Avenue Supermarts, the company behind D-Mart retail chain, is going to be the next important IPO in the Indian markets. Even before more details like price and dates of the IPO are finalized, DMart IPO is reported to be actively traded in unofficial grey market at strong premiums. We dug deep into Avenue Supermarts’ draft prospectus to find out more about the company and here is what makes DMart IPO interesting:
Radhakishan Damani as promoter – Radhakishan Damani is a well-known personality among regular share market investors. The ace investor, who is the guru of Rakesh Jhunjhunwala, made bulk of his fortune through value investing in companies like VST Industries, Sundaram Finance, Blue Dart Express and Trent. Radhakishan Damani also locked horns with Harshad Mehta and eventually emerged winner. Damani later put active trading and investing on a temporary hold to concentrate on D-Mart.
Since Damani is a stock market legend, it is obvious that there will be some curiosity around his company but it helps that Avenue Supermarts is an investment-grade business. It is not difficult to imagine other prominent investors like Rakesh Jhunjhunwala getting interested in Avenue Supermarts (as a matter of fact, it is one of the constant talking points between Jhunjhunwala and Damani). Another legendary investor Ramesh Damani already owns 100,000 shares in the company and also serves as an independent director.
No external investor – Despite the frenzy around DMart IPO, it is quite an interesting fact to know that there is no external investor in the firm. Radhakishan Damani directly owns 43.8% in the company while his investment vehicle Bright Star owns another 15.8%. His brother and several other family trusts own the remaining shares.
No OFS (Offer for sale) – Absence of external investors is not necessarily a negative factor as there is no offer for sale (OFS) by such investors or promoters in DMart IPO. Everyone reading IPO Central regularly knows that we are not a fan of OFS IPOs as the company in question gets nothing from such offers. This is not the situation with Avenue Supermarts IPO and the company will issue new shares to raise INR1,870 crore (INR18.7 billion). Out of this, INR1,080 crore will be used towards debt reduction by prepayment or repayment of loans and redemption or earlier redemption of NCDs. Another INR366.6 crore will be used for construction and purchase of fit outs for new stores.
Fast-growing business – Radhakishan Damani’s company attracts immense attention as this is a fast growing business. According to the draft prospectus, the company’s top-line grew from INR2,222.4 crore in FY2012 to INR8,606.1 crore in FY2016. That’s nearly four times in that many years. Its performance prior to FY2012 is also equally impressive as Avenue Supermarts was incorporated in 2000 and opened first store in 2002 only.
Differentiated business model – The company is a pure food and grocery (F&G) retailer and stocks food, toiletries, beauty products, garments, kitchenware, bed and bath linen, and home appliances. D-Mart follows a slightly differentiated business model of operating discount stores in suburbans which help in keeping costs low. D-Mart is usually the lowest priced retailer in the regions it operates and achieves this competitiveness through a combination of various factors such as buying huge volumes at low prices, owning underlying real estate or entering into long-term lease arrangements, following cluster approach and targeting densely-populated residential areas in opening new stores.
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Focused play (no diversification) – Such fast growth is usually credited to diversification into related but separate lines of business. It is particularly true in retailing where players often tend to expand into areas beyond food and grocery (F&G) for better margins. A look at D-Mart’s competitors Reliance Retail and Future Group reveals expansion into digital, home, apparel and footwear is the norm in the industry. However, Avenue Supermarts has stayed focused on the F&G segment through its 15 years of operations.
Robust profitability – Expanding into related areas is often a choice most retailers are forced to make as margins are very thin in core F&G operations while overhead costs are high. Avenue Supermarts is an exception in this manner as well and recorded a profit of INR321.2 crore in FY2016. This is up from INR60.4 crore in FY2012. It is noteworthy to highlight that not just profits, but profitability also improved in these years.
Avenue Supermarts’ 3.7% consolidated profit margin is quite strong for an F&G retail business. It helps to know that Future Retail – closest listed competitor of Avenue Supermarts – registered a margin of 1.9% in the first nine months of FY2017. Another competitor Trent achieved 6.3% profit margin in the same nine months but it operates largely in apparel retailing (Westside) while the smaller F&G business is run as a joint venture with TESCO.
Avenue Supermarts’ consolidated financial performance (in INR crore)
|Profit after tax||60.4||93.9||161.4||211.7||321.2|
|Profit margin (%)||2.7||2.8||3.4||3.3||3.7|
We will publish detailed review and analysis of DMart IPO in the coming days once the company finalizes vital details but in the meanwhile, feel free to head to our discussion page to know what fellow investors think about DMart IPO.
PS: The company has announced that DMart IPO will open for subscription on 8 March and the listing will be on 21 March 2017.