Avenue Supermarts came out with the results for Q2 FY20 in October. 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

Below are the consolidated results for DMART for Q2 of FY20. Note the impact of lower corporate taxes. PBT growth was 20.6%, however due to lower corporate taxes introduced by the government, PAT shows a substantial growth of 46.1%. If we remove the impact of corporate taxes then the PAT growth would be in line with revenue growth (i.e. somewhere around 24-25 %).

Q2 FY20 (Crores) Q2 FY19 (Crores) Growth (%)
Revenue 5999 4907 22.3%
Expense 5584 4562 22.4%
PBT 415 344 20.6%
Taxes 96 113 -15%
PAT 320 219 46.1%
  • Revenue: At 22%, the revenue growth was tad disappointing. The historical revenue growth is given below:
Q2 FY20 Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18
22% 27% 32% 33% 38% 26% 23%
  • EBITDA: The EBITDA grew by about 33% to 517 crores. The EBITDA margin was higher at 8.6% compared to 7.9% in Q2 FY19. Management attributes the higher EBITDA margin in Q2, to a better product mix. The table below captures the EBITDA growth over the past few quarters.
Q2 FY20 Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18
33% 41% 28% 7.5% 23% 39% 42%
  • PAT: PAT growth seems to have got a boost predominantly due to lowering of corporate taxes. The table below captures the PAT growth over the past few quarters.
Q2 FY20 Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18
46.1% 21.5% 21.5% 2.1% 18% 43% 73%
  • EPS: The EPS growth was in line with PAT growth.
Q2 FY20 Q2 FY19 Growth (%)
EPS 5.17 3.5 47.7%

Expenses

The table below captures the expenses incurred by the company in Q2 FY20.

Q2 FY20 (Crores) Q2 FY19 (Crores) Growth (%)
Purchase of Stock in trade 5462 4405 24%
Employee Benefit expense 111 89 25%
Finance Cost 19 10 90%
Other Expense 293 238 23%
  • Expenses were pretty much in line with revenue growth. No major surprises here.

Balance Sheet Analysis: (Consolidated)

Please note that I am highlighting only the important aspects of the balance sheet. I am also limiting to standalone numbers for previous years and consolidated numbers from FY19 onwards (as the subsidiaries numbers were too miniscule to have made any difference).

Q2 FY20 (Crores) FY19 (Crores) FY18 (Crores) FY17 (Crores) FY16 (Crores)
Assets (Non-Current)
Property plant and Equipment 4810.80 4274.03 3233.65 2515.58 2061.26
Capital work in progress (i.e. new stores under construction) 403.53 376.84 147.05 152.89 81.68
Investment Properties (i.e. properties owned and rented by Dmart to other companies/entities) 17 18.10 16.32 27.37 13.65
Investment in Subsidiaries (ex: E-Commerce) 237 212 129.50 36.61 15.99
Assets (Current)

Note: Current assets are merely a snapshot of that specific day.
Inventories 2067.54 1608.65 1147.03 933.15 660.20
Trade Receivables (Why does a B2C retailer have trade receivables?) 32.88 64.37 33.35 20.99 8.37
Cash and Cash Equivalents 235.27 124.98 64.04 30.25
Other Current Assets (mostly Advances given to suppliers) 122.28 114.86 79.47 57.82 47.77
Liabilities (Non-Current)
Shareholder Equity 6235.90 5587.45 4642.71 3837.06 1511.86
Borrowings (NCD and Term loans) 275 125.67 246.00 980.92 908.46
Liabilities (Current)
Current Borrowings 550.33 304.15 7.25 122.66 113.49
Trade payables 685.51 463.27 315.87 266.75 200.46
Others (currently maturing NCD and Term loans) 323.35 423.71 330.44 492.83 253.52

Assets:

