Avenue Supermarts IPO set to open: Pros & cons you must know before taking a call

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NEW DELHI: Avenue Supermarts, which owns supermarket chain of DMart, will allot shares to anchor investors later on Tuesday, while the initial public offering (IPO) will kick off on Wednesday.

The Rs 1,870 crore issue will be sold in the price band of Rs 295-Rs 299 per share, which will conclude on March 10. The minimum bid lot would be of 50 equity shares and in multiples of 50 thereafter.

With a host of peers such as Future RetailBSE -0.36 %, Shoppers StopBSE -1.26 % and TrentBSE 1.90 % already in the listed universe, here is what various brokerages said on the issue:

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The brokerage noted that food & grocery (F&G) still has lower penetration compared with other categories such as apparel & accessories, footwear, jewellery & watches and consumer electronics and increased penetration in this category will benefit organised players such as DMart.

“Better RoE profile, strong background of the promoter, strategically located stores, intense focus on maintaining lower costs and strong brand perception are the compelling factors indicating that ASL is a long-term story that will unfold going ahead,” the brokerage said.
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The brokerage noted that even through the company is following a different business model such as ownership (higher capex against lease model) vis-à-vis rental by other large players like such as Future retail and Trent, the key ratios such as average ROE and ROCE were higher at 15 per cent and 10 per cent between FY12 and FY16 against the industry average of 7 per cent and 5 per cent, respectively.

“Further, the company had total debt of Rs 1,240 crore at the end of first nine months of FY17, which is expected to fall by Rs 1,080 crore over FY18-20. This, in turn, could make the company almost debt free, which could further improve the return ratios going ahead. Apart from this, the company has also witnessed a decent growth in terms of sales per store (CAGR: ~18%) and sales per sq feet (CAGR: ~16%) during FY12-16. Any further progress in terms of store addition and more penetration in the existing market may result in strong revenue growth over medium to long term,” the brokerage said.

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The brokerage said the company has expanded its footprint using a cluster-based approach.

“It has strengthened its existing presence in certain regions by opening new stores within a radius of a few kilometers of existing stores and distribution centres. This has ensured the creation of a cluster of stores within a region where the company has developed better understanding of local needs and preferences, enabling the company to tailor its offerings,” Sharekhan said.

“Such clusters have also led to increased penetration and presence in under-served markets, higher cost efficiency due to economies-of-scale achieved in the supply chain and inventory management, and greater and concentrated brand visibility due to focused implementation of marketing and advertising initiatives,” it said.

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The company has reported a CAGR of 40.4 per cent in its revenues in last five years which stood at Rs 8,588 crore in FY16 and its consolidated profit after tax for the period grew at a CAGR of 51.5 per cent at Rs 318.7 crore in FY-16. For the nine months period ended Dec-16 the company’s revenues stood at Rs 8,784 crore and PAT was at Rs 387.4 crore.

The brokerage noted that the IPO is priced at 58 times FY16 earnings (at upper price band) while its nearest peer Future Retail and Trent are trading at 76 times and 125 times, respectively.

“While on FY17 earnings (annualised) basis, the company’s IPO is priced at 36 times at the upper end of the price band, its peers Future Retail and Trent are trading at around 37 times and 20 times, respectively. We believe Avenue Supermarts IPO is attractively priced at current price band considering its financial performance,” it said.