (Downside: 30%)

Current market price INR 1485.7 as of 4th Dec, 2018.

Annexures
Avenue Supermarts: P&L

FY Mar (INR mn) 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E

Net Revenues 22,086 33,409 46,865 64,394 85,838 1,18,977 1,50,332 1,93,928 2,48,713 3,17,109 4,01,936 5,06,439 6,33,049 7,79,916 9,46,818 11,32,395 13,33,961 15,47,395 17,33,082 19,06,390 20,58,901 21,82,435
%growth 51.3% 40.3% 37.4% 33.3% 38.6% 26.4% 29.0% 28.3% 27.5% 26.8% 26.0% 25.0% 23.2% 21.4% 19.6% 17.8% 16.0% 12.0% 10.0% 8.0% 6.00%

COGS (18,840) (28,574) (39,844) (54,872) (73,035) (1,00,810) (1,26,356) (1,63,000) (2,08,525) (2,65,204) (3,35,306) (4,21,429) (5,25,470) (6,45,760) (7,81,993) (9,32,925) (10,96,239) (12,68,458) (14,17,121) (15,54,936) (16,75,133) (17,71,201)
%revenue 85.3% 85.5% 85.0% 85.2% 85.1% 84.7% 84.1% 84.1% 83.8% 83.6% 83.4% 83.2% 83.0% 82.8% 82.6% 82.4% 82.2% 82.0% 81.8% 81.6% 81.4% 81.2%
Total SG&A
Expenses (1,865) (2,684) (3,603) (4,932) (6,166) (8,354) (10,447) (12,605) (16,166) (20,612) (26,126) (32,919) (39,831) (47,502) (55,822) (64,627) (73,694) (82,750) (89,714) (95,527) (99,868) (1,02,473)
%revenue 8.4% 8.0% 7.7% 7.7% 7.2% 7.0% 6.9% 6.5% 6.5% 6.5% 6.5% 6.5% 6.3% 6.1% 5.9% 5.7% 5.5% 5.3% 5.2% 5.0% 4.9% 4.7%

EBITDA 1,381 2,150 3,418 4,590 6,636 9,812 13,528 18,323 24,022 31,293 40,504 52,091 67,748 86,654 1,09,003 1,34,842 1,64,028 1,96,187 2,26,247 2,55,927 2,83,901 3,08,761
%margin 6.3% 6.4% 7.3% 7.1% 7.7% 8.2% 9.0% 9.4% 9.7% 9.9% 10.1% 10.3% 10.7% 11.1% 11.5% 11.9% 12.3% 12.7% 13.1% 13.4% 13.8% 14.1%

DA (375) (458) (570) (815) (984) (1,278) (1,590) (2,099) (2,693) (3,433) (4,177) (5,263) (6,264) (7,346) (8,490) (9,667) (10,841) (11,972) (12,765) (13,368) (13,744) (13,869)
%grossblock 4.1% 4.2% 4.1% 4.5% 4.5% 4.6% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%

EBIT 1,006 1,692 2,848 3,775 5,652 8,534 11,938 16,224 21,329 27,860 36,327 46,828 61,484 79,308 1,00,513 1,25,175 1,53,187 1,84,215 2,13,482 2,42,559 2,70,157 2,94,892
%revenue 4.6% 5.1% 6.1% 5.9% 6.6% 7.2% 7.9% 8.4% 8.6% 8.8% 9.0% 9.2% 9.7% 10.2% 10.6% 11.1% 11.5% 11.9% 12.3% 12.7% 13.1% 13.5%

Finance Cost (260) (426) (557) (724) (913) (1,220) (595) (345) (394) (427) (291) (291) (283) (204) (196) (117) (105) (93) (81) (65) (61) (57)
%EBIT 25.9% 25.2% 19.6% 19.2% 16.2% 14.3% 5.0% 2.1% 1.8% 1.5% 0.8% 0.6% 0.5% 0.3% 0.2% 0.1% 0.1% 0.1% 0.04% 0.03% 0.02% 0.02%

Profit before tax 884 1,409 2,449 3,233 4,917 7,471 12,221 15,878 20,936 27,433 36,036 46,537 61,201 79,104 1,00,317 1,25,058 1,53,082 1,84,122 2,13,401 2,42,494 2,70,096 2,94,835

