The month of October saw Avenue Supermarts announce the quarterly results for Q2 FY19. Let us have a quick look at the results. Before we look into the results, I would recommend you to look at the below links.

Financial Analysis

Q2 FY19 (Crores) Q2 FY18 (Crores) Growth (%)
Revenue 4886.38 3528.13 38.49%
Expense 4537.33 3235.07 40.25%
PBT 349.05 293.06 19.01%
PAT 225.74 191.04 18.16%
  • Revenue: The revenue growth for Q2 was extremely good at about 38%. In comparison, Q1 saw a revenue growth of 26.3%, Q4 FY18 saw revenue growth of 22.5% and Q3 FY18 saw a revenue growth of 22%. Clearly revenue growth for Q2 far outstripped the revenue growth for the past 3 quarters.
  • EBITDA: What came in as a surprise was the EBITDA growth. EBITDA grew by 22.6% to 390 crores. In Q1 EBITDA grew by 39.4% to 423 crores. In Q4 FY18 EBITDA grew by 41.8% to 294 crores and in Q3 FY18 the EBITDA grew by 46.5% to 422 crores. Even the EBITDA margin saw a drop and came in at 8.1% in Q2 FY19. In Q2 FY18 the EBITDA margin was 9.1%.

The drop in EBITDA and the EBITDA margin was definitely a surprise. We know that higher EBITDA is not sustainable but the company should have at least held on to the margins. I believe there are two reasons for this:

  • Reason 1: Company MD informed that they were concentrating on revenue growth in this quarter which would have led to higher discounts which in-turn would have impacted the EBITDA. I am not sure of the reason why the company chased Revenue growth in this quarter. Management has always said that the scope of growth is huge for all players so lowering of margins to aid revenue growth should ideally not be due to competition.
  • Reason 2: In FY18, Dussehra festival was in September, hence all the Dussehra sales were accounted for, in Q2 of FY18. Whereas in FY19 Dussehra was in October and the sales would be accounted as a part of Q3 FY19. One may argue that this should not have mattered as sales growth in Q2 FY19 was pretty good. But we should note that during festivals, people tend to buy cloths, utensils, home decoration items (like curtains, bedsheets) etc. All of these are high margin products. Since Q2 missed sales of these items, margins are bound to get impacted.
  • PAT: Since EBITDA is down, even PAT is down. PAT grew by a dismal 18%. In Q1 the PAT had grown by about 43%. In Q4 FY18 the PAT had grown by 73% and in Q3 FY18 the PAT had grown by 63%.
  • The EPS increased to 3.62. The growth in PAT and growth in EPS are in-line with each other for this quarter which is as expected.
Q2 FY19 Q2 FY18 Growth (%)
EPS 3.62 3.06 18.3%

Expenses

Q2 FY19 (Crores) Q2 FY18 (Crores) Growth (%)
Purchase of Stock in trade 4394.61 3266.91 34.51%
Employee Benefit expense 84.20 69.72 20.76%
Finance Cost 10.08 10.94 -7.86%
Other Expense 224.46 178.37 25.83%
  • Purchase of Stock in Trade: This is the major expense for the company which is expected. Let us now calculate its contribution as a percentage of the total revenue which is captured in the table below. As EBITDA numbers indicated, this number is pretty high at 90%. In Q1 FY19 it was about 86%. In Q4 FY18 it was 88% and in Q3 this value was 77%.  So, one of the two has happened in Q2:
    • The company bought more items and was not able to sell most of the items leading to inventory pileup.
    • The company sold the items but at a discount leading to lower margins.

I believe it might be a combination of both the factors. The company might have stocked items for Dussehra and also it might have sold items at a discount leading to lesser revenue. An interesting point to note is that in Q2 FY18, the purchase of stock as a percentage of revenue was 92%!

