Avenue Supermarts: All engines firing AVENUE SUPERMARTS

Strong show on revenues and earnings will help sustain high valuations

The results of Avenue Supermarts for the March 2017 quarter (Q4) should put to rest concerns about its rich valuations expressed by some market participants.

The strong same-store sales growth (SSSG) of more than 20 per cent, over 40 per cent growth in both revenues as well as net profits (over the March 2016 quarter), and a stable Ebitda (earnings before interest, taxation, depreciation, and amortisation) margin were the key highlights of the company’s results.

The Avenue Supermarts stock, which rose to its all-time high on Friday in anticipation of strong results, currently trades at 52 times the FY19 estimated earnings.

On the basis of FY17 numbers, the price-to-earnings (PE) multiple is a whopping 104. The difference between the PE for FY17 and FY19 indicates the high growth expectations the market has from the company.

However, even as these valuations are on the higher side, they are unlikely to correct in a hurry, given the company’s focus on delivering profitable growth, a business model that none has been able to replicate in the domestic industry, low floating stocks in the counter, and, consequently, high demand from investors.

While demonetisation provided a fillip to the company’s December quarter revenues, this metric normalised in Q4. Ignatius Navil Noronha, chief Closing price on BSE executive officer and managing director at Avenue Supermarts, says: “It is very hard to decipher the upside from demonetisation. Sales have come back to normal levels in the March quarter. We are quite happy with what we have delivered.”

The company’s standalone revenues from operations stood at ~3,111 crore in Q4, up 41 per cent on a year-on-year basis. The Ebitda margin remained stable at seven per cent even as net profits grew 48 per cent to ~97 crore.

For the year ended March 31, 2017, net profits jumped 51.6 per cent to ~483 crore, compared to ~318 crore in the corresponding period a year earlier, while revenues stood at ~11,912 crore, compared to ~8,595 crore during FY16.

Going ahead, apart from healthy revenue growth, earnings will also get a leg up from a reduction in the company’s debt, which will drive interest cost savings of about ~60 crore. In FY17, the company paid ~122 crore as interest.

Overall, the company’s strategy of adding stores in existing markets, coupled with a low fixed-cost ownership model, enables it to offer value to consumers and deliver robust SSSG.

Consistent financial performance, robust return ratios (return on equity of 28 per cent), and a faster inventory turnover are among the key strengths of Avenue Supermarts. The company's business model and enviable financials are key reasons for investors' bullishness.

While peers such as Big Bazaar offer big discounts on select days in a year, D-Mart does not have any such offers, though it matches the prices offered by Big Bazaar on such days. It also keeps an eye on advertising costs and keeps overall costs firmly under check. The company has a 50 per cent stake in its e-commerce venture — Avenue Ecommerce Ltd, which will enable it to tap into the rising popularity of the e-commerce channel as well.

In this backdrop, it is not surprising that most analysts are positive on the scrip despite high valuations.