Consistent revenue and profit growth, steady same store sales and a good business model makes the IPO of Avenue Supermarts (D-Mart) attractive. Investors with an appetite for risk can subscribe to the issue.

The company is in the retail business, selling products such as food and groceries (55 per cent of revenues), home and personal care products (20 per cent of revenues) and general merchandise, such as crockery, furniture, garments, footwear, and home appliances (25 per cent of revenues).

It operates about 118 stores, predominantly across Maharashtra, Gujarat, Telengana and Karnataka. D-Mart is raising about ₹1,870 crore to repay a portion of its debt, redeem NCDs and construct new stores and purchase fitments for the same. D-Mart’s business is somewhat similar to listed companies such as Future Retail, Trent and Reliance Industries (i.e. Reliance Retail).

A comparison of valuations shows that D-Mart is not expensive. At the price band of ₹295-299, D-Mart will trade at 35-36 times its annualised earnings for the nine months ended December 2016 on the post-issue equity. Future Retail trades at 37.5 times and Trent, at 73.7 times.

What clicks for D-Mart While the retail business per se is capital intensive, D-Mart stands out due to its business model. A majority of the existing stores are own stores, thus helping the company save on fixed costs, such as rent. Secondly, the company follows a cluster-based approach when expanding its network rather than spreading its wings far and wide. This implies that it saves on supply chain costs. Out of the 118 stores currently, about 59 are located in Maharashtra and 27 in Gujarat. In the next few years, it plans to follow the same cluster-based approach to deepen the network in other southern and western States.

Thanks to the tight leash on costs, D-Mart has been able to offer low prices to consumers every day and maintain consistent footfalls rather than come up with ad hoc promotional offers to attract customers. Operating margins are also good for the same reasons.

Despite the low-margin food and grocery business accounting for 50-60 per cent of revenues, operating margins in the last few years have consistently been 6-7 per cent. To put this in perspective, Reliance Retail, with its multiple format stores across apparel, electronics, footwear, and others, outside of food and grocery, has EBIT margins of only about 2-3 per cent. D-Mart’s margins have a chance for improvement over the longer term, as it expands its private label business across the segments it operates. It is currently only at a nascent stage.

D-Mart also boasts a good pedigree, being promoted by RK Damani, a well-known stock broker. It has CB Bhave, former SEBI chairman, as an independent director on its board.

Financials Revenue has grown at a compounded annual growth rate of 40.4 per cent since fiscal 2012, to ₹8,606 crore at end of fiscal 2016. Net profit has grown by a higher 59.1 per cent over this period to ₹387.4 as of March 2016. The company’s same store sales growth (i.e. growth in revenues from the same stores which have been in operation for at least 24 months) stands at around a healthy 20 per cent since fiscal 2012. This high growth rate may have been achieved due to better understanding of customer needs in its clusters. The company has also not gone overboard on new store openings in the last five years, adding only 10-20 new stores each year. Its debt-to-equity ratio stands at 0.74.

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