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.

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