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Mar 08, 2017 08:22 AM IST | Source: Moneycontrol.com

D-Mart IPO: 9 things that analysts highlight which you could use

Analysts cite customer acquisition models, store ownership, promoter background, among other as its strengths. However, discounts, manpower intensive business, discount war among others could be the key risk.

D-Mart IPO: 9 things that analysts highlight which you could use
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Avenue Supermarts, the operator of retail chain D-Mart, is set to hit the primary market on March 8, 2017 with its Rs 1,870 crore initial public offering.

The issue will close on March 10, 2017. This is the second major IPO to be rolled out this week, with the first one being that of Music Broadcast Limited, the operator of Radio City FM channel.

In its upcoming issue, Avenue Supermarts has set a price band of Rs 295-299. The bids can be made for a minimum of 50 equity shares and in multiples of 50 shares thereafter.

Analysts have largely recommended adding this to the investor’s shopping cart, citing good business models as well as strong promoter backing. The firm is backed by value investor Radhakishan Damani. Here are a few things that brokerages are talking about the stock.

Strengths

Customer acquisition

The company’s strategy of every day low cost/every day low price (EDLC/EDLP) bodes well for it, feel analysts at KRChocksey Research. “It offers low prices on an everyday basis by achieving low procurement and operations cost. They believe in maintaining the relationship with customers and target lower-middle, middle and aspiring upper-middle income consumers,” the research firm said in a report.

HDFC Securities also spoke about nature of products. “Majority of products stocked by ASL are everyday products forming part of basic rather than discretionary spending,” HDFC Securities said in a report. “Its customer acquisition and retention strategy is targeted at lower-middle, middle and aspiring upper-middle income consumers,” it added.

Ownership model

Expanding from one store in 2002 to 118 outlets as of January-end, the retail chain has expanded its footprint by owning the real estate area which houses them. “Owning the real estate on which ASL’s stores are built or entering into long-term lease arrangements has helped to control its fixed costs per store. Other than the rental savings, which is partially offset by higher capital and capital servicing costs, ownership (including long-term leases) of its stores provides significant long-term competitive advantage,” HDFC Securities said in its report.

Promoter background

SMC Research, on its part, highlighted the strong promoter background and senior management team that has helped the firm give better shopping experience at its stores. “The company believes that its employees have been an important factor in its success as the quality and efficiency of the services,” it said in a report.

Financials

Analysts at KR Chocksey Research believed that the retial chain’s average ROE and ROCE has been higher than industry average. “Further, the company has a total debt of Rs 1,240 crore at the end 9MFY17, which is expected to reduce by Rs 1,080 crore over FY18-20,” the research firm said in its report. This could improve return ratios as the company could stand at an almost debt-free level, it added.

The company’s CAGR revenue grew at 40 percent for the last five years at Rs 8,588.1 crore. Meanwhile, its consolidated profit after tax for the same period grew at a CAGR of 51.5 percent at Rs 318.7 crore.

Valuations

Anand Rathi and Nirmal Bang Securities have given a subscribe call to the IPO, while other majors have hailed the company’s prospects.

“Avenue Supermarts is a long term story and should be viewed from 2-3 years point of view. We like the business model of the company given its lean cost, customer centric focus and cluster based ownership model. At upper price band of Rs 299, the stocks looks attractive and recommend investors to subscribe the issue for listing as well as long term gains,” said analysts at Nirmal Bang Securities.

Simultaneously, Anand Rathi too vouched for subscription of the issue citing attractive pricing.

Challenges

Market share

HDFC Securities has cited risks to market share if competition intensifies. “18 out of its 21 distribution centres are located in Maharashtra and Gujarat. It may continue to open more stores in Maharashtra and Gujarat. Existing and potential competitors to its businesses may increase their focus on these two states, which could reduce its market share,”

Discounts

Nirmal Bang Securities sees risk to margins due to ongoing discount war. “Also the company is keen on experimenting e-commerce way through its associate company, which can impact profitability,” it said in report.

Inventory

The company is said to keep its inventory that are sufficient for a few days of operation. “…If the supply of products is disrupted, it may be unable to procure an alternate source of supply of products in time to meet the demands of customers. Such disruption to supply would materially and adversely affect its business, profitability and reputation,” said ICICI Securities in a report.

Manpower intensive

SMC Research feels the manpower-intensive nature of its business could hurt the firm. “A high proportion of its total staff comprises of employees on contract. Its business may be adversely affected if it fails to obtain employees on contract or at commercially attractive costs,” it said in a report.
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