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Analysts give thumbs up to D-Mart IPO

The D-Mart IPO is an attractive offer for investors, say analysts, citing the food and grocery supermarket chain’s promising growth record


D-Mart owner Avenue Supermarts sets price band for the issue at Rs295-299 per share. Photo: Mint
D-Mart owner Avenue Supermarts sets price band for the issue at Rs295-299 per share. Photo: Mint

Mumbai: The Rs1,870-crore initial public offering (IPO) of Avenue Supermarts Ltd, parent of D-Mart, is potentially attractive for investors, given the food and grocery supermarket chain’s promising growth record, analysts say.

Avenue Supermarts is divesting a 10% stake in the IPO that opens on Wednesday and closes on Friday. The price band has been set at Rs295-299 per share.

The company has earmarked 35% of the shares on offer for retail investors, 50% to qualified institutional buyers (QIBs) and 15% to non-institutional bidders on a proportionate basis, the company said in a statement.

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“The issue does not have comparable listed peers. They are bringing to the table a company growing at 40%,” said Arun Kejriwal, director of Kejriwal Research and Information Services Pvt. Ltd.

“We need to understand that the market share of this company is insignificant, which makes the opportunity to grow virtually infinite,” said Kejriwal, adding that at 33 times FY17 earnings, the issue is a good bargain, with a known promoter.

“None of the competitors have been successful, and D-Mart is the only one making profits. It is a well-executed business model,” said Kejriwal.

The supermarket chain, with a focus on value-retailing, opened its first store in Mumbai in 2002, and had expanded to 118 stores as of 31 January.

Radhakishan Damani and his family own 91.34% of Avenue Supermarts.

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According to the company’s share-sale prospectus, its revenue grew at a compounded annual growth rate (CAGR) of 35.28% from fiscal 2014 to Rs8,606 crore in fiscal 2016.

For the nine months to December 2016, the company reported a total revenue of Rs8,803 crore.

Its net profit grew at a CAGR of 40.55% from fiscal 2014 to Rs318.76 crore in fiscal year 2016.

For the nine months to December, its net profit was Rs387.47 crore.

The company intends to use the proceeds from the IPO to repay debt of Rs1,080 crore, fund the construction and purchase of fit-outs for new stores to the tune of Rs366.6 crore, and the rest for general corporate purposes.

Emkay Global Financial Services Ltd has a buy rating on the IPO.

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“In organized retail space, D-Mart seems to have created the right kind of model, which is giving them good visibility for top line growth. A 40% CAGR is phenomenal for such a business,” said Dhananjay Sinha, head of research at Emkay Global.

“In terms of their operations, they have the right locations for their stores. Their product assortment is very good, as they are using their own data analytics for consumers’ consumption patterns,” Sinha said.

“They own lot of their stories, rather than leasing them, saving on rental costs. They have managed to keep staff costs low. They have a conservative approach, and have been able to leverage well on their assets,” added Sinha.

Kisan Ratilal Choksey Shares and Securities Pvt. Ltd rates the issue a “subscribe”, saying that the stock has reasonable valuations, given listed peers such as Future Retail Ltd and Trent Ltd are trading at around 37 times and 50 times FY17 earnings per share, respectively.

“Further, an increase in the penetration among different tier-II and tier-III cities in the years to come could assist them to capture potential market share and provide strong financial performance visibility going ahead,” analysts at Kisan Ratilal Choksey added in a report.

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