Avenue Supermarkets IPO opens today - Avoid.

ISSUE DETAILS:

Issue opens / closes on	8-03 /10-03-2017
Promoters	Radhakishan Damani
Business	Super markets - retail / chain
ISSUE SIZE	Rs 1866 cr
FACE VALUE	Rs 10
PRICE Band	Rs 295-299 (at 40 times fy17 earnings)
LISTINGS	Bse, Nse
BRLMs	Kotak Mahindra, Axis capital, Edelweiss, Inga Capital, ICICI Sec JM Financial, SBI Caps and MOtilal Oswal.
REGISTRAR	LinkIntime

Business:

Avenue Supermarkets runs retail chain stores under the brand name D-Mart, with a focus on value-retailing. According to Technopak, in Fiscal 2016 the Company was one of the largest and the most profitable F&G retailer in India. The enterprise offers a wide range of products with a focus on the Foods, Non-Foods  and General Merchandise & Apparel product categories.

The first store in Mumbai, Maharashtra, was opened in 2002. As of January 31, 2017, they have  118 stores with Retail Business Area of 3.59 million sq.ft.

Objects of the offer:

Out of the Rs 1866 cr to be raised, Rs 1080 cr has been earmarked for repayment of loans and early redemptions of NCDs. Only Rs 366 cr will go for establishment of new stores.

Risks:

1. Business is concentrated in the states of Maharastra Gujarat.
2. Manpower   intensive business. Fraud, negligence, theft will impact business.
3. Highly competitive segment.
4. In the past,  Promoter Group has been penalised by SEBI for certain non-compliance with regulatory rules.
5. Delay and non-appointment of requisite number of independent directors to the Board.
6. Average cost of acquisition of shares by promoter group is Rs 3.33 and Rs 10.

          Financials:

                                                   (Rs in crores)

	31-12-2016 (9 months)	31-03-2016	31-03-2015
Capital	561.54	561.54	561.54
Revenue	8803	8606	6458
Net profit	387	319	212
EPS	6.90##	5.68	3.87

## Not annualised.

Average RNOW in the last 3 years is 19%.

Valuation and recommendations:

The offer is made around 40 PE, on the company’s fy17 earnings, which is irrational, compared to risks associated with business and the promoters background.

D stands for discounts, however for the IPO, the company is demanding for huge premium.

Avoid the IPO.  The stock is likely to trade below Rs 200 in the medium term.