Tax expense (282) (472) (835) (1,109) (1,715) (2,683) (4,158) (5,413) (7,137) (9,352) (12,285) (15,865) (20,864) (26,967) (34,199) (42,633) (52,186) (62,768) (72,750) (82,668) (92,077) (1,00,511)
%PBT 32% 34% 34% 34% 35% 36% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34%
Total
Comprehensive
income 604 939 1,614 2,117 3,205 4,796 8,058 10,465 13,799 18,081 23,751 30,672 40,338 52,137 66,119 82,425 1,00,895 1,21,354 1,40,651 1,59,827 1,78,019 1,94,324
%margin 2.7% 2.8% 3.4% 3.3% 3.7% 4.0% 5.4% 5.4% 5.5% 5.7% 5.9% 6.1% 6.4% 6.7% 7.0% 7.3% 7.6% 7.8% 8.1% 8.4% 8.6% 8.9%

Minority Interest - - - (0.44) (0.45) (0.46) (0.23) - - - - - - - - - - - - - - -

Total
comprehensive
income
attributable to the
parents of the
company 604 939 1,614 2,117 3,205 4,796 8,058 10,465 13,799 18,081 23,751 30,672 40,338 52,137 66,119 82,425 1,00,895 1,21,354 1,40,651 1,59,827 1,78,019 1,94,324
%margin 2.7% 2.8% 3.4% 3.3% 3.7% 4.0% 5.4% 5.4% 5.5% 5.7% 5.9% 6.1% 6.4% 6.7% 7.0% 7.3% 7.6% 7.8% 8.1% 8.4% 8.6% 8.9%
Dividend Payout
ratio % 0% 0% 0% 0% 0% 20% 20% 20% 20% 20% 20% 30% 30% 30% 30%

Retained
Earnings 604 939 1,614 2,117 3,205 4,796 8,058 10,465 13,799 18,081 23,751 30,672 32,270 41,710 52,895 65,940 80,716 97,083 98,456 1,11,879 1,24,613 1,36,027
Avenue Supermarts: Balance Sheet

FY Mar (INR mn) 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E

Non Current Assets 23,118 28,407 36,762 45,160 54,584 64,883 75,326 85,853 96,814 1,08,201 1,19,663 1,30,780 1,41,079 1,50,058 1,56,441 1,61,342 1,64,549 1,65,936

Core non current assets 21,752 27,033 34,525 42,923 52,347 62,646 73,089 83,616 94,577 1,05,964 1,17,426 1,28,543 1,38,842 1,47,821 1,54,204 1,59,105 1,62,312 1,63,699

Long term Investments 275 489 163 163 163 163 163 163 163 163 163 163 163 163 163 163 163 163

Other non current assets 1,091 886 2,074 2,074 2,074 2,074 2,074 2,074 2,074 2,074 2,074 2,074 2,074 2,074 2,074 2,074 2,074 2,074

Current Assets 7,897 29,786 19,722 24,238 30,435 40,191 53,793 76,469 1,00,836 1,33,959 1,79,753 2,38,739 3,14,811 4,09,167 5,07,077 6,19,791 7,46,795 8,86,468

Cash & Cash Equivalents 351 18,843 5,602 8,121 10,420 15,325 22,928 38,234 53,701 76,536 1,10,680 1,56,763 2,18,876 2,98,517 3,83,731 4,84,681 6,01,430 7,32,915

Trade Receivables 84 210 335 348 442 559 701 875 1,083 1,322 1,589 1,882 2,196 2,523 2,799 3,049 3,261 3,424

Inventories 6,717 9,479 11,634 13,618 17,422 22,157 28,014 35,209 43,902 53,952 65,333 77,943 91,588 1,05,976 1,18,397 1,29,911 1,39,953 1,47,979

Other current assets 745 1,254 2,151 2,151 2,151 2,151 2,151 2,151 2,151 2,151 2,151 2,151 2,151 2,151 2,151 2,151 2,151 2,151

Total Assets 31,016 58,194 56,484 69,398 85,019 1,05,074 1,29,120 1,62,322 1,97,651 2,42,161 2,99,416 3,69,519 4,55,890 5,59,225 6,63,518 7,81,133 9,11,344 10,52,404

- - - - - - - - - - - - - - - - - -

Non Current Liabilities 9,647 10,331 2,927 4,187 4,671 4,946 3,246 3,246 3,246 2,356 2,356 1,476 1,426 1,376 1,326 1,276 1,226 1,176

Long term debt 9,085 9,809 2,460 3,720 4,204 4,479 2,779 2,779 2,779 1,889 1,889 1,009 959 909 859 809 759 709

Other long term liabilities 562 521 467 467 467 467 467 467 467 467 467 467 467 467 467 467 467 467

