In the beginning of May, Avenue Supermarts came out with the results for Q4 FY18. Let us have a look at the results. Before we look into the results, I would recommend you to look at the below links.

Financial Analysis

Q4 FY18 (Crores) Q4 FY17 (Crores) Growth (%)
Revenue 3824.86 3120.49 22.57%
Expense 3575.17 2969.02 20.41%
PBT 249.69 151.47 64.84%
PAT 167.09 96.66 72.86%
  • Revenue: The revenue for Q4 FY18 grew by mere 22.5%. In Q3 revenue grew by a similar rate.
  • EBITDA: EBITDA improved by 41.8% to 294 crores. In Q3 the EBITDA grew by 46.5% to 422 crores. EBITDA margin has improved by 100 bps from 6.7% in Q4 FY17 to 7.7% in Q4 FY18. Interestingly in Q3 the EBITDA margins had improved from 8.6% in Q3FY17 to 10.3% in Q3FY18. There is a huge seasonal factor that comes into place between Q3 and Q4. Diwali and end of year spending skews up the Q3 results. This can be noticed in all aspects of P&L.
  • PAT: On the same lines, the PAT grew by a whopping 73%. In Q3 we saw the PAT grow by 63%. One noticeable aspect is the drop in finance cost which directly helps boost the bottom-line. Loan repayment from the IPO proceeds are helping in improving the bottom-line. PAT margin improved from 3.1% in Q4 FY17 to 4.4% in Q4 FY18. However a notable point is the fact that the PAT margins were 6.1% in Q3FY18 compared to 4.5% in Q3FY17. So the company makes more profit in Sept to Dec quarter compared to Q4. Q4 seems to be a rather dull quarter for the company.
  • The EPS increased by about 58.5% to 2.68. The PAT growth and EPS growth show a divergence due to the IPO in Q4 FY17. Hopefully from Q1 of FY19 we should see the EPS growth and PAT growth to be inline.
Q4 FY18 Q4 FY17 Growth (%)
EPS 2.68 1.69 58.57

Expenses

Q4 FY18 (Crores) Q4 FY17 (Crores) Growth (%)
Purchase of Stock in trade 3369.46 2772.16 21.54%
Employee Benefit expense 72.41 54.18 33.64%
Finance Cost 13.18 30.76 -57.15%
Other Expense 199.86 179.01 11.64%
  • Purchase of Stock in Trade: This is the major expense for the company and is expected to be one. An interesting metric is its contribution as a percentage of the total revenue which is captured in the table below. In Q3 this value was 77%, however in Q4 purchase of stock in trade has shot up to 88% of its revenue. Clearly the company was not able to sell high margin products in Q4. This is further corroborated by looking at the PAT margins. So profitability wise and efficiency wise Q4 was not as good as Q3 FY17 (which is a Diwali-to-new year quarter). Q3 lets people open up their purse for discretionary spending. Q4 seems to be a quarter of austerity.
Q4 FY18 (%) Q4 FY17 (%) Growth (bps)
Purchase of Stock in trade as a % of revenue 88.09% 88.83 74
  • 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 have increased by 16 bps which indicates that the company has been hiring more people and/or the existing staff has received a good hike. However as a percentage of revenue, employee expense is about 1.89% which is negligible.
Q4 FY18 (%) Q4 FY17 (%) Growth (bps)
Employee expense as a % of revenue 1.89% 1.73% 16
  • Finance Cost: Finance cost has come down by about 68 bps. The repayment of loans using the proceeds of the IPO have resulted in lower costs. The table below shows the finance cost as a percentage of revenue. As of Q4, finance costs are negligible. This directly aids the PAT and also provides headroom for the company to leverage in future.
Q4 FY18 (%) Q4 FY17 (%) Growth (bps)
Finance Cost as a % of revenue 0.3% 0.98% ·        68
  • Other Expense: For Dmart, “other expense” is a sizeable number. The company brackets contract employee payment (i.e. instore employee salaries), 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 actually decreased by 51 bps. This reduction, I believe, may not be due to cost cutting but due to higher revenue growth compared to growth in other expenses.
Q4 FY18 (%) Q4 FY17 (%) Growth (bps)
Other Expense as a % of revenue 5.22% 5.73% -51

With respect to expenses, Quarter on quarter, the company has been able to show similar performance. The growth in expenses is less than the growth in revenue. For a retailer, even a few bps saving in expenses goes a long way in increasing the PAT.

