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Why is the market waiting for the D-Mart IPO?

LiveMint logoLiveMint 27-02-2017 Soumya Gupta

Mumbai: The country’s most profitable food and grocery retail chain is about to go public. Avenue Supermarts, parent of the Mumbai-based D-Mart chain of supermarkets, announced it will go public on 8 March this year.

The company filed a red herring prospectus with capital markets regulator Securities and Exchange Board of India (Sebi) in September last year.

The company had filed a draft red herring prospectus to raise Rs1,870 crore.

Avenue Supermarts has been a widely anticipated public issue for a while now.

In financial year 2015-16, Avenue Supermarts made a profit of Rs318.19 crore on revenues of nearly Rs8,600 crore, as per filings with the Registrar of Companies. The company’s profit after tax rose more than 50% year-on-year.

Compare this with revenues and profits of D-Mart’s biggest rivals. Reliance Retail made a profit after tax of Rs306.54 crore. What’s more, the company’s annual revenue was Rs18,399 crore, more than double than that of Avenue Supermarts. A subsidiary of the Mukesh Ambani-led Reliance Industries Ltd, it operates supermarket chains like Reliance Fresh (for fruits, vegetables, staples and personal care), Reliance Digital and Reliance Jewels, among a list of 10 brands of retail chains.

Avenue Supermarts has also outperformed Kishore Biyani’s Future Retail that made a profit of just Rs14.55 crore, following a Rs379.21 crore loss the previous year. The company’s annual revenue was Rs6,845 crore, slightly smaller than Avenue Supermarts in size, as per its annual report for financial year 2015-16.

Also Read| D-Mart parent Avenue Supermarts to launch $280 million IPO on 8 March

Future Retail operates Big Bazaar, Food Bazaar and EasyDay, among a total of seven retail chain brands. It went public in 2016 after merging Bharti Retail, a subsidiary of Sunil Mittal-owned Bharti Eenterprises. It has a market capitalisation of Rs11,047 crore and a price-earnings ratio of 31.5, as per latest market data.

It’s not just numbers that make Avenue Supermarts attractive.

The company was set up by serial investor Radhakishan Damani, famous for mentoring equities guru Rakesh Jhunjhunwala, who is often referred as India’s Warren Buffett.

D-Mart has found an unconventional path to profitability. In a private placement offer letter sent to HDFC Bank last year, D-Mart laid out its strategy for success in a rather difficult business.

One major factor that stood out in D-Mart’s strategy is that it owns most of its stores. Avenue Supermarts operates a real estate subsidiary called Nahar Seth and Jogani Developers Private Limited, of which it owns 90% as per Avenue Supermarts’ company filings from the last fiscal year. This subsidiary, set up in 2014, had a turnover of Rs75 crore and assets worth Rs 10.66 crore by the end of last fiscal year.

“Our stores are largely owned by us or some of them are on long-term lease”, Avenue Supermarts said in its letter to HDFC Bank. “This will provide us an edge over competitors due to sky-rocketing lease rentals, which affect operating margin and may become non-viable in some of locations (sic).” Avenue Supermarts operates an in-house project team to zeroes in on real estate to expand stores. The company operates 110 stores as of March 2016, as per its latest company filings.

In October 2015, Mint had reported that D-Mart had managed a successful run by staying focused on the core food and grocery business.

Emails sent to D-Mart chief executive officer Neville Noronha remained unanswered on Monday.

Although D-Mart is yet to disclose the final price band for its shares, the public issue is expected to provide an exit to its biggest shareholder R.K. Damani, who owns 50% of the company individually, and 15.8% more through his family investment firm Bright Star Investments Pvt. Ltd. Most of the company’s shareholders are members of the Damani family.

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