Avenue Supermarts DCF Valuation: Value per Share of Rs1,997.15
Avenue Supermarts has grown at CAGR of more than 25% in the last five years and its market cap crossed Rs 1.5 trillion mark in Feb 2020. The current market price is at Rs2492.10, trading at 124.1 times of earnings against an industry average of 97.18 times PE (moneycontrol.com). The stock overtook NTPC, Indian Oil Corporation (IOCL), Coal India, UltraTech Cement and HDFC Life Insurance Company in the past five weeks to stand at number 20th position in the overall market capitalisation ranking. (Business Standard, Feb 2020)
Avenue Supermarts has all the attention of the stock market participants and a discounted flow valuation has been presented below. The promoter shareholding is around 80% and as per SEBI norms they need to shed another 5.21% before the end of the current financial year. Assuming that the QIP and proposed OFS fetches a total of Rs8000 crores in the current year, the DCF valuation gives a value of Rs 1997.15 per share. The assumptions used in this model are described below.
The methodology used is based on Prof. Damodaran's book on Valuation (http://pages.stern.nyu.edu/~adamodar/) and financials have been sourced from moneycontrol.com.
Key Drivers of Value
1. Revenue Growth: The biggest driver of value for Avenue Supermarts is its revenue growth. As of Jan 2020 Investor Presentation, 51% of revenues come from food segment, 20% from Non Foods FMCG and 29% from General Merchandise and Apparel. These are segments that have potential of growing at 20 to 30% per annum in the coming years. Moreover, organized retail constitutes only 10% of the total retail market in India, therefore, the potential is huge with improving demographics.
2. Operating Margins: Those of us who have visited D-Mart stores can relate to the no frills and value retailing focus. Their deep knowledge of optimal product assortment, strong supplier network, high operating efficiency and lean cost structures help them in maintaining their operating margins now and in the future. (Investor Presentaton, Jan 2020)
3. Risk Profile: By consistently generating increasing revenues quarter after quarter, Avenue Supermarts is able to reduce its risk defined in terms of beta ie., variability in stock price returns. Avenue Supermarts beta calculated on a three year monthly basis (since its listing on stock market) is much lower than the sector average. (0.66 vs 0.87)
Link to DCF Valuation Model for Avenue Supermarts:
https://drive.google.com/open?id=1YlV4ljKwMdeuw1CC_0jZ-zwLBpNno-9k
4. Increased investment and steady foot print expansion: For every rupee of capital that is invested, Avenue Supermarts is able to generate revenues of close to three rupees. Avenue Supermarts has increased its foot print to 196 stores as of Jan 2020 and plans to increase its foot print further. In the current year, they are going to raise Rs8000 crores by sale of promoter equity to institutional investors and they are going to use this money for investment and expansion.
5. Tax Reduction: The marginal tax rate for Avenue Supermarts has decreased from 34% to 22% from the current financial year. Therefore, they will be encouraged to payoff their debt and increase their investments further.
6. Strong Management Team and Human Capital: Avenue Supermarts has a strong management team and entrepreneurial background. They nurture their human capital by providing training and rewards to their employees. (Annual Report 2018-19)
7. Integration with technology: Avenue Supermarts integrates and streamlines its business processes with the help of technology to support key aspects of business including cash management systems, in-store systems, logistics systems, human resources, projects management, maintenance and other administrative functions. (Annual Report 2018-19)
8. Barriers to Entry: Foreign Direct Investment (FDI) in multi-brand retail is limited to 49%, so foreign players have to make investments in partnership with domestic players. This limits foreign entry into retail and provides much needed and valuable time for domestic retailers like Avenue Supermarts. Given the sheer size of the domestic retail sector, competition from Reliance Retail, Future Retail, Amazon More Retail, Walmart-Flipkart and others may not limit their revenues and margins.
The Way Ahead
Avenue Supermarts needs to stick to its value retailing strategy, steadily expand its footprint and integrate its brick and mortar business with the e-commerce model.
Avenue Supermarts has all the attention of the stock market participants and a discounted flow valuation has been presented below. The promoter shareholding is around 80% and as per SEBI norms they need to shed another 5.21% before the end of the current financial year. Assuming that the QIP and proposed OFS fetches a total of Rs8000 crores in the current year, the DCF valuation gives a value of Rs 1997.15 per share. The assumptions used in this model are described below.
The methodology used is based on Prof. Damodaran's book on Valuation (http://pages.stern.nyu.edu/~adamodar/) and financials have been sourced from moneycontrol.com.
Key Drivers of Value
1. Revenue Growth: The biggest driver of value for Avenue Supermarts is its revenue growth. As of Jan 2020 Investor Presentation, 51% of revenues come from food segment, 20% from Non Foods FMCG and 29% from General Merchandise and Apparel. These are segments that have potential of growing at 20 to 30% per annum in the coming years. Moreover, organized retail constitutes only 10% of the total retail market in India, therefore, the potential is huge with improving demographics.
2. Operating Margins: Those of us who have visited D-Mart stores can relate to the no frills and value retailing focus. Their deep knowledge of optimal product assortment, strong supplier network, high operating efficiency and lean cost structures help them in maintaining their operating margins now and in the future. (Investor Presentaton, Jan 2020)
3. Risk Profile: By consistently generating increasing revenues quarter after quarter, Avenue Supermarts is able to reduce its risk defined in terms of beta ie., variability in stock price returns. Avenue Supermarts beta calculated on a three year monthly basis (since its listing on stock market) is much lower than the sector average. (0.66 vs 0.87)
Link to DCF Valuation Model for Avenue Supermarts:
https://drive.google.com/open?id=1YlV4ljKwMdeuw1CC_0jZ-zwLBpNno-9k
4. Increased investment and steady foot print expansion: For every rupee of capital that is invested, Avenue Supermarts is able to generate revenues of close to three rupees. Avenue Supermarts has increased its foot print to 196 stores as of Jan 2020 and plans to increase its foot print further. In the current year, they are going to raise Rs8000 crores by sale of promoter equity to institutional investors and they are going to use this money for investment and expansion.
5. Tax Reduction: The marginal tax rate for Avenue Supermarts has decreased from 34% to 22% from the current financial year. Therefore, they will be encouraged to payoff their debt and increase their investments further.
6. Strong Management Team and Human Capital: Avenue Supermarts has a strong management team and entrepreneurial background. They nurture their human capital by providing training and rewards to their employees. (Annual Report 2018-19)
7. Integration with technology: Avenue Supermarts integrates and streamlines its business processes with the help of technology to support key aspects of business including cash management systems, in-store systems, logistics systems, human resources, projects management, maintenance and other administrative functions. (Annual Report 2018-19)
8. Barriers to Entry: Foreign Direct Investment (FDI) in multi-brand retail is limited to 49%, so foreign players have to make investments in partnership with domestic players. This limits foreign entry into retail and provides much needed and valuable time for domestic retailers like Avenue Supermarts. Given the sheer size of the domestic retail sector, competition from Reliance Retail, Future Retail, Amazon More Retail, Walmart-Flipkart and others may not limit their revenues and margins.
The Way Ahead
Avenue Supermarts needs to stick to its value retailing strategy, steadily expand its footprint and integrate its brick and mortar business with the e-commerce model.
Investors' discretion is advised.
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