Recommendation from Retail Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year. 

AVENUE SUPERMARTS LTD : GROWING FROM STRENGTH TO STRENGTH

HERE IS WHY
✓Huge growth potential
✓Focus on cost reduction
✓Good returns on capital employed

Avenue Supermarts Ltd. owns and operates one of India’s biggest retail chain stores – DMart. DMart is a one-stop supermarket chain which aims to offer customers a wide range of basic home and personal products under one roof at competitive prices. With one store in 2002, DMart now has stores in 234 locations in various states. DMart follows a ‘everyday low cost - everyday low price’ strategy which aims at procuring goods at competitive prices, using operational and distribution efficiency and thereby delivering value for money to customers by selling at competitive prices.

The company reported net sales of Rs 24,143.06 crore in FY21 as against Rs 24,870.20 crore in FY20, which is a decline of 2.92 per cent. The company reported PBIDT of Rs 1,939.26 crore in FY21 and Rs 2,188.3 crore in FY20, which is an 11.38 per cent decline. The PAT also dropped by nearly 15.5 per cent to Rs 1,099.43 crore in FY21 from Rs 1,300.98 crore in FY20. The company has reported cash from operating activities of Rs 1,375 crore in FY20 as against Rs 1,280 crore reported in FY20 – a growth of 7.42 per cent YoY. FY21 has not been the best year for many companies and DMart was no exception. With lockdown restrictions across the country in 2020-21, the key financial parameters like revenue, EBITDA and PAT have seen decline in growth.

The company’s net sales were at Rs 7,411.68 crore in March 2021, up by 18.47 per cent from Rs 6,255.93 crore in March 2020. PBIDT was Rs 612.66 crore in March 2021, up 46.80 per cent from Rs 417.33 crore in March 2020. The quarterly net profit was at Rs 413.87 crore in March 2021 against net profit of Rs 271.28 crore in March 2020, an increase of 52.56 per cent. EBITDA margin stood at 8.3 per cent in Q4FY21 as compared to 6.7 per cent in Q4FY20. PAT margin stood at 5.5 per cent in Q4FY21 as compared to 4.3 per cent in Q4FY20. Basic earnings per share (EPS) for Q4FY21 stood at Rs 6.39 as compared to Rs 4.25 for Q4FY20.

The company has added 13 stores in Q4FY21. This is a good performance despite the disruption in construction work and demand weakness. The Q4FY21 performance was led by lockdowns easing in the states and stores operating for normal working hours. DMart improved its focus on the e-commerce business and has expanded its presence in the MMR region as also commenced servicing four new cities – Ahmedabad, Pune, Bangalore and Hyderabad. Reduction in debt and lower tax will support PAT growth. The company has repaid all its long-term debts by using its proceeds from the recent QIP issue.

DMart has strong recovery potential given its healthy balance-sheet. It is well-placed in the domestic retail industry given its strong execution capabilities, lower cost of operation and streamlined distribution network, thus aiding it to penetrate into newer markets. The company continues to have robust liquidity position with cash and investments worth Rs 2,600 crore as on FY21. We expect the company to continue its healthy growth trajectory going forward on the back of further easing of lockdowns and revival in discretionary sales such as apparel, laundry, footwear, travel and such relevant ‘out of home’ usage categories. The total debt to equity ratio is 0.0034. On the returns front, it has ROE and ROCE of 15.67 per cent and 20.84 per cent. By virtue of these factors, we recommend our reader-investors to BUY this stock.