Avenue Supermarts IPO: Issue looks reasonably priced; HEM Securities recommend to 'Subscribe'
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Co is an emerging national supermarket chain, with a focus on value-retailing. According to Technopak, in Fiscal 2016 company was one of the largest and the most profitable F&G retailer in India. Co offer a wide range of products with a focus on the Foods, Non-Foods (FMCG) and General Merchandise & Apparel product categories. For Fiscal 2016, Maharashtra contributed a majority of co's revenue from sales (62.57%) followed by Gujarat (18.83%),Telangana (10.15%), Karnataka (6.14%) Andhra Pradesh (1.03%), Madhya Pradesh (0.85%) and Chhattisgarh (0.43%). Co operate and manage all its stores. Co operate predominantly on an ownership model (including long-term lease arrangements, where lease period is more than 30 years and the building is owned by co) rather than on a rental model. Co open new stores using a cluster approach on the basis of adjacencies and focusing on an efficient supply chain, targeting densely-populated residential areas with a majority of lower-middle, middle and aspiring upper-middle class consumers. Co operate distribution centres and packing centres which form the backbone of co's supply chain to support its retail store network. As of January 31, 2017, co had 22 distribution centres and six packing centres in Maharashtra, Gujarat, Telangana and Karnataka.
Co intends to bring issue for repayment or prepayment of a portion of loans and redemption or earlier redemption of NCDs availed by company worth of Rs 1080 Cr & construction and purchase of fit outs for new stores worth of Rs 366.6 Cr.
Reasons to "Subscribe"
As of January 31, 2017, co had 118 stores with Retail Business Area of 3.59 million sq.ft, located across 45 cities in Maharashtra (59), Gujarat (27), Telangana (13), Karnataka (7), Andhra Pradesh (4), Madhya Pradesh (3), Chhattisgarh (1), NCR (1), Daman (1) and Rajasthan (2). Thus, depicting wide presence of co. Also, co's financial strength looks attractive as co's return ratios are higher than its peers. Co's ROE & ROCE stands at 21% & 19% respectively for FY16 against its peers like Future retail ( ROE 2 %, ROCE 4% for Fy16) & Trent Ltd ( ROE 4 %, ROCE 8% for Fy16).
At price band of Rs 295-299, p/e multiple will turn out to be 35- 36 on post issue annualized H1FY17 eps of Rs 8.28/share of company. Looking after attractive business model & strong financials of company, issue looks reasonably priced as compare to its peers Future retail (p/e of 813) & Trent Ltd (p/e of 82).
Hence we recommend "Subscribe" for short as well as long term horizon on issue.
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