Wednesday, 12 February 2020

Avenue Supermarts DCF Valuation: Value per Share of Rs1,997.15

Avenue Supermarts has grown at CAGR of more than 25% in the last five years and its market cap crossed Rs 1.5 trillion mark in Feb 2020. The current market price is at Rs2492.10, trading at 124.1 times of earnings against an industry average of 97.18 times PE ( The stock overtook NTPC, Indian Oil Corporation (IOCL), Coal India, UltraTech Cement and HDFC Life Insurance Company in the past five weeks to stand at number 20th position in the overall market capitalisation ranking. (Business Standard, Feb 2020)

Avenue Supermarts has all the attention of the stock market participants and a discounted flow valuation has been presented below. The promoter shareholding is around 80% and as per SEBI norms they need to shed another 5.21% before the end of the current financial year. Assuming that the QIP and proposed OFS fetches a total of Rs8000 crores in the current year, the DCF valuation gives a value of Rs 1997.15 per share. The assumptions used in this model are described below.  

The methodology used is based on Prof. Damodaran's book on Valuation ( and financials have been sourced from

Key Drivers of Value

1. Revenue Growth: The biggest driver of value for Avenue Supermarts is its revenue growth. As of Jan 2020 Investor Presentation, 51% of revenues come from food segment, 20% from Non Foods FMCG and 29% from General Merchandise and Apparel. These are segments that have potential of growing at 20 to 30% per annum in the coming years. Moreover, organized retail constitutes only 10% of the total retail market in India, therefore, the potential is huge with improving demographics.

2. Operating Margins: Those of us who have visited D-Mart stores can relate to the no frills and value retailing focus. Their deep knowledge of optimal product assortment, strong supplier network, high operating efficiency and lean cost structures help them in maintaining their operating margins now and in the future. (Investor Presentaton, Jan 2020)

3. Risk Profile: By consistently generating increasing revenues quarter after quarter, Avenue Supermarts is able to reduce its risk defined in terms of beta ie., variability in stock price returns. Avenue Supermarts beta calculated on a three year monthly basis (since its listing on stock market) is much lower than the sector average. (0.66 vs 0.87)

Link to DCF Valuation Model for Avenue Supermarts:

4. Increased investment and steady foot print expansion: For every rupee of capital that is invested, Avenue Supermarts is able to generate revenues of close to three rupees. Avenue Supermarts has increased its foot print to 196 stores as of Jan 2020 and plans to increase its foot print further. In the current year, they are going to raise Rs8000 crores by sale of promoter equity to institutional investors and they are going to use this money for investment and expansion.

5. Tax Reduction: The marginal tax rate for Avenue Supermarts has decreased from 34% to 22% from the current financial year. Therefore, they will be encouraged to payoff their debt and increase their investments further.

6. Strong Management Team and Human Capital: Avenue Supermarts has a strong management team and entrepreneurial background. They nurture their human capital by providing training and rewards to their employees. (Annual Report 2018-19)

7. Integration with technology: Avenue Supermarts integrates and streamlines its business processes with the help of technology to support key aspects of business including cash management systems, in-store systems, logistics systems, human resources, projects management, maintenance and other administrative functions. (Annual Report 2018-19)

8. Barriers to Entry: Foreign Direct Investment (FDI) in multi-brand retail is limited to 49%, so foreign players have to make investments in partnership with domestic players. This limits foreign entry into retail and provides much needed and valuable time for domestic retailers like Avenue Supermarts. Given the sheer size of the domestic retail sector, competition from Reliance Retail, Future Retail, Amazon More Retail, Walmart-Flipkart and others may not limit their revenues and margins.

The Way Ahead

Avenue Supermarts needs to stick to its value retailing strategy, steadily expand its footprint and integrate its brick and mortar business with the e-commerce model.

Investors' discretion is advised.