Q2 FY19 (%) Q2 FY18 (%) Growth (bps)
Purchase of Stock in trade as a % of revenue 90% 92.59% 259
  • Employee Benefit Expense: Employee benefit expense includes the salaries of permanent employees. The expense for the contract employees is captured in “other expenses”. Year-on-year the expenses as a percentage of revenue has decreased by 25 bps. Hence in absolute number terms the employee expense has increased but as a percentage of revenue the number has decreased. At 1.72% this is clearly a negligible amount.
Q2 FY19 (%) Q2 FY18 (%) Growth (bps)
Employee expense as a % of revenue 1.72% 1.97% 25
  • Finance Cost: In absolute number terms the finance cost has remained constant. Finance cost as a percentage of revenue has come down by about 11bps to 0.20%. We know that the company has paid back most of the loans using the proceeds of the IPO which in-turn has resulted in lower finance costs. The company is virtually debt free and can take on more debt (if needed) in order to trigger faster store expansion in future.
Q2 FY19 (%) Q2 FY18 (%) Growth (bps)
Finance Cost as a % of revenue 0.20% 0.31% 11
  • Other Expense: For Dmart, the ‘other expense’ is a sizeable number. The company brackets contract employee (i.e. instore employee) payment, lease rentals, store operation costs like electricity bills, repairs and maintenance, legal fees, travel expenses for key employees etc as other expense. The table below shows the other expenses as a percentage of the overall revenue. Year-on-year the other expense as a percentage of revenue has decreased by 46 bps. Hence in absolute numbers, the other expense has increased but as a percentage of revenue this has seen a decrease. By the way in Q1 FY19 this was 4.64%
Q2 FY19 (%) Q2 FY18 (%) Growth (bps)
Other Expense as a % of revenue 4.59% 5.05% -46

In summary, in Q2 FY19 we saw the expenses grow faster than the revenue which has impacted the PAT.

Utilization of IPO Proceeds

Post the IPO, the proceeds earmarked for general corporate purpose has more or less been exhausted. In Q2 FY19 the company did not utilized any additional money earmarked to repay the loans. Hence an amount of 181 crores is still left for repaying back the loans. The company utilized about 66 crores in building new stores and putting fitouts in these shops. However the company has managed to open only 3 stores in this quarter. This indicates that the amount spent on fitouts should ideally be for the new shops that are planned for H2 of FY19.

IPO Plan (Crores) Utilized as of Q2 FY19 (Crores) Utilized as of Q1 FY19 (Crores) Utilized as of Q4 FY18 (Crores) Utilized as of Q3 FY18 (Crores) Utilized as of Q2 FY18 (Crores) Utilized as of Q1 FY18 (Crores)
Repayment of NCDs/Term Loans 1080 899 899 864 864 864 864
Construction of fitouts for new stores 366.6 211.30 144.93 94.02 45.9 9.89 0
General Corporate purposes 423.4 423.05 423.05 420.25 419.79 418.27 417.45

Balance Sheet Analysis

Please note that I am highlighting only the important aspects of the balance sheet.

Q2 FY18 (Crores) End of FY18 (Crores) End of FY17 (Crores) End of FY16 (Crores)
Assets (Non-Current)
Property plant and Equipment 3559.67 3233.65 2515.58 2061.26
Capital work in progress (i.e. new stores under construction) 291.82 147.05 152.89 81.68
Investment Properties (i.e. properties owned and rented by Dmart to other companies/entities) 15.93 16.32 27.37 13.65
Investment in Subsidiaries (ex: E-Commerce) 154.6 129.50 36.61 15.99
Assets (Current)

Note: Current assets are merely a snapshot of that specific day.
Inventories 1446.53 1147.03 933.15 660.20
Trade Receivables (?? Why does a B2C retailer have trade receivables!) 72.32 33.35 20.99 8.37
Cash and Cash Equivalents 93.09 64.04 30.25
Other Current Assets (mostly Advances given to suppliers) 69.74 79.47 57.82 47.77
Liabilities (Non-Current)
Shareholder Equity 5129.04 4642.71 3837.06 1511.86
Borrowings (NCD and Term loans) 123 246.00 980.92 908.46
Liabilities (Current)
Current Borrowings 176 7.25 122.66 113.49
Trade payables 452.48 315.87 266.75 200.46
Others (currently maturing NCD and Term loans) 406.72 330.44 492.83 253.52

Assets:

  • Property plant and Equipment: In the first half of FY19, the company has spent about 326 crores in building tangible assets. In the entire FY18 the company spent close to 718 crores in constructing new stores and building other tangible assets. In the first half of FY18 the company had spent only about 150 crores. Hence, the bulk of the CAPEX amounting to about 550 crores came in the second half of FY18 that resulted in 19 new stores being opened in H2 FY18. A similar store count pattern can be expected for FY19 as well.
  • Capital work in progress: Capital work in progress represent the money spent on stores that are still getting built. The amount is Q2 FY19 was much higher at 291 crores compared to the amount spent in Q4 FY18 which came in at 147 crores. So, clearly, many more stores are still under construction.
  • Current Assets: Inventories: In Q2 FY19, the company saw a pileup of inventories and the number stood at 1446 crores. Even though Inventory numbers are dynamic and reflect the state on a particular date, we can clearly see from historical data that Inventories have constantly being going up. As the number of stores increase the company has to stock more items in the marts and hence the higher inventory number. It could also be the effect of festivals. The company might have stocked up items for Dussehra. With an inventory turnover of 28 days it gets sold pretty quickly so I am not too worried about inventory pileup.
    • When Inventories increase the trade payables also generally increases. This can be seen in the liabilities. In Q2 FY19, the trade payables has increased by 43% to 452 crores.

Liabilities:

  • Shareholder Equity: The major liability for the company continues to be the shareholder equity. As I have been saying, for the company it is a liability, but for a shareholder it is a good news to know that the net-worth of the company is its major liability.
  • Borrowings: Post the IPO, the borrowings have dropped substantially. The company managed to payback most of the loans using the IPO proceeds.
    • Please also note the spike in current liabilities. This indicates that the some of the long term borrowings are due this year and hence some of these borrowings have got converted to current borrowing.

Over all the balance sheet continues to remain healthy.

E-Commerce

  • I did not see any additional information being shared by the company on the e-commerce front. In Q1 we noticed that the Dmart ready store count had reached to 58. I do not have any new numbers for these pick-up stores.
  • The company MD has admitted that the company is going through a learning curve for e-commerce [2]. When quizzed about e-commerce Neville, the company MD, has the following to say:

“I don’t understand much there. Only thing I observe is that most countries can’t even afford to have two large digital marketplace players, whether it is merchandise, social, food delivery or taxi rides. The winner takes all as an idea is something that is worth thinking.”

So the management realizes that in eCommerce space, the dominant player laughs all the way to the bank. Dmart is neither a dominant player nor does it have the requisite experience. It appears like e-commerce is going to be a very bumpy ride for Dmart. e-commerce ka ladoo, Dmart khayee to pachtaye aur na khayee to bhi pachtayee.

  • One thing that made me uneasy while reading the interview of MD [2] was the fact that the company does not maintain lot of information about its customers. Even the e-commerce arm does not capture enough information about its customers. With AI digging deeper into all aspects of life, the company should be thinking about using its data for more insights into customers. I am surprised that the company does not deem it as important.

Summary

  • Revenue growth was extremely good but EITDA and PAT suffered in this quarter.
  • The company was able to open only 3 new stores in Q2 FY19. In Q1 the company had opened 2 stores. Dmart generally sees a spate of store openings towards Q4 of each year.
    • By the way in the interview in [2], Nivelle re-iterated his desire to speed up the store openings by going into the lease model. This might reduce CAPEX but it will increase the OPEX. It will be interesting to see the impact of this on the bottom line.
  • Overall, bottomline wise this was a disappointing quarter. It could be due to Management’s focus to increase revenues. It could also be due to the fact that the festival season got pushed to Q3.

Reference

Disclaimer

I am not a SEBI registered research analyst. The information provided above is my subjective view based on what I have read on different websites, annual reports, and quarterly reports of various companies which I assume to be accurate. The above information should not be treated as an offer/advise to purchase a specific stock/investment instrument. Since these are my subjective opinions, I could be wrong in my understanding or presentation of information. I do not claim that the above information is complete or can be relied upon as such. I cannot be held responsible for any loss or damage caused due to any inadvertent error in the above information. I will not be liable for investment decisions made by readers of this article based on the above information. I am not an investment advisor. I may or may not have position in the above company. Please consult your investment advisor for all your investment needs.