Avenue Supermarts came out with the results for Q4 FY19 in May. 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.

You can watch the abridged version of the results in the following video

For detailed analysis of the results, continue to read the article below.

Financial Analysis

Q4 FY19 (Crores) Q4 FY18 (Crores) Growth (%)
Revenue 5048 3825 32%
Expense 4731 3575 32%
PBT 317 250 26.8%
PAT 203 167 21.5%
  • Revenue: At 32%, the revenue growth was pretty decent. The historical revenue growth is given below:
Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18
33% 38% 26% 23% 23%
  • EBITDA: The EBITDA grew by about 28% to 377 crores. This is lesser compared to its historical EBITDA growth. The table below captures its EBITDA growth over the past few quarters.
Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18
7.5% 23% 39% 42% 47%
  • The EBITDA margin dropped to 7.5% compared to 7.7% in Q4 FY18.
  • PAT: PAT growth was disappointing at 21.5%. The table below captures the PAT growth over the past few quarters.
Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18
2.1% 18% 43% 73% 66%
  • The EPS growth was in line with PAT growth.
Q4 FY19 Q4 FY18 Growth (%)
EPS 3.25 2.68 21.2%

Expenses

Q4 FY19 (Crores) Q4 FY18 (Crores) Growth (%)
Purchase of Stock in trade 4414 3369 31%
Employee Benefit expense 86 72 19.4%
Finance Cost 12 13 -7%
Other Expense 263 200 31.5%
  • Purchase of Stock in Trade: As expected, purchase of stock in trade is the major expense for the company. The growth in purchase of stock in trade is in line with the revenue growth. As a percentage of revenue this forms 87% of the total revenue. Which is close to 88% we saw in Q4 FY18.
  • 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 there has been a growth of close to 19% in the employee expense. As a percentage of revenue this is a miniscule number.
  • Finance Cost: The finance costs are negligible for the company. However the company has taken shareholder approval for issueing NCDs. So expect slightly higher finance costs in the coming quarters.
  • Other Expense: For Dmart, Other expense is a sizeable number. The company brackets contract employee (i.e. instore employee) salary payment, lease rentals, store operation costs like electricity bills, repairs and maintenance, legal fees, travel expenses for key employees etc as other expense. With increase in store count this value is bound to increase.

Balance Sheet Analysis

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:

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

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

Assets:

  • Property plant and Equipment: In FY19 the company has spent about 1040 crores on tangible assets (including 21 stores). In FY18 the company spent close to 718 crores on tangible assets (including 24 stores). Hence, the company spent more in FY19 but added fewer stores. Clearly, the cost of opening new stores is increasing (assuming the company opened stores in similar priced locations in both FY18 and FY19).
  • Capital work in progress: Capital work in progress represent the money spent on stores that are still getting build. As of march 2019 this amount is twice that of march 2018. Again this shows that more money was spent in Q4 FY19 for the upcoming stores. This is a good indication on the stores count for FY20.
  • Investment in subsidiaries: This is an increase in the investment made by the parent company into its subsidiaries Align Retail Trades Private Limited (which manufactures its private labels like Premia) and Avenue E-Commerce Limited (which is responsible for Dmart Ready). Align retail is a profit generating subsidiary whereas the e-commerce arm is still making a loss (albeit reduced loss). We will look at these subsidiaries when we analyze the annual report of Avenue Supermarts in a future article. The fact that the company is putting more money into its subsidiary indicates that the management is serious about these subsidiaries and sees potential for future growth in both these entities. By the way the company has added another subsidiary called Reflect wholesale and retail private limited. I am curious to know more about this subsidiary (I have used the reflect brand of product that Dmart sells, but I am still wondering why another subsidiary is needed for this and why is not part of the other subsidiary Align Retail Trades…)
  • Current Assets: Inventories: In FY19 the inventory has increased. As the number of stores increase, the company has to stock more items in the marts and hence the higher inventory number. The inventory days at 29 days means that it gets sold pretty quickly.
    • When Inventories increase, the trade payables are generally see to increase as well. This can be seen in the liabilities. Trade payables has increased by 46% to 463 crores.

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 a good news to know that the net-worth of the company is its major liability.
  • The borrowings have dropped substantially post the IPO as the company managed to payback the loans using the IPO proceeds. The management has taken approval to issue new NCDs. So the borrowing would increase in FY20.

Over all the balance sheet continues to remain healthy.

E-Commerce

The P&L numbers for the e-commerce subsidiary is given below. We will do a detailed analysis of the numbers when we analyze the annual report.