Thursday, 30 January 2020

Avenue Supermarts Ltd: Analysis of Financial Performance Dec 2019

Avenue Supermarts Ltd (D-Mart) continues to outperform quarter after quarter and year after year. In the most recent quarter ended on Dec 2019, it has registered revenues of Rs. 68,069.30 millions, growth rates of 24.38% and 13.66% when compared to revenues of Dec 2018 and Sep 2019 respectively. In the last three quarters, net profit margins have been hovering around the 5.5% mark, notwithstanding the growth in revenues, as shown in the figure below.

In the last five years, revenues have grown at an impressive CAGR of 25.45% and gross margins have been consistently maintained at 14 to 15%.

In the current financial year 2019-20, 20 stores have been added and the total number of stores is 196 as of Dec 2019 as reported in D-Mart investor presentation.

Notwithstanding, the rise in the number of stores, revenue per square feet has been increasing year after year as shown in the figure below. (D-Mart Investor Presentation Jan 2020)

Key Financial Ratios of Avenue Supermarts

Profitability Ratios

1.  Return on Assets = EBITDA*(1-t)/Total Assets
     Return on Invested Capital = EBITDA *(1-t)/(Book Value of Equity + Book Value of Debt - Cash and equivalents) Debt includes all interest bearing debt + current portion of long term debt.

With increase in revenues, reduction in taxes and improved margins, profitability is expected to improve in FY 2020. (FY 2020 figures are projected figures)

Return on Invested Capital can be further decomposed into post-tax operating margin and invested capital turnover ratio. As of FY 2019 every rupee that was invested, generated more than three rupees in revenues.

2. Return on Equity = Net Income/Book Value of Equity

As of FY 2019, Return on Equity was 16.15% and for FY 2020 it is projected to be 20 to 21%.
(Remember D-Mart started trading on 21-Mar-2017 which translated in to higher paid up capital and lower ROE in FY2017)

Liquidity Ratios: 

1. Current Ratio = Current Assets/Current liabilities
2. Quick Ratio or Acid test ratio = (Cash+Short term investments+Accounts Receivables)/Current liabilities
3. Cash Ratio = Cash + Marketable Securities
4. Defensive Interval = (Cash + Accounts Receivables + Marketable Securities)/Daily Expenditures
Daily Expenditures  = (Annual Operating Expenses - Non Cash Charges)/365
5. Working Capital = Excess of Current Assets over Current liabilities

The figure below summarizes the liquidity position as of Sep-2019. The current ratio seems to stabilize around 1.6/1.7x in the past one and half years and working capital stood at 10,088 million INR as of Sep-2019.

As of Sep 2019, D-Mart's Defensive Interval Ratio was at 15.84 which means it can meet daily operational expenses up to 16 days without tapping into long term resources and its cash operating expenses for the first half of 2020 stand at Rs.106911 millions.

Activity Ratios

1. Accounts Receivables Turnover = Revenues/Average Accounts Receivables
    Days Receivables Outstanding = 365/Accounts Receivables Turnover
2. Inventory Turnover Ratio = Cost of Revenues or COGS/Average Inventory
    Days Inventory Held = 365/Inventory Turnover Ratio
3. Accounts Payables Turnover = Purchases/Average Accounts Payable
    Days Payables Outstanding = 365/Accounts Payables Turnover
4. Working Capital Cycle = Days Receivables Outstanding + Days Inventory Held - Days Payables Outstanding

The inventory holding period has slightly increased by Sep 2019 when compared to Mar 2019 but one needs to view this in the context of growth in revenues. As of Sep 2019, D-Mart's working capital recycles in 24 days. D-Mart collects cash from its customers and boasts of  'deep knowledge and understanding of optimal product assortment and strong supplier network' as well as 'high operating efficiency and lean cost structures'. (Investor Presentation Jan 2020)

Solvency Ratios 

1. Interest Coverage Ratio = EBIT/Interest
2. Debt to Capital Ratio = Debt/Debt + Equity (Debt includes all interest bearing debt)
3. Debt to Equity Ratio = Debt/Equity
4. Long Term Debt to Capital = Long Term Debt/(Long Term Debt + Equity)
5. Long Term Debt to Equity = Long Term Debt/Equity

As of Sep 2019, D-Mart's interest coverage ratio was at a healthy 25.29x and debt ratios are shown in the figures below.

