Avenue Supermarts which owns and runs DMart – Management, Business insights:
Very well known Indian Retail company established in 2000 by founder and veteran investor Radhakishