IPO Note - Avenue Supermarts Ltd.(D Mart) - Rating Subscribe

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Captain Sangeeta
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IPO Note - Avenue Supermarts Ltd.(D Mart) - Rating Subscribe

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IPO Note - Avenue Supermarts Ltd.(D Mart) - Rating Subscribe

Valuation & Recommendation

Avenue Supermarts Limited (D mart) stands to gain from operating leverage. At a P/E of 52xs of FY16 EPS. We believe that D Mart. demands a discount to its domestic peers. We assign a Subscribe rating to the IPO.

Avenue Supermarts Limited (D mart) is Mumbai based supermarket chain D-Mart. Company is among
the largest and the most profitable F&G retailer in India. Company offers a wide range of products
with a focus on the Foods, Non-Foods (FMCG) and General Merchandise & Apparel product categories.
The company has incorporated in 2002 and has started growing from there and shown consistent
steady performance. Company has 112 stores located across 41 cities in India. Company operates and
manages all its stores. D mart also operates distribution centers and packing centers which form the
backbone of the supply chain to support its retail store network. Company has 21 distribution centers
and six packing centers in Maharashtra, Gujarat, Telangana and Karnataka.

Value retailing to a well defined target consumer base

The D Mart’s business model is based on the concept of offering value retailing to customers using the
EDLC/EDLP strategy. The EDLC/EDLP strategy is based on offering low prices on an everyday basis by
achieving low procurement and operations cost rather than as special promotion limited to certain
products or to a particular day, week or any other specific period in the year. The customer
acquisition and retention strategy is targeted at lower-middle, middle and aspiring upper-middle
income consumers. The majority of the products stocked by them are essential products forming part
of basic rather than Discretionary spending, due to which that their business is not materially affected
by seasonality or temporarily depressed macro-economic conditions. The EDLC/EDLP strategy requires
us to minimize costs of procurement, supply and operation to achieve low prices for customers on a
daily basis. The company focuses on providing such low prices across product categories and product
subcategories within these categories everyday rather than on a particular day of the week or any
specific period of the year.

Steady footprint expansion using a distinct store acquisition strategy and ownership model
The company’s business has grown rapidly in recent years, primarily through expansion of store
network from one store in 2002 to112 stores as of September 15, 2016 across eight states in India,
concentrated in western and southern India. Key highlights of expansion in the last four Fiscals are set
out below:

High operating efficiency and lean cost structures through stringent inventory management using
IT systems

The company has benefitted from in-depth understanding of local needs and ability to respond quickly
to changing consumer preferences. This has been achieved in part due to advanced IT systems. Use of
IT systems for procurement, sales and inventory management which enables them to identify and
quickly react to changes in customer preferences by adjusting products available, brands carried,
stock levels and pricing in each of stores and effectively monitor and manage the performance of
each of stores. Their IT systems are built with a wide range of data management tools specific to
business needs and support key aspects of business, including procurement, sales and inventory
control on a daily basis. IT systems also support cash management, in-store systems, logistics systems,
human resources and other administrative functions. Their IT systems run on ERP applications and are
robust and scalable. Together with supply chain management systems and internal controls to
minimise product shortage and the occurrence of out-of-stock situations and pilferage, they are able
to operate efficiently and productively with minimal disruptions to day to day operations. Inventory
Turnover Ratio (computed by dividing revenue from operations by average inventory, which is an
average of opening inventory and closing inventory) was 14.32, 14.03 and 14.18, respectively in Fiscal
2014, 2015 and 2016.
Aviation is my first love. Stocks are my second love. My father is a famous investor. I am still learning the ropes :)
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