D-Mart has pared down its long term debt over the last five years and currently long term debt constitutes only 7.25% of the total capital. So there are no solvency or liquidity concerns for D-Mart for now or any time soon.

Data Source:

Investors' discretion is advised.

Monday, 20 January 2020

Perspectives on India's Retail Industry

In a recent address at the National Retail Federation in New York, Microsoft CEO Satya Nadella remarked that by capturing the commercial intent and buying behaviour of consumers, retail industry is going to set the tone for not just for consumer experience but also the global economy in the coming decade.

As of FY end 2018-19 India's private consumption expenditure stood at $1.6 trillions which is 60% of India's GDP. Retail industry accounts for $857 billions out of the total private consumption expenditure. (Reference: D-Mart Investor's Presentation/Crisil Report Jan 2020/CEIC Data) Effectively, retail industry accounts for 25 to 30 % of India's GDP. Not just India, for most major economies retail industry accounts for a significant share of GDP.

Driven by technology and modernisation, the retail sector in India is at the cusp of evolution. Disruptions throughout the value chain – sourcing, manufacturing, transportation, procurement, warehousing and inventory, distribution, marketing and advertising, selling, logistics, delivery,after sales servicing, etc. – are driving this evolution, not just in retail but throughout the broader consumer business practices. (Unravelling the Indian Consumer Feb 2019, Deloitte)

In this context, India's retail industry is a fertile ground for big ticket retail majors - both domestic and foreign, specially given the fact that organised retail accounts for only 9 to 10% of the total retail industry.Close to 90% of the Indian retail industry is dominated by traditional mom and pop (kirana) stores. (Industry Research Report by CARE Aug 2019) One needs to watch out for this sector not just for its sheer economic size but also its political prominence.

The organized retail industry which is just 9 to 10% of the total retail market is further categorized into segments as shown in the figure below.

 As shown in the figure below, the growth in organized retail (secondary axis) is expected to be much steeper (1.5x) than the traditional retail business. Many industry estimates expect organized retail to double in size from the $90 billions (FY 2019) in four to five years depending on the cyclicality of the economy. If the growth rate of overall retail is expected to be around 10 to 12%, organized retail is expected to grow at 20% in the next five to six years.

With increasing smart phone and internet penetration coupled with tech savvy urban consumers, the growth in e-retail is expected to be at least 30% per year for the next five to six years. Online retail is worth $20 billions in FY 2019 not even 3% of the total retail industry.


Some of the major players in organized retail in India and their revenues as of Mar 2019 are listed below. Reliance Retail is by far, the largest retailer in the country and D-Mart has shown consistent growth in the past few years.


As stated earlier, online retail is the fastest growing segment of the retail industry with growth rates expected in excess of 30% per annum at least for the next five years. Some of the major e-commerce websites are listed (based on traffic) in the graph below. (


1. Consolidation and buyouts: In multi-brand retail, FDI is restricted to 49%, therefore, many foreign retail giants would prefer to enter organized retail through buyouts to avoid any regulatory hurdles. Also the local knowledge and insights provided by domestic players are invaluable for foreign investors eyeing Indian markets. Even within the domestic industry, consolidation is going to be the key to optimize on costs and maximize revenue generation per square foot. We can see a number of examples including Walmart buying out Flipkart, Amazon taking a 49% stake in Aditya Birla More Retail Chain along with Samara Capital, Goenka Group's Spencer's Retail buying  Godrej's Nature Basket etc. 

