Detailed Rationale

CRISIL Ratings has revised its outlook on long term rating of Avenue Supermarts Limited (ASL) to 'Positive' from 'Stable' while reaffirming the long-term ratings at 'CRISIL AA+’.

 

The revision in outlook reflects the company’s strong presence in the organized food & grocery retail segment, its continually improving geographic footprint benefitting scale of operations while maintaining strong operating efficiencies and a robust financial risk profile. These strengths are partially offset by susceptibility to regulatory changes and intense competition in the segment.

 

Operating performance improved substantially year-on-year in the first nine months of fiscal 2023, with strong recovery in same-store demand, scale up of stores opened over the past couple of years and continued store additions. On a consolidated basis, company recorded revenues of Rs. 32,246 crore, a 45% growth over Rs. 22,190 crore in the corresponding period previous fiscal. Company has been consistently increasing its geographic footprint and currently has 324 stores spread across 13 states and one union territory. Company is expected to continue adding 30-40 stores per annum and thereby deepen its penetration in the organized Food and Grocery retail segment.

 

In 9 month fiscal 2023 EBITDA stood at Rs 2866 crores (8.9% margin) as compared to Rs 1759 crores (7.9% margin) in 9 month fiscal 2022. Increasing operating leverage has benefitted improvement in margins. Overall profitability is expected to maintained at similar levels backed by faster breakeven of stores, superior per-store revenue compared with peers, stable proportion of non-F&G sales, high inventory turnover as well as maintenance of the gross margin at around ~15% despite increase in competitive intensity.

 

Financial risk profile should remain robust over the medium term, driven by strong tangible networth and a debt free balance sheet. Liquidity is also strong with cash and bank balance in excess of Rs. 1,400 crore as on March 31, 2022. Strong cash accruals per annum should be sufficient to meet its annual capex requirement.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of ASL and its wholly owned subsidiaries, Align Retail Trade Pvt Ltd (ARTPL), Avenue Food Plaza Private Ltd (AFPL), Avenue E-commerce Ltd (AEL), Nahar Seth and Jogani Developers Pvt Ltd and Reflect Healthcare And Retail Private Limited. The subsidiaries are an integral part of the operations of ASL. All the five companies are referred to as ASL.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Strong position in the organised retail segment: The market position is reinforced by steady same-store growth (barring fiscal 2021), retail productivity and short gestation for new stores. ASL operates 324 stores (as on March 31, 2023) under the DMart brand.

 

Strong procurement abilities and low-priced products along with high cost control will lead to greater footfall. This results in high inventory turnover and revenue per square foot (sq ft) and translates into industry-leading retail store productivity. Aggregate revenue per sq ft stood at Rs 29,959 in fiscal 2022 (Rs 27,306 in fiscal 2021) is higher than most retailers in the same segment. Though operating profitability has improved over the years, it had weakened in fiscal 2021 because of the impact of Covid-19.

 

Operations of the company are largely concentrated in West and South India. Expected large cluster-focused store addition over the next three years will help diversify geographical reach. Track record of outpacing peers in growth, strong merchandising and compelling value proposition and benefits of economies of scale will strengthen the market share of ASL over the medium term. However, the impact of industry consolidation and intensity of competition (mainly from online retailers) will remain key monitorables.

Robust financial risk profile and strong liquidity

Networth was sizeable at Rs 14,909 crore as on September 30, 2022, while strong annual cash generation continued despite steady store addition. The company has been able to maintain healthy operating metrics while adding stores and has prepaid debt through proceeds of its qualified institutional placement (QIP) in fiscal 2020. Out of the total QIP proceeds of Rs 4,098 crore, Rs 1,035 crore remained unutilised as of December 2022, which has translated into strong debt protection metrics. The company incurred capital expenditure (capex) of over Rs 2,000 crore in fiscal 2022 and increased retail space to over 11.5 million sq ft (which further increased to 12.6 million sq ft as on December 31, 2022) from 8.8 million sq ft.