Utilization of IPO Proceeds

Post IPO, the proceeds earmarked for general corporate purpose have already been utilized. It has exhausted most of the money set aside for repayment of loans as well. Since the company has opened 24 stores in Q4, it was bound to utilize some of the money raised for construction of fitouts. As of Q4 FY18, out of the 366 crores marked for store expansion, 94 crores have been utilized. That leaves about 272.5 crores in the bank for future expansions.

IPO Plan (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 864 864 864 864
Construction of fitouts for new stores 366.6 94.02 45.9 9.89 0
General Corporate purposes 423.4 420.25 419.79 418.27 417.45

Balance Sheet Analysis

Please note that I am highlighting only the important aspects of the balance sheet. I am also limiting to the standalone numbers

End of FY18 (Crores) End of FY17 (Crores) End of FY16 (Crores)
Assets (Non-Current)
Property plant and Equipment 3233.65 2515.58 2061.26
Capital work in progress

(i.e. new stores under construction)

 147.05 152.89 81.68
Investment Properties

(i.e. properties owned and rented by Dmart to other companies/entities)

 16.32 27.37 13.65
Investment in Subsidiaries (ex: E-Commerce) 129.50 36.61 15.99
Assets (Current)

Note: Current assets are merely a snapshot of that specific day.
Inventories 1147.03 933.15 660.20
Trade Receivables

(?? Why does a B2C retailer have trade receivables!)

 33.35 20.99 8.37
Cash and Cash Equivalents 64.04 30.25
Other Current Assets (mostly Advances given to suppliers) 79.47 57.82 47.77
Liabilities (Non-Current)
Shareholder Equity 4642.71 3837.06 1511.86
Borrowings (NCD and Term loans) 246.00 980.92 908.46
Liabilities (Current)
Current Borrowings 7.25 122.66 113.49
Trade payables 315.87 266.75 200.46
Others (currently maturing NCD and Term loans) 330.44 492.83 253.52

The standalone balance sheet for FY18 is interesting and reassuring. Let us try to analyze these numbers.

Assets:

  • Property plant and Equipment: In FY18 the company spent close to 718 crores in constructing new stores and building other tangible assets. Note that at the end of H1 only about 150 crores was spent. So close to 550 crores was spent in second half of FY18 that resulted in 19 new stores being opened in H2 FY18. Note that in FY17 this number was close to 450 crores. So FY18 saw a 60% increase in spending on buying/building marts and other tangible assets.
  • Capital work in progress: In Q2 of FY18 the capital work in progress was about 288 crores. By the end of Q4 it has dropped by 50% to 147 crores. So, clearly in the first half of the year, the company was busy constructing new stores which saw the light of the day by Q4 which is reflected in the lower numbers for capital work in progress.
  • Current Assets: Inventories: Inventories have constantly being going up with the passing of every year and so has been the store count. As the number of stores increase the company has to stock more items in the marts and hence the higher inventory number. With an inventory turnover of 28 days it gets sold pretty quickly so no worries on this front for me.
    • As I was mentioning in Q3 as well, the inventory numbers should be looked at, in conjunction with Trade-payables. As the inventories increase the trade payables are bound to increase. Dmart pays its vendors within 10 days so again no worries on this front as well. Holding your vendors to a longer payable days will result in dissatisfied vendors.