2. Phygital: No rivalry between brick and mortar and e-commerce platforms.'Phygital' is the future.
"Physical stores have their own advantages and nuances and digital has its own advantages,” Kishore Biyani CEO of Future Group said in New Delhi at a recent conference organized by Amazon. “Both have come in different eras and in another 3-4 years, it will become phygital,” referring to a retailing term visualises merger the two formats. “It has happened in the (other parts of the) world and it will happen faster in India.” Now Big Bazaar's 'Sabse Saste Din' are also available on

3. Data Analytics and Technology: As stated earlier, technology and data analytics are going to play a critical role in the evolution of global economies in general and retail in particular. Producers will have to adopt to the needs of evolving consumer data trends. By analyzing consumer data and trends in buying behaviour, one can evaluate the changing tastes and preferences, raising income levels, dietary patterns and health consciousness of consumers etc. Advertising strategy built around consumer buying habits is far more effective in earning revenues. Data usage and privacy issues will have to be handled by sovereign governments in a way that benefits consumers and doesn't suppress business interests. Technology is already playing a key role in bringing in efficiencies and streamlining operations through out the retail value chain.

4. Brand Building through Enhanced Consumer Experience: Building brand loyalty by way of enhanced consumer experience, both online and offline is the key for retailers. Millennials ( the new age cyber citizens!) account for 34% of India's population and they value consumer experience more than anything else. With the integration of technology, retailers across the world are trying out new ideas including personalized display at stores, AR/VR based shopping options, consumer alerts through blue tooth beacon devices while in stores, conversational commerce through voice activated assistance, inventory and supply chain management devices, battery operated shopping carts etc. (Deloitte Report, Unraveling the Indian Consumer Feb 2019) Subscription based revenue models are being increasingly used to lock in consumers and thereby revenue streams for years to come.

5. Traditional mom and pop stores are going to be at the center of e-commerce action: Although, unorganized retail is set to decline by at least 10% in the next four to five years, traditional mom and pop stores are going to be at the center of the e-tail revolution. Big companies like Reliance Retail have announced plans to tie up with small retailers in the next five years. (Refer to The Economic Times article - indias-ubiquitous-kirana-stores-are-finding-themselves-in-great-demand) In Bengaluru's HSR layout, retail firms like Metro are helping traditional kirana stores to ramp up and streamline their operations and consumer data. In the next few years, by integrating with these traditional outlets, e-commerce companies will be able to reduce their delivery timelines and provide better user services. 

6. Largest Employers and impact on other industries in the value chain: Retail industry accounts for 10% of the total employment and trends in retail industry are going to shape up other industries through out the value chain and employment generation.

Notwithstanding, the current downturn in the economy, consumption expenditure is expected to bounce back in the coming quarters and the CAGR of retail industry as a whole would be around 10 to 12% in the next four to five years. Moreover, with a business friendly government at the centre, organized retail is set to attract higher investments both domestic and foreign.

Friday, 17 January 2020

Cost of Equity for Indian Companies by Sector Jan 2020 (based on Prof. Damodaran's data set)

This is a descriptive article based on the data set provided Prof. Damodaran on this website The objective is to provide a reference point for cost of equity for Indian companies specially for retail investors. It is already known that cost of equity (using CAPM model) becomes a critical input to evaluate risk from an equity investor stand point of view in corporate finance and valuation. Given below is the link to the spreadsheet containing the cost of equity for Indian companies by sector.

The rest of this article is devoted to describing some of the trends in cost of equity for Indian companies.

For the market as a whole there is not much of a difference in terms of cost of equity between 2019 and 2020. The overall cost of equity for the market as a whole as of Jan 2020 is 10.16%  as against 10.21% of 2019.

Advertising, electronics, oil/gas and dining industry are among the industries with highest cost of equity as shown in the image below.

Broadcasting, beverages and real estate services are among the industries with lowest cost of equity.

In terms of percent increase in the cost of equity advertising, software (internet) and retail (building supply) industries are at the top. The percentages indicated in the figure below represent the percent change when compared to 2019.

Beverages, trucking and retail are among the industries that have shown a decline in the cost of equity when compared to 2019.

Investors are advised to use their discretion in making their investment decisions.