FY19 (Crores) FY18 (Crores) Growth (%)
Total Income 144.2 44.6 223%
Cost of Goods Sold 127.8 40.9 212%
Employee Expense 16.1 12.8 25.4%
Other Expense 40.1 28.3 42%
EBITDA -40.4 -37.9 6.6%
PAT -50.8 -48.1 5.7%
  • Total Income: There is a noticeable increase in the revenue of the ecommerce arm. Revenue grew by 223% (albeit on a lower base).
  • COGS: The cost of good grew at a slightly lower rate of 212% indicating a miniscule advantage in pricing power on probably some of the discretionary items sold online.
  • Employee expense: This is a positive development. Note that there is a very modest increase in employee cost with the increase in sales. I guess from here on, the employee expense may not increase linearly with increase in income.
  • Other expense: Other expense should include the expenses in running the Dmart Ready stores and the salaries for the runners for home delivery etc. Again the numbers are substantial but growth is lower compared to the income growth. I hope that it stays this way/
  • EBITDA\PAT: I am not too concerned about these numbers at this stage. The management is pacing the E-commerce growth by calibrating the growth rate based on the amount of loss it can sustain.
  • Store Count: As of FY19, the Dmart ready store count has reached 196. A year back this was 58.

Though the subsidiary is making losses, the losses should reduce once the operations attain critical size when other expenses even out and the subsidiary should turn profitable. Looking at these numbers I am turning optimistic about the ecommerce venture of Avenue supermarts.

Let us try to build a “what-if” scenario. Let us try to project the above growth rates into FY20 and FY21 as below:

  • FY20:
    • The income grows at the same rate as FY19 i.e. 223%
    • The COGS grows at the same rate as FY19 i.e. 212%
    • The employee expense grows at the same rate as FY19 i.e. 25.4%
    • The other expense grows at the same rate as FY19 i.e. 42%
  • FY21:
    • The income growth rate reduces by half of FY20 i.e. it grows at 111%
    • The COGS growth rate reduces by half of FY20 i.e. it grows at 106%
    • The employee expense grows at the same rate as FY20 i.e. 25.4%
    • The other expense grows at the same rate as FY20 i.e. 42%

Then the P&L for the e-commerce subsidiary for FY20 and FY21 would look as below:

Projected FY21 (Crores) Projected FY20 (Crores) FY19 (Crores)
Total Income 982.766 465.766 144.2
Cost of Goods Sold 821.390 398.736 127.8
Employee Expense 25.317 20.189 16.1
Other Expense 80.857 56.942 40.1
EBITDA 55.202 -10.101 -40.4
  • One can debate the growth rate numbers (and therefore the timing for the above numbers), but the above numbers definitely give us the direction. I believe the subsidiary should break even when the revenue reaches somewhere around 700 to 750 crores.

Allied Retail Trades Private Limited

This subsidiary is responsible for the store branded (or company branded) products ex: Premia. The P&L numbers are given below:

FY19 (Crores) FY18 (Crores) Growth (%)
Total Income 920.1 701.9 31.1%
Cost of Goods Sold 882.6 675.2 30.7%
Employee Expense 4.3 3.1 36.5%
Other Expense 14.1 10.4 35.7%
EBITDA 19.1 13.1 46.1%
PAT 10.1 5.7 77.7%
  • The company managed to sell close to 1000 crores of its in-house products which is about 5% of its total sales. Now, I am not sure if the loose items (like rice and dal) are part of this revenue or not. So I cannot comment if this is a sizable amount or not.
  • The topline seems decent but the worry is on the EBITDA and profits. EBITDA margins are 2.1% and PAT margins are 1.1%. This business does not seem to be adding value to the company (yet). I am surprised though… I was under the impression that margins should have been higher for these products.

Avenue food Plaza Limited

Avenue food plaza should be responsible for managing the food stores outside the Dmart stores (i.e. within the Dmart premises), for example, softy icecream, sugarcane juice and the sweetcorn counters that we see outside the Dmart stores. The sales are miniscule but the margins are amazing!

FY19 (Crores) FY18 (Crores) Growth (%)
Total Income 24.4 17.8 32.4%
Cost of Goods Sold 10.6 8.2 28.5%
Employee Expense 0 0
Other Expense 5.2 3.8 38.5%
EBITDA 7.8 5.8 34%
PAT 5.7 4.2 35.6%
  • The EBITDA margins are 32% and PAT margins are 23.2%.
  • I couldn’t help but laugh when I compared the revenue and PAT numbers for Allied retail trades and Avenue food plaza. No wonder the mutli-screen cinema halls are so touchy on allowing outside food in their theaters (they might as well be making more profits from selling popcorn than the cinema tickets)!

Summary

  • Revenue growth was pretty decent but the EBITDA and PAT numbers were disappointing. This is a repeat of Q3 FY19 results. The entire H2 was disappointing as far as P&L is concerned
  • The company was able to open only 21 stores (which was three less than FY18). Management informed that this was because of delays in approvals from government. Management is hopeful of seeing improved store count numbers in FY20. The Dmart ready store count has reached 196 in FY19. It was 58 in FY18. We harp on the low store count growth for the flagship Dmart stores, but completely miss this Dmart ready store growth rate! The P&L for ecommerce is a direct result of the Dmart ready store growth.
  • The P&L of the e-commerce arm was encouraging (in comparison with the FY18 numbers). I am hopeful that by FY21 it should turn EPS accretive. The EBITDA and PAT for Allied retail trades needs to be watched carefully. The margins for Allied retail trades were disappointing.

Overall a very sober quarter. I am expecting FY20 to be a much better year for the company.

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.