  • Property plant and Equipment: In the first half of FY20 the company has spent about 536 crores on tangible assets (including building about 14 stores). In FY19 it spent about 1040 crores on tangible assets (including building 21 stores) and in FY18 the company spent close to 718 crores on tangible assets (including 24 stores). Generally the store opening rate increases in second half. So I expect the expenditure on new stores to go up in H2.
  • Capital work in progress: Capital work in progress represents the money spent on stores that are still getting built. We can clearly see that there is more money at work in building new stores as of H1 FY20 compared to entire FY19. This is a clear indication that second half shall see many new stores being opened.
  • Right of use assets: I saw a new line item called right of use assets which, I believe, is related to the leased shops of Dmart. Dmart’s store count comprises of 20 percent shops that are on long lease. Hence, this line item could indicate these leased assets. These leased assets make up about 254 crores as of Q2 FY20.
  • Current Assets: Inventories: As the number of stores increase, the company has to stock more items in the marts and hence the higher inventory numbers for Q2 FY20.
    • When Inventories increase, the trade payables increase as well. This can be seen in the liabilities. Trade payables has increased to 685 crores.
  • Intangible assets: One of the dicey numbers is the Intangible assets. It generally represents the brand value of the company which is an asset. At times, when there are many choices, People tend to buy products based on brand (recall) of a company. Hence company brand is an asset. From what I know, there is no preset method to asses and allocate a number to the brand value. It is at the management’s discretion (in conjunction with inputs from brand rating agencies). Fortunately, Dmart has itemized a modest amount of about 28 crores as intangible assets.

Liabilities:

  • Shareholder Equity: The major liability for Avenue supermarts continues to be the shareholder equity. As I have been saying, for the company it is a liability, but for a shareholder it is good to know that the net-worth of the company is its major liability.
  • Borrowings: Since the company has issued new NCDs in FY20, its borrowing numbers seem to have increased proportionately.

Overall the balance sheet appears to be healthy.

Cash Flow statement: (Consolidated)

The company has shared the cash flow statement as well for H2 FY20. Below are some of the important line items from the cash flow statements. I have omitted the items that were either negligible or not very relevant to the current discussion.

H2 FY20 (Crores) H2 FY19 (Crores)
Cash flow from Operating Activities:
Net Profit Before tax 921.55 727.36
Depreciation and Amortization 174.60 90.98
Increase in Inventory (458.89) (311.67)
Tax Paid (305.19) (238.74)
Net Cash Generated from Operating Activities (A) 567.72 287.42
Cash flow from Investing Activities
Purchase of property, stores, equipment/intangible assets/investment properties (768.29) (608.99)
Net Cash generated from Investing activities (B) (742.30) (366.27)
Cash flow from Financing Activities
Money obtained by issuing commercial paper 690.17 133.13
Money obtained by issuing NCD 200 0
Money obtained from Short term borrowing 270.14 35.88
Repayment of Commercial Paper (670) (0)
Repayment of NCD (123) (35)
Repayment of Short term borrowing (55) (0)
Finance Cost (i.e. Interest Paid) (23.83) (18.53)
Net Cash Generated from Financing Activities (C) 284.99 107.48
 
Net Increase or Decrease in Cash and Cash Equivalents (A + B + C) 110.41 28.63
Total Cash and Cash Equivalents 235.27 96.08
  • Cash flow from Operating Activities: The highlight of the first half of FY20 was obviously the PBT numbers.
    • Inventory: Net cash due to operating activities was dented due to the cash being stuck in the unsold inventory. This is expected from a retailer like Dmart as it needs to stock products. Inventory numbers are merely a snapshot of a particular day. With number of inventory days for the company being about 29 days, all this inventory will eventually get sold.
    • Tax: The cash outgo due to taxes was relatively less due to lowering of corporate taxes.
  • Cash flow from Investing Activities: The major investing activity for Dmart is the construction (and taking on lease) the Dmart stores. The company spent about 768 crores in H2 FY20 compared to 608 crores in H2 FY19. With increase in PBT, the company can afford to spend more on building new properties. This is the beauty of Economics of scale. As the number of stores increase, PBT increases. As PBT increases there is more cash available to the management and hence it can open more stores. As the store count grows it results in higher PBT leading to increased spending on new stores thereby increasing the store count. A self-feeding loop!
  • Cash flow from Financing Activities: The Company was able to make only 567 crores from its operating activities. However it ended up spending close to 742 crores (as investing activities). This gap needs to be bridged and one way is by using long and short term borrowings. In H2 the company issued NCDs worth 200 crores.