Current Liabilities 6,163 9,444 6,860 8,049 9,386 11,086 13,081 15,611 18,670 22,360 26,720 31,764 37,468 43,770 49,657 55,444 61,092 66,175

Short term debt 1,286 1,388 73 597 719 856 856 856 756 656 556 456 356 256 156 - - -

Trade Payables 1,944 2,607 3,173 3,837 5,054 6,616 8,611 11,141 14,300 18,090 22,550 27,694 33,498 39,900 45,887 51,830 57,478 62,561

Other short term liabilities 2,933 5,448 3,614 3,614 3,614 3,614 3,614 3,614 3,614 3,614 3,614 3,614 3,614 3,614 3,614 3,614 3,614 3,614

Total Liabilities 15,810 19,774 9,787 12,236 14,058 16,032 16,327 18,857 21,916 24,716 29,076 33,240 38,894 45,146 50,983 56,720 62,318 67,351

Equity attributable to parent 15,204 38,418 46,691 57,162 70,961 89,042 1,12,793 1,43,465 1,75,735 2,17,445 2,70,339 3,36,280 4,16,996 5,14,079 6,12,534 7,24,413 8,49,026 9,85,053

Non-controlling interest 1 1 6 - - - - - - - - - - - - - - -

Total Equity 15,205 38,419 46,697 57,162 70,961 89,042 1,12,793 1,43,465 1,75,735 2,17,445 2,70,339 3,36,280 4,16,996 5,14,079 6,12,534 7,24,413 8,49,026 9,85,053

Total Liabilities & Equity 31,016 58,194 56,484 69,398 85,019 1,05,074 1,29,120 1,62,322 1,97,651 2,42,161 2,99,416 3,69,519 4,55,890 5,59,225 6,63,518 7,81,133 9,11,344 10,52,404
Avenue Supermarts: Cash Flow

FY Mar (INR mn) 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E

Beginning Cash balance 5,602 8,121 10,420 15,325 22,928 38,234 53,701 76,536 1,10,680 1,56,763 2,18,876 2,98,517 3,83,731 4,84,681 6,01,430

Cashflow from Operations 11,578 14,204 18,652 24,215 31,387 33,075 42,761 54,392 67,964 83,509 1,00,835 1,04,593 1,19,489 1,33,811 1,46,847
Net Income 10,465 13,799 18,081 23,751 30,672 32,270 41,710 52,895 65,940 80,716 97,083 98,456 1,11,879 1,24,613 1,36,027
Add: Depreciation 2,099 2,693 3,433 4,177 5,263 6,264 7,346 8,490 9,667 10,841 11,972 12,765 13,368 13,744 13,869
Changes in AR (13) (94) (116) (143) (174) (208) (239) (267) (293) (314) (327) (276) (250) (212) (163)
Changes in Inventory (1,984) (3,803) (4,735) (5,857) (7,195) (8,692) (10,050) (11,382) (12,610) (13,644) (14,388) (12,420) (11,514) (10,042) (8,026)
Changes in AP 664 1,216 1,563 1,995 2,530 3,159 3,790 4,460 5,143 5,805 6,402 5,987 5,943 5,648 5,083
Add: Interest paid 345 394 427 291 291 283 204 196 117 105 93 81 65 61 57

Cash flow from Investing (10,497) (12,117) (13,732) (14,621) (15,790) (17,225) (18,733) (19,952) (20,784) (21,140) (20,951) (19,148) (18,269) (16,951) (15,256)
Capex (10,497) (12,117) (13,732) (14,621) (15,790) (17,225) (18,733) (19,952) (20,784) (21,140) (20,951) (19,148) (18,269) (16,951) (15,256)

Cash flow from Financing 1,439 212 (15) (1,991) (291) (383) (1,194) (296) (1,097) (255) (243) (231) (271) (111) (107)
Short term debt 525 121 137 - - (100) (100) (100) (100) (100) (100) (100) (156) - -
Long term debt 1,260 485 275 (1,700) - - (890) - (880) (50) (50) (50) (50) (50) (50)
Interest paid (345) (394) (427) (291) (291) (283) (204) (196) (117) (105) (93) (81) (65) (61) (57)

Ending Cash balance 8,121 10,420 15,325 22,928 38,234 53,701 76,536 1,10,680 1,56,763 2,18,876 2,98,517 3,83,731 4,84,681 6,01,430 7,32,915
Avenue Supermarts: DCF (1/2)