Liabilities:

  • Shareholder Equity: Again as noted in Q3, the major liability for the company is the shareholder equity. For the company it is a liability, but for a shareholder it might be a good news to know that the net-worth of the company is its major liability. In Q2 it was about 80% of the total liability and now at the end of Q4 it has increased to 82%! At the end of FY7 this number was 66%.
  • Borrowings: As of Q4 FY18 the non-current borrowings have come down to 246 crores. In Q4 FY17 it was close to 980 crores. Note that at the end of Q2 FY18 the non-current borrowings were at 389 crores. The company has constantly brought down the debt by using the IPO proceeds and possibly using internal accruals.
    • The non-current borrowings should in-fact be looked in-conjunction with “Other” current financial liabilities. In a financial year, the non-current liabilities (ex: loans/NCDs maturing in say 12 to 24 months) get converted to current liabilities (loans/NCDs maturing in current FY). So looking only at non-current borrowings gives a one sided picture. When we look at other current financial liabilities the numbers have dropped to 330 crores in FY18 compared to 501 crores in FY17. Clearly the current maturing loans/NCDs have dropped as well in FY18. So the company owes less to its creditors!
    • In Q3 result analysis, I had mentioned that the company plans to increase its debt by about 1000 crores to buy land for its new stores (The proceeds of IPO were not meant to buy land. I did not hear more on this aspect though. Waiting to see the company comment on this part). The only item I have seen is in [3] where the company is proposed to go in for a 482 crore term loan which is rated Crisil-AA.

Overall I am very satisfied with the current asset-liability numbers. An efficiently managed, near-debt free retailer who owns most of his stores, has an ever increasing net worth and posed to grow his stores every single year! I am not sure what more can one ask for.

Future Growth

  • The company wants to increase its store footprint at a much higher rate of close to 30 stores a year. This is a great sign!
  • We know by now that E-commerce is a challenging business compared to Brick and Mortar. Selling is not a problem, making profits definitely is. The management has re-iterated that e-commerce makes sense to them only in urban areas where they are facing real estate price escalations. Beyond metros and urban areas, it expects B&M stores to dominate sales.
    • Dmart does not foresee ecommerce business adding significant revenue to its business. The company currently is invested in e-commerce because it wants to learn as it expands its online presence. The cost of delivery of grocery items is higher. So the company charges a delivery fee to its customers and customers do not like being charged this fee. As long as the free delivery psychology of the masses does not change, the company many find it difficult to penetrate e-commerce market. Growth of the pick-up-point based model is an interesting option that one needs to keep a close watch on.
    • On Private label business the company is very clear in its strategy that it does not want to concentrate on owning private labels. They realize that India has entrenched brands with loyal following. Breaking this loyalty would necessitate providing cheaper and low quality products which does not make sense to the management as it will impact their brand image. In grocery section, Premia is an interesting brand, I hope that the company could leverage this business in the future.

Summary

  • Revenue growth has been in lower-20s for couple of quarters now. With a higher store count growth rate, I hope to see this number going up in the coming quarters.
  • Store growth caught up in Q4 FY18 and the company managed to outdo itself in FY18 by opening 24 stores compared to 21 in FY17. The company is also looking at leasing more stores to keep the momentum going. A growing company is a happy sight (as long as it is able to maintain its margins). Three cheers.
  • PAT growth was phenominal! Again this is predominantly due to a better sales mix (apparels and general merchandise) and lower interest cost. As I keep saying I would love to see grocery sales contributing to the PAT growth than the discretionary items. Grocery sales are eternal, dependable, and a basic necessity.
  • Number of stores v/s the Size of India gives one a perspective on the growth opportunity lying ahead for the company.
  • There has been some criticism of the company on the drop in like-for-like sales in FY18. Like-for-like sales have dropped from 21.1% in FY17 to 14.2%. One cannot expect sales to grow exponentially from mature stores that have been operating for many years now. Additionally, like-for-like growth does not take into account the sales from stores that have been opened in the past 2 years. By ignoring these new stores, we would be ignoring sales and profits from 45 stores. Like-for-like is a good metric to look at but fretting over it may be an overkill for a grocer who plans to expand his store count at the rate of 30 stores a year.

References

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.