D-Mart IPO - Invest with what you saved in there...

The company that owns the D-Mart supermarket retail chain, Avenue Supermarts, is coming out with its IPO next week. The IPO opens on 08-Mar and closes on 10-Mar with an issue price range of INR 295 – INR 299 aiming to raise a total of INR 18.70 Billion. This has been most awaited IPO of 2017. The promoter of the company Radhakishan Damani is one of the best stock pickers and a veteran stock market investor. Even the venerable Rakesh Jhunjhunwala considers him a mentor.

This IPO is the second to come out next week. The first being the Radio City IPO, which opens on 06-Mar. Will this cause lesser demand for D-Mart? I don’t think so. The IPO is already trading in the grey market which indicates the interest levels from investors. But is the IPO priced right? Let us review the company and figure out if this is something that one must invest in.

The big positive about this IPO is that there are no Offer For Sale from the existing shareholders. This means that the promoter Radhakishan Damani will continue to own the 100,000 shares in the company. All shares that are being issued are new and the proceeds will be used to partially repay some debt and NCDs (Non Convertible Debentures) while at the same time build some new stores. D-Mart currently has 118 stores across Maharashtra and Gujarat and planning to expand to other states. The focus of D-Mart has been to identify and build a story in a densely populated location and cater to lower middle, middle and aspiring upper middle class audiences. They have built a reputation of a company with tight cost controls and low priced products in the retail space. They have also been aggressively working on their margins and have been improving it year on year. They have improved the margin from 2.70% to 3.70% in 4 years from 2012. Retail is not a margin-intensive industry and runs on real tight margin. Therefore to improve the margin by 100 basis points (which is a 37% increase compared to the 2012 numbers).

Avenue Supermarts’ consolidated financial performance (in INR Millions)
Details	FY2012	FY2013	FY2014	FY2015	FY2016
Total revenue	22,224.0	33,551.0	47,023.0	64,577.0	86,061.0
Total expenses	21,340.0	32,142.0	44,574.0	61,343.0	81,139.0
Profit after tax	604.0	939.0	1,614.0	2,117.0	3,212.0
Profit margin	2.70%	2.80%	3.40%	3.30%	3.70%

The revenues have grown from 22 Billion to 86 billion in 4 years (CAGR of 40.28%) while profits have increased from 0.6 Billion to 3.2 Billion in the same period (CAGR of 51.86%). The EPS for the period ending 31-Mar-2016 stood at INR 5.86. With that EPS, the company is valued at a PE of 52.60 at the price at which it is being offered. It does seem a tad high especially given that the margins are pretty tight. However, when we look at the likely annualized EPS for FY 2017 (INR 9.20), the PE reduces to 32.50. There is only one listed company, Future Retail, which can be looked at for comparing D-Mart’s PE and this company trades at a whopping 393.2 PE (looking at 2016 EPS) but this comes down to a decent but still expensive PE of 37.50 when we consider the expected 2017 annualized EPS. Another thing to consider is that the margins of Future Retail are half of what D-Mart is achieving. All of this makes D-Mart or Avenue Supermarkets an incredible buy. But there is likely to be a lot of demand for this IPO and the chances of being allotted are slim. But still, go for it. You may get lucky. :)