FYE Mar (INR mn) 2018A 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E

Net Revenues 1,50,332 1,93,928 2,48,713 3,17,109 4,01,936 5,06,439 6,33,049 7,79,916 9,46,818 11,32,395 13,33,961 15,47,395 17,33,082 19,06,390 20,58,901 21,82,435
%growth 29.0% 28.3% 27.5% 26.8% 26.0% 25.0% 23.2% 21.4% 19.6% 17.8% 16.0% 12.0% 10.0% 8.0% 6.0%

EBITDA 13,528 18,323 24,022 31,293 40,504 52,091 67,748 86,654 1,09,003 1,34,842 1,64,028 1,96,187 2,26,247 2,55,927 2,83,901 3,08,761
%margin 9.0% 9.4% 9.7% 9.9% 10.1% 10.3% 10.7% 11.1% 11.5% 11.9% 12.3% 12.7% 13.1% 13.4% 13.8% 14.1%

D&A (1,590) (2,099) (2,693) (3,433) (4,177) (5,263) (6,264) (7,346) (8,490) (9,667) (10,841) (11,972) (12,765) (13,368) (13,744) (13,869)

EBIT 11,938 16,224 21,329 27,860 36,327 46,828 61,484 79,308 1,00,513 1,25,175 1,53,187 1,84,215 2,13,482 2,42,559 2,70,157 2,94,892

NOPAT 7,879 10,708 14,077 18,387 23,976 30,906 40,580 52,343 66,339 82,616 1,01,103 1,21,582 1,40,898 1,60,089 1,78,303 1,94,629

Add: D&A 1,590 2,099 2,693 3,433 4,177 5,263 6,264 7,346 8,490 9,667 10,841 11,972 12,765 13,368 13,744 13,869

Less: Capex (9,156) (10,497) (12,117) (13,732) (14,621) (15,790) (17,225) (18,733) (19,952) (20,784) (21,140) (20,951) (19,148) (18,269) (16,951) (15,256)

Less: Change in NCWC (1,714) (1,332) (2,681) (3,289) (4,005) (4,839) (5,742) (6,498) (7,189) (7,760) (8,154) (8,313) (6,709) (5,822) (4,606) (3,106)

Unlevered Free Cash Flows (1,401) 977 1,972 4,799 9,528 15,540 23,877 34,458 47,688 63,739 82,651 1,04,290 1,27,806 1,49,366 1,70,490 1,90,136

Terminal Value 24,43,159

Total Unlevered Free cash
flows (1,401) 977 1,972 4,799 9,528 15,540 23,877 34,458 47,688 63,739 82,651 1,04,290 1,27,806 1,49,366 1,70,490 26,33,295

time factor (mid-year

convention) 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 10.5 11.5 12.5 13.5 14.5
discount factor 0.94 0.84 0.74 0.66 0.59 0.52 0.46 0.41 0.36 0.32 0.29 0.25 0.23 0.20 0.18

PV of unlevered FCF 921 1,650 3,565 6,283 9,098 12,411 15,903 19,540 23,188 26,696 29,907 32,540 33,764 34,216 4,69,213

EV 7,18,894
Terminal value as %of EV 60.6% 29.93
Avenue Supermarts: DCF (2/2)

Enterprise Value (INRmn) WACC

718894 11% 12% 13% 14% 15%

3.5% 7,51,095 6,96,091 6,52,667 6,17,514 5,88,474

Enterprise Value (INRmn) 7,18,894
4.0% 7,86,911 7,23,992 6,75,055 6,35,905 6,03,874
Less: Market Value of Debt (4,393)
Terminal Growth Rate
4.5% 8,28,236 7,55,612 7,00,077 6,56,233 6,20,740
Add: Cash 5,602
5.0% 8,76,449 7,91,750 7,28,227 6,78,819 6,39,293
Add: Investments 2,044
5.5% 9,33,428 8,33,448 7,60,130 7,04,063 6,59,799
Less: Minority Interest (6)
Share Price (INR) WACC
Market Value of Equity 7,22,141
1142 10.6% 11.6% 12.6% 13.6% 14.6%
# of outstanding shares (mn) 632,084
2.5% 1,132 1,057 998 949 908

3.5% 1,235 1,139 1,063 1,003 954

Target Share Price(INR) 1,142 Terminal Growth Rate
4.5% 1,372 1,243 1,145 1,069 1,008