Prudent expansion plans will entail a sizeable increase of about 20% per annum in retail space to over 14 million sq ft by fiscal 2024. Strong cash generation of over Rs 2,500-Rs 3,000 crore per annum is expected to be sufficient for capex, resulting in low dependence on external borrowings. Furthermore, liquidity is expected to remain healthy.

Weakness:
Susceptibility to increasing competition

Consolidation in the industry will increase the bargaining power of competitors in the brick-and-mortar retail segment, which may impact the gross margin of the company over the medium term.

The competitive intensity is also increasing because of higher focus of e-retailers in the F&G space. While ASL is a small player in the online F&G space, other players, such as BigBasket and BlinkIt, and entrants, such as JioMart, are registering aggressive growth. Though e-retail is a small proportion of overall rating, it will remain a key monitorable over the medium term.

Liquidity: Strong

Liquidity is backed by healthy cash accrual, nil debt and cash and equivalents of over Rs 1,400 crore as on March 31, 2022. Utilisation of fund-based working capital limit of Rs 645 crore was negligible over the six months through January, 2023. The capex to be incurred for opening stores over the next three fiscals is expected to be funded through internal accruals, besides healthy cash and cash equivalents (including unutilised QIP amount of Rs. 1,035 crore as on December, 2022). 

 

ESG profile

The environment, social and governance (ESG) profile of ASL supports its strong credit risk profile.

 

The retail sector has low environmental impact, primarily in the form of low emissions and water consumption and increasing focus on the usage of sustainable packaging. The sector has moderate social impact because of its direct bearing on the health and wellbeing of its workers and customers.

 

The company’s increasing focus on addressing ESG risks supports its ESG profile.

 

Key ESG highlights of ASL:

• The company’s ESG disclosures are in line with the guidelines framed by the Ministry of Corporate Affairs and publish Business Responsibility Report., and it is in the process of further strengthening the disclosures over the medium term.
• ASL has obtained the Gold-certified Green Building Certification issued by the Indian Green Building Council and US Green Building Council for 152 of its buildings (including retail outlets).
• The company has installed solar panels on 152 store rooftops, with solar power contributing 17.1% to its total power requirement. The company is also undertaking water conservation and plastic package waste management by encouraging users to carry their own bags, replacing tubs with paper pouches and focussing on usage of sustainable building material.
• The company has gender diversity, with 2,668 permanent women employees constituting 23.6% of the total workforce in fiscal 2022.
• The governance structure of ASL is characterised by 42.9% of independent director, a split chairman and chief executive officer position, extensive financial disclosures, presence of an investor grievance committee and a board comprising three independent directors out of seven members.

CRISIL Ratings believes that as ASL’s ESG strategy evolves over the medium term, more quantitative information on relevant parameters and goals is desirable.

 

There is growing importance of ESG among investors and lenders. The company’s commitment to ESG and embedding sustainability principles across the organisation and its value chain will play a key role in enhancing stakeholder confidence and access to capital markets.

Outlook: Positive

CRISIL Ratings believes ASL’s credit profile will benefit by improvement in business profile, supported by steady store expansion which will benefit revenues and also ensure healthy operating profitability. The company is also expected to sustain its debt metrics at superior levels with strong annual cash generation and healthy financial flexibility, while pursuing organic growth.

About the Company

ASL is engaged in the organised retail business through its DMart chain of stores. The company was incorporated in 2000 and has Mr Radhakishan Damani, an equity market investor, as its promoter. Mr Ignatius Navil Noronha is the chief executive officer and managing director. As of March 2023, ASL had 324 hypermarket stores across 13 states and one union territory.

ARTPL procures grocery items (including pulses, rice, wheat) from local agricultural produce market committees and packages and supplies the items to ASL. AFPL runs fast-food counters outside the DMart stores. AEL is into e-retailing of F&G and operates in certain regions of Mumbai and few other cities.  

 

In the first nine months of fiscal 2023, revenue and profit after tax (PAT) of ASL were Rs 32,246 crore and Rs 1,918 crore, respectively, compared with Rs 22,190 crore and Rs 1,066 crore, respectively, in the corresponding period of the previous fiscal.

Any other information: Not applicable