Avenue Supermarts Ltd.
Avenue Supermarts, the owner of the most profitable and one of the leading supermarket chains in India – Dmart. As compared to its peers that operate under a lease model, Dmart’s ownership based business model has borne well for the company in terms of earning consistent profits. Their robust store operating metrics has resulted in better return ratios despite being capital intensive. Their mantra – “Everyday low cost /Everyday low price” has led D-Mart to offer higher discounts compared to other retail players but this has also impacted their margins.
FY20 began on a good note for Dmart with margins expanding to 10.3% (highest since the past 6 quarters). Revenue increased by 27%yoy with the addition of 8 new stores (which was largely a spill-over from the previous quarter but this healthy growth is likely to continue in FY20). PAT increased by ~34% yoy despite an increase in Interest and depreciation costs.
The company is in aggressive expansion mode. Their cluster based expansion strategy has resulted in ~21 new store openings every year since the past 5 years. Whenever the company opens a new store in an existing locality, revenue from that store grows at a much faster pace than that of an existing store. This results in a better RoIC. Going forward, expansion is expected to be far more aggressive based on – 1) the company is considering entering into long term lease contracts and 2) BOD has recently approved issuance of 2.5cr equity shares through a qualified institutions placement this would help with the store additions (and not impact the debt level).
Avenue Supermart’s growth story is likely to continue in FY20 as well. Their revenue trajectory is sustainable aided by steady same-store sales growth (SSSG) along with the addition of new stores. With lower corporate tax rates, negligible debt, falling property prices and weakening competition, the retail chain is perfectly placed to ramp up its store count. However, the intense price competition and the possible lease cost will exert pressure on the bottom line.
The company has a strong financial position. By keeping their SKU’s low, the company’s inventory turnover is much higher as compared to its peers. Consequently, this has lead to a better cash conversion cycle. Back in 2017, with the proceeds from the IPO, company reduced its debt considerably. Their debt/equity stands at 0.1x despite being capital intensive. Their RoE and RoCE is 17.45% and 25.57% respectively.
A stock that retraces only 38.2% of the swing is in a major bull run. The 1239 is just the 38.2% of the entire swing from where the stock bounced back from. The recent fall in May 2019 again halted at the same zone and then moved up. The breakout from the previous highs in Sep-19 was with a big bull candle. Break of the zone with a bull candle is an indication that the bulls are now preparing to take the stock higher. The stock has halted at the 61.8% of the Fibonacci extension. At the same zone we also have a trend line resistance. The 61.8% of the Fib extension is the first major resistance the counter faces post the breakout. Further a base formation is also required post the breakout. A retest of the breakout zone is required to validate a breakout. Hence one can buy at two place one around the 1770 levels where a higher base could be formed and the second at the breakout zone at 1660. As stated earlier this stock is in a strong bull trend and hence the dips are a very good buy in the counter. The Fibonacci extension at 2360 is the first target above the 1931 levels and then at 3054 which is the 161.8% of the swing selected.