5.5% 1,563 1,381 1,250 1,152 1,075

6.5% 1,846 1,573 1,390 1,258 1,158

Avenue Supermarts: WACC

Particulars Rate Explanation

10year Govt. bond - Country default spread

Risk Free-Rate (Rf) 6.1%
Source: Aswath Damodaran

Mature mkt premium + Country risk premium

Equity risk premium 6.0%
Source: Aswath Damodaran
Average Unleverd Beta 1.1 Source: Aswath Damodaran Unlevered Betas (Emerging markets)
Cash/Firm Value 0.7%
Average unlevered beta adjusted for cash 1.1
Gross Debt (INR mn) 4,393
Current Mkt Cap (INR mn) 8,26,766
Gross Debt/Current Mkt Cap 0.5%
Target Capital Structure (D/E) 5.0%
Tax Rate 34% Effective Tax Rate
Levered Beta 1.2
Cost of Equity 13.0% 95.2%
Cost of Debt 8.7% 4.8%
WACC 12.6%
Avenue Supermarts: Trading Comparables

Name EV (INR mn) EV/Sales19E EV/Sales20E EV/EBITDA19E EV/EBITDA20E

Bucket 1-Indian Peers
Trent 1,07,310 4.1x 3.4x 40.4x 31.3x
VMart 49,534 3.2x 2.6x 27.8x 21.2x
Future Retail 2,18,770 1.0x 0.9x 19.0x 15.3x
Spencers 22,958 1.0x 0.9x
Bucket 2-Asian peers
Yonghui Superstores co ltd 8,19,800 1.0x 0.8x 26.9x 19.7x
Siam Makro 3,56,860 0.9x 0.8x 16.8x 15.4x
Bucket 3 - Global peers
Costco 72,80,000 0.8x 0.8x 15.3x 14.6x
Walmart 2,10,90,000 0.6x 0.6x 9.8x 9.8x

Average 1.9x 1.6x 26.0x 20.6x

EV (INR mn) 3,66,557 3,98,401 4,75,883 4,93,653

Enterprise Value (INR mn) 4,33,624

Less: Market Value of Debt (4,393)
Add: Cash 5,602
Add: Investments 2,044
Less: Minority Interest (6)
Market Value of Equity 4,36,870
# of outstanding shares (mn) 632.084

Target Share price (INR) 691

Avenue Supermarts: Transaction Comparables & Stock Price

Announcement Date Target Acquirer EV (INRmn) EV/Sales

3-Sep-18 More Amazon & Samara Capital 85,714 2.0x
5-Oct-17 Hypercity Future Retail 13,388 1.1x
Average 1.6x
EV (INRmn) 2,52,974
Q2FY18-19 Q1FY18-19 Q4FY17-18 Q3FY17-18 LTM Values
Net Revenue 45,594 38,100 40,939 35,083 1,59,715
COGS & SG&A (39,456) (35,155) (36,721) (31,904) (1,43,236)
EBITDA 6,139 2,945 4,217 3,179 16,480

Enterprise Value (INR mn) 2,52,974

Less: Market Value of Debt (4,393) Methodology Stock Price (INR) Weight assigned
Add: Cash 5,602 DCF 1,142 80%
Add: Investments 2,044
Trading Comparable 691 15%
Less: Minority Interest (6) Transaction Comparable 405 5%
Market Value of Equity 2,56,221
# of outstanding shares (mn) 632.084
Target Price (INR) 1,038

Target Share price (INR) 405

Avenue Supermarts

Avenue Supermarts revenue split Retailer’s Gross Margin across different categories in FY16

2014 2015 2016 2017 2018 Gross Margin

Industry Average
Foods 53.3% 52.8% 53.1% 53.5% 51.6% Benchmarks
Food and Grocery* 12-25%
Non-Foods 21.5% 21.2% 20.6% 19.9% 20.0%
Apparel* 30-50%
General Merchandise & Apparel 25.2% 25.9% 26.4% 26.8% 28.4% Non-Food FMCG* 12-35%
General Merchandise 25-30%
Accessories 20-45%
Furniture & furnishing 30-40%
E-commerce retail sales value (INR bn) and growth rate (%) Footwear* 30-55%
Smart Electronics 7-16%
Retail Value Others 23-27%
% Y-o-Y
Year RSP excl. sales
Growth
tax
2010 82 40.5%
Competitive positioning
2011 111 35.0%
2012 156 40.5%
Revenue/sq. ft.
2013 227 45.7% Company Gross Margin
(INR)
2014 575 153.4%
D Mart 16% 32918
2015 760 32.2%
Trent 52% 11168
2016 1450 90.7%
Spenser 21% 18336
2017 1960 35.2%
Future Retail 26% 5681
2018(P) 2589 32.1%
V-Mart 32% 9876
2019(P) 3366 30.0%
2020(P) 4331 28.7%
2021(P) 5436 25.5%
2022(P) 6686 23.0%