The company is steadily increasing profits and using them to build new stores. It is prudently availing loans and issuing NCDs in such a way that the finance costs do not dent its profits.  Overall a healthy cash flow statement.

 

Consolidated vs Standalone (i.e. Subsidiary numbers)

Avenue Supermarts has subsidiaries like Allied Retail Trades Private Limited (for store brand products like Premia), Avenue food Plaza Limited (for food counters outside Dmart like ice cream booths etc), Dmart Ready (for E-commerce). Each of these subsidiaries contributes to the overall growth of the company. Let us have a look at the balance sheet and cash flow numbers for these subsidiaries. Now, the company does not separately provide the details for them. We will have to infer their numbers using the standalone and consolidated numbers.

P&L Numbers for Subsidiaries

The table below captures the P&L for consolidated and standalone. The difference between the two should be the numbers for the subsidiaries.

Consolidated (Crores) Standalone (Crores) Subsidiaries (Crores)
Revenue 5999 5958 41
Expense 5584 5534 50
PBT 415 423 -8
Taxes 96 94 2
PAT 320 333 -13
  • The subsidiary numbers computed by this method are not very convincing to me. Since the revenue sharing model between Dmart and its Subsidiaries are not known, we cannot take these numbers on the face value. A revenue of mere 41 crores for H1 FY20 seems highly unrealistic to me. Mind you this includes the sales numbers for its instore brands like Premia, the sales from E-commerce venture and the Softy Icecreams sold outside Dmart as well ! (Going by the crowd near the Softy stalls, the company should be earning 41 crores selling the softies itself !)
  • The PAT is negative which clearly indicates that the E-commerce venture is not profitable yet.

Balance Sheet for Subsidiaries

The table below captures the balance sheet for the subsidiaries (please look at the last column). One thing that stands out is the fact that the total investment seems to be less.

  • Property, plant and Equipment is hardly about 72 crores.
  • Inventories stocked by the subsidiaries is meagre at about 36 crores
  • Its liability numbers are small as well.

As I mentioned before, we do not know the revenue sharing and service model between Dmart and its subsidiaries. Without this knowledge, it is tough to judge these subsidiaries as separate entities.

(All the numbers are in Crores) Consolidated Standalone Subsidiary Numbers
Assets (Non-Current)
Property plant and Equipment 4810.80 4739 71.8
Capital work in progress (i.e. new stores under construction) 403.53 403.15 0.38
Investment Properties (i.e. properties owned and rented by Dmart to other companies/entities) 17 17 0
Assets (Current)

Note: Current assets are merely a snapshot of that specific day.
Inventories 2067.54 2031.08 36.46
Trade Receivables 32.88 70.81 – 37.93
Cash and Cash Equivalents 235.27 224.09 11.18
Other Current Assets (mostly Advances given to suppliers) 122.28 79.93 42.35
Liabilities (Non-Current)
Shareholder Equity 6235.90 6265.79 – 29.89
Borrowings (NCD and Term loans) 275 275 0
Liabilities (Current)
Current Borrowings 550.33 545.33 5
Trade payables 685.51 683.57 1.94
Others (currently maturing NCD and Term loans) 323.35 320.37 2.98

Other Information

  • In Q2 the company opened 5 new stores. In Q1 the company had opened 9 stores. The company now has 189 stores.
  • The company has used up the remaining 65 crores from the proceeds of IPO. So the IPO money is now completely used up.

Summary

  • Revenue growth was not very encouraging. The PAT was higher mainly due to lowering of corporate tax rates. If we remove the impact of reduction of taxes, the profits are merely in line with revenue growth
  • The company was able to open 5 stores in Q2.

Overall a very muted quarter. I was a little disappointed with the results. I am hoping for a better Q3 due to holiday shopping (assuming people had postponed their shopping plans till the festive season).

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.