Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Avenue Supermarts Ltd (ASL) to ‘CRISIL AAA/Stable’ from ‘CRISIL AA+/Positive’.

 

The upgrade factors in the company’s strong presence in the organised food and grocery (F&G) retail segment, continually improving geographical footprint benefitting scale of operations while maintaining strong operating efficiency, and a robust financial risk profile. Operating performance registered strong growth in fiscal 2024 with rise in volumes, scale up of stores opened over the past couple of years, and new store additions. On a consolidated basis, revenue registered on-year growth of 18% to Rs 50,789 crore in fiscal 2024 from Rs 42,876 crore. The company has been consistently increasing its geographical footprint and, as on March 31, 2024, it had 365 stores spread across 13 states and one union territory. It is expected to add 30-40 stores per annum, thereby deepening its penetration in the organised F&G retail segment.

 

In fiscal 2024, operating Ebitda (earnings before interest, taxes, depreciation, and amortisation) stood at Rs 4,104 crore (8.1% margin) against Rs 3,657 crore (8.5% margin) previous fiscal. Margin moderated slightly on-year due to lower contribution of the high-margin accruing general merchandise and apparel business. However, improving operating leverage will continue to support overall margin over the medium term. Consolidated profitability is expected to remain 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 gross margin at around 15% despite increase in competitive intensity.

 

Financial risk profile shall 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 of ~Rs 1,670 crore as on March 31, 2024. Strong cash accrual of over Rs 3,000 crore per annum should be sufficient to meet annual capital expenditure (capex) requirement.

 

These strengths are partially offset by moderate susceptibility of operating performance to inflationary pressures, large store additions, higher-than-expected losses in the e-commerce segment and exposure to intense competition. During times of high inflation, discretionary spends moderate, which impacts the general merchandise business (22.4% of revenue in fiscal 2024). Furthermore, the company has been adding 30-40 new stores every year and remains susceptible to lower-than-expected ramp-up of those stores. Its e-commerce business is currently incurring losses, and any larger-than-expected losses in this segment can hamper overall operational metrics. However, taking a calibrated approach in expanding the e-commerce business (present in 23 cities), minimises this risk to some extent.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of ASL and its various subsidiaries, which are in the same business and an integral part of the operations of 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: Market position is reinforced by steady same-store growth (barring pandemic-hit fiscal 2021), retail productivity and short gestation for new stores. The company operates 365 stores (as on March 31, 2024) under the DMart brand.

 

Strong procurement abilities and low-priced products, along with high cost control, will lead to greater footfall. This results in large inventory turnover and revenue per square foot (sq ft), and translates into industry-leading retail store productivity. Aggregate revenue per sq ft of Rs 32,941 in fiscal 2024 (Rs 31,096 in fiscal 2023) is higher than most retailers in the same segment.

 

Operations are largely concentrated in West and South India. Expected large cluster-focused store addition over the next three fiscals 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 market share over the medium term.

 

• Robust financial risk profile and strong liquidity: Networth was sizeable at Rs 18,589 crore as on March 31, 2024, while strong annual cash generation continued despite steady store addition. The company has maintained healthy operating metrics while adding stores, and had prepaid debt through proceeds of its qualified institutional placement (QIP) in fiscal 2020. The entire QIP proceeds of Rs 4,098 crore were utilised by March 2024.

Strong cash generation of over Rs 3,000 crore per annum is expected to be sufficient for capex, resulting in low dependence on external borrowings. The company incurred capex of over Rs 2,500 crore in fiscal 2024 and increased retail space to over 15.1 million sq ft as on March 31, 2024, from 13.4 million sq ft previous fiscal.

 

Weakness:

• Susceptibility to increasing competition: Organised penetration in the F&G segment currently remains limited (~6%). Also, the organised F&G space faces intense competition from unorganised players, particularly from unorganised Brick & mortar kirana stores.

 

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 Blinkit, BigBasket and Zepto, and new entrants such as JioMart are registering aggressive growth. Though e-retail is a small proportion of overall rating, it will remain monitorable over the medium term.

Liquidity: Superior

Liquidity is backed by healthy cash accrual, nil debt and cash and equivalents of ~Rs 1,670 crore as on March 31, 2024. Utilisation of fund-based working capital limit of Rs 445 crore was negligible over the 12 months through March 2024. The capex to be incurred for opening stores over the next three fiscals is expected to be funded through internal accrual, besides healthy cash and equivalent.

 

ESG profile

The environment, social, and governance (ESG) profile of ASL supports its 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 use of sustainable packaging. The sector has moderate social impact because of its direct bearing on the health and wellbeing of its workers and customers.

 

ASL key ESG highlights:

• ASL has commissioned 190 solar plants with a cumulative capacity of 27.8 megawatt, fulfilling ~12% of its total energy demand from renewable energy, as of fiscal 2023.
• About 59% of the stores have obtained green building certificates from various certifying agencies.
• The company’s 144 stores (of 324 as on March 31, 2023) are equipped with sewage treatment plants, thereby reducing freshwater consumption.
• It reported higher gender diversity (~38%) and lower attrition rate (~17%) compared with peers.
• Governance structure is characterised by ~43% of its board comprising independent directors, ~29% being woman board directors, presence of independent chairperson on the board, and extensive financial disclosures. 
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There is growing importance of ESG among investors and lenders. The commitment of ASL to ESG will play a key role in enhancing stakeholder confidence and access to capital markets.

Outlook: Stable

The credit risk profile of ASL will continue to benefit from its business risk profile, supported by steady store expansion that will benefit revenue 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.

Rating Sensitivity Factors

Downward factors:

• Significant decline in revenue and operating margin because of large gestation losses from new stores impacting overall cash generation
• Larger-than-expected debt-funded capex weakening gearing to above 0.20 time on sustained basis

About the Company

ASL is engaged in the organised retail business through its DMart chain of stores. The company was incorporated in 2000 and is promoted by Mr Radhakishan Damani, an equity market investor. Mr Ignatius Navil Noronha is the chief executive officer and managing director. As of March 2024, ASL had 365 hypermarket stores across 13 states and one union territory.

 

Align Retail Trades Private Limited procures grocery items (including pulses, rice, wheat) from local agricultural produce market committees and packages and supplies them to ASL. Avenue Food Plaza Private Limited runs fast food counters outside the DMart stores. Avenue Ecommerce Limited e-retails F&G and operates in certain regions of Mumbai and a few other cities.  

Any other information: Not Applicable