Tuesday, 24 December 2019

The Case for One Child Policy in India

It is high time for all governments - state and center, to consider implementing one child policy. Patriotism does not mean hoisting flags and singing national anthem - all citizens need to show their commitment by participating in nation building.

The idea here is to not blame any one section or political party or anyone else. As a nation, we have inherited a number of problems - population explosion is at the center - and it requires a collective and sustained effort to solve these problems.

1. Quality of living: When there is a large population and scramble for resources the quality of living goes for a toss. In terms of UN Human Development Index, we are faring very bad and the signs of improvement are limited. Unless, we address population explosion it is next to impossible to provide a good quality of life for all citizens.

2. Mismatch between jobs creation and requirements: While the number of graduates aspiring for jobs is increasing every year the number of jobs created is no where near the requirement - that is both public and private sector combined. India cannot be a South East Asian miracle economy based on manufacturing export driven growth. (that time is already gone!) Instead, we need to aim at 25 to 30% of GDP contribution from manufacturing. Investment in research and technology needs to give birth to newer industries and sectors.

3. Onus on automation and cost cutting: Private sector operates for profit and the onus in the coming decades is going to be on automation and cost cutting across sectors (manufacturing and services). All businesses go through cycles and once they get used to working on lean structures, there is no need to increase the size of their human capital. Therefore, even if private capital expenditure increases the number of jobs created may not meet the requirements of the huge population.

4. Insufficient and incomplete subsidies: All governments boast of providing subsidies and cash transfers to the depleted sections but someone needs to check for sufficiency. Is your rupees 3000 odd cash transfer sufficient for a family to sustain for a month ? What is the standard of living of these people working on low or negligible incomes ? How much income is required for a family to lead a life of reasonable quality and standards ?

5. World's population may flatten out but not India's: Even if the world population stabilizes, at this rate India is going to be the most populous country in the world in one or two decades.

6. Encourage adoptions: One third world's malnourished children are in India - so why not have a strong adoption law and encourage adoptions.

We need some tough and unpopular measures if we have to fulfil our dream of being an advanced economy.

Wednesday, 18 December 2019

One Child Policy for India: Address Population Explosion

When we are hotly contesting citizenship, immigration, infiltration etc why not address the elephant in the room? Today clearly we have a situation where resources (or mobilisation of resources) are falling short of meeting the needs of an over growing and out of control population. If we cannot provide good life to our future generations then we do not have any right to bring them into this world. So at the risk of irking people's sentiments why don't we implement one child policy ? At least for two or three decades, till the time we completely eliminate poverty and provide good life to existing population. Those who want a second child can go for adoption wherever possible.
In terms of human development index and quality of living, we have a long way to go. It is possible to provide good quality of living only when population is under control.

Wednesday, 27 November 2019

The other name for empowerment is informed decision making

In the age of consumerism, people have a right to choose from different products and services that are available to them. People can compare and contrast between different options that are available to them and make informed decisions.When all other sectors are positively responding to technology, why should not electoral politics move to the next level ?

The big idea, here is to identify and disseminate economic indicators at all administrative and geographical jurisdictions. Sophistry is for the weak and wicked. It is important to not bombard people with numbers and indices. So why not devise or identify easy to understand economic metrics (5 to 10 of them at the most) and make them available to people even in all vernacular languages.

As smart phone and internet penetration keep improving people get access to data and information. Using existing (independent !!) institutions, resources and without significant additional cost burden, it is possible to set up such a system where people can make informed electoral decisions. At the moment, in all parts of the world including the advanced economies, electoral politics are subject to all kinds of vagaries which we may not be proud of.

Also, as standards of living improve, people may no longer be direct beneficiaries of public schemes or at least one would expect so. In such a case, how do you judge the performance of your public representatives ?

When will people be empowered ? Not when some one belonging to their race, caste, creed, language etc gets elected to their public office. Not when they choose based on liquor or food or money they receive prior to voting day. The real empowerment is when people can make informed voting decisions based on unbiased numbers.