Should you opt for Avenue Supermarts IPO? What brokerages have to say

Initial public offer (IPO) of Avenue Supermarts that operates supermarket chain, D-Mart, hits the markets today. It plans to raise Rs 1,870 crore through a fresh issue of equity shares in the price band of Rs 295-299. The fresh issue will constitute around 10% of the post-issue paid-up equity share capital of the company, assuming the issue is subscribed at the upper end of the price band.

Avenue Supermarts recently allotted 18,762,541 equity shares at Rs 299 per share (including share premium of Rs 289 per share) aggregating to Rs 561 crore (approximately) to 35 anchor investors that include Smallcap World Fund, New World Fund, Fidelity, Government of Singapore, JP Morgan, T Rowe Price, HDFC MF, Reliance MF, ICICI Prudential MF and SBI MF. Its business has grown rapidly in recent years, primarily through expansion of its store network from one store in 2002 to 118 stores as of January 31, 2017 across eight states in India, concentrated in western and southern India. The D-Mart business model is based on the concept of offering value retailing to the customers using the Every Day Low Cost/ Every Day Low Price (EDLC/EDLP) strategy, which offers low prices on an everyday basis by achieving low procurement and operations cost.The company's net profits have grown in each of the last five financial years since FY12. If one were to annualise the reported net profit for nine months of FY17, it is well on its way to topping the Rs 500-crore mark for the financial year. So should you subscribe to the issue? Here is what leading brokerages and research houses suggest. Financial Astrology Tips 

AMBIT CAPITAL

Avenue Supermarts has a well-established business model given: (i) strong execution history; stores up from 32 in FY10 to 110 in FY16 with 24% RoE, (ii) cost control; and (iii) high inventory turn of 12x. Business catering to all socio-economic classes in the $400bn Indian food/grocery market presents a long growth ramp. Nearly half its stores are less than four years old, implying strong SSG for next three – four years. Moreover, RoIC of new stores in smaller towns is unlikely to be dilutive as lower sales density will be offset by modest capex. The above attributes combined with a strong balance sheet (net-debt-to-equity: 0.7x) make valuation at 36x FY17E annualised EPS and 18x FY17E EV/annualised EBITDA seem inexpensive; Future Retail trades at 64x FY17E EPS and 26x FY17E EV/annualised EBITDA with RoE of 1%. Future & Option Trading Tips