Avenue Supermarts came out with the results for Q3 FY19 in January. 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.

Below is a visual review of the results for the company for Q3 FY19.

Financial Analysis

Q3 FY19 (Crores) Q3 FY18 (Crores) Growth (%)
Revenue 5459.58 4107.53 33%
Expense 5064.66 3722.36 36%
PBT 394.92 385.15 2.53%
PAT 257.11 251.77 2.12%
  • Revenue: The revenue growth for Q3 was very good at about 33%, IN Q2 we saw the revenue grow at 38% and in Q1 revenue grew at 26.3%. Q4 FY18 had seen revenue growth of 22.5%. On the revenue side, the company managed to retain a consistent growth.
  • EBITDA: The surprising part was the drop in EBITDA. EBITDA saw a slower growth of 7.5% to 453 crores. Disappointment in EBITDA continued from Q2 where the growth was about 22.6% to 390 crores. In Q1 EBITDA had grown by 39.4% to 423 crores. In Q4 FY18 EBITDA grew by 41.8% to 294 crores.
    • The EBITDA margin dropped to 8.3% in Q3 FY19 compared to 10.3% in Q3 FY18. Note that in Q2 FY19 the EBITDA margin was 8.1%. And in Q2 FY18 the EBITDA margin was 9.1%.

The continued drop in EBITDA and the EBITDA margin was a surprise. My premise for the drop in EBITDA margin for Q2 was the delayed Dussehra festival. Hence, I was expecting higher EBITDA in Q3 as Dussehra was part of Q3. Instead, the EBITDA dropped! The management attributes this drop to three factors:

  • Reason 1: Company decided to focus on revenue growth by taking in price cuts. This led to a drop in gross margins.
  • Reason 2: The Company opted to go aggressive on capacity building. This meant spending more on infrastructure as well as hiring people. These expenses were front loaded, which means the company has spent the money now and will see the results (i.e. Revenue and profits from these spending) in the coming quarters.
  • Reason 3: Due to the festival season (Dussehra, Diwali, Christmas and New Year), the company decided to keep its shop open for longer hours. This led to some overspending (I believe this overspending would involve operating expenses like electricity, manpower, transportation etc).

Regarding Reason 1: Q3 is a big season for both online and offline retailers. The Diwali dhamaka and big day sales from retailers lead to intense competition and huge price cuts. For online retailers, I recall reading that, electronic goods were the largest set of items that got sold during Diwali. This Diwali was in-fact celebration of TV sets! Now Dmart is not in the race for electronic items. However, there would have been intense competition for apparels, household appliances and utensils. And the ignorant and gullible me, was expecting improved margins due to festival seasons leading to higher margins from discretionary items whereas it turned out to be the exact opposite!

Regarding Reason 2: Let us delve more on this when we discuss the expenses.

Regarding Reason 3: There is not much one can do about this I guess. Increased working times are bound to increase the OPEX. Management can however look at optimizing the costs if it plans to keep the stores open for longer hours as a policy decision. And I am sure the management would be working towards it.

  • PAT: PAT growth was a complete washout. Since EBITDA was down, PAT was down as well. PAT grew by 2.1%. In Q2 FY19 PAT had grown by 18%. In Q1 the PAT had grown by about 43% and in Q4 it had grown by a whopping 73%.
  • The EPS growth was in line with PAT growth.
Q3 FY19 Q3 FY18 Growth (%)
EPS 4.12 4.03 2.2%

Expenses

Q3 FY19 (Crores) Q3 FY18 (Crores) Growth (%)
Purchase of Stock in trade 4673.67 3185.73 46.7%
Employee Benefit expense 87.93 70.42 24.86%
Finance Cost 14.89 10.96 35.85%
Other Expense 259.63 178.92 45.10%
  • Purchase of Stock in Trade: As expected, purchase of stock in trade is the major expense for the company. There is a whopping 46% growth in the money spent in buying the items. However, this does not match the revenue growth of 33%. This in itself is an indicator that the company bought products and sold them at moderate margins. This led to a lower revenue growth. This gets clearer when we compute these numbers as a percentage of revenue.
Q3 FY19 (%) Q3 FY18 (%) Growth (bps)
Purchase of Stock in trade as a % of revenue 85.60% 77.55% 805

Close to 85% of the revenue was spent on the purchase of goods. How has this number been panning over the past few quarters? The table below captures this data.

Q3 FY19 (%) Q2 FY19 (%) Q1 FY19 (%) Q4 FY18 (%) Q3 FY18 (%)
Purchase of Stock in trade as a % of revenue 85.60% 90% 85.84% 88.09% 77.55%
  • Employee Benefit Expense: Employee benefit expense includes the salaries of permanent employees. The expense on the contract employees is captured in “other expenses”. Year-on-year there has been a growth of close to 25% in the employee expense. Management has indicated that they have front loaded the employee expense. This could have resulted in the increase seen in employee expense. The expenses as a percentage of revenue has decreased by 10 bps. Hence, in absolute number terms the employee expense has increased, but as a percentage of revenue the number has decreased.
Q3 FY19 (%) Q3 FY18 (%) Growth (bps)
Employee expense as a % of revenue 1.61% 1.71% -10
  • Finance Cost: In absolute number terms the finance cost has marginally increased. Finance cost as a percentage of revenue is negligible. The company is virtually debt free.
Q3 FY19 (%) Q3 FY18 (%) Growth (bps)
Finance Cost as a % of revenue 0.27% 0.26% 1 bps
  • Other Expense: For Dmart, Other expense makes up a sizeable amount. 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. In Q3 FY19 there is a 40 bps increase in other expense as a percentage of revenue. This clearly indicates that there is a significant expenditure by the company on operational expense. In Q2 FY19 the other expense as a percentage of revenue has decreased by 46 bps. The second reason for drop in EBITDA (i.e. Front loading of expenses) is visible in these numbers. Also the third reason for the drop in EBITDA can also be felt here (i.e. Overspending due to extended hours during festivals).
Q3 FY19 (%) Q3 FY18 (%) Growth (bps)
Other Expense as a % of revenue 4.75% 4.35% 40 bps

Utilization of IPO Proceeds

The company has more or less exhausted all the amount raised from the IPO. It has close to 165 crores left to be spent. Which might get utilized in repaying some of the loans and building some of the fitouts before Q4.

IPO Plan (Crores) Utilized as of Q3 FY19 (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)
Repayment of NCDs/Term Loans 1080 999 899 899 864 864 864
Construction of fitouts for new stores 366.6 282.50 211.30 144.93 94.02 45.9 9.89
General Corporate purposes 423.4 423.05 423.05 423.05 420.25 419.79 418.27

Summary

  • Revenue growth was pretty decent, but the EITDA and PAT numbers were miserable.
  • The drop in PAT was not a major concern for me considering the fact that the company has spent money on building future assets. What worries me is the price cut the company had to take in order to increase its sales. I don’t think the competition is intense yet. Rather, I believe, we are at least a decade away before online and offline can cannibalize each other’s revenue. I am only wondering if Q3 results would look similar for all the years in the future. From hereon would every Diwali end up being a race towards lowest margins? Only time will tell the answer.
  • The company was able to open only 4 new stores in Q3 FY19.In the first nine months of FY19, the company managed to open nine new stores across India.
  • Overall, numbers wise, it was a challenging quarter for the company. I hope the company bounces back in Q4.

Reference

  • Avenue Supermarts Q3 FY19 results

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 positions in the above company. Please consult your investment advisor for all your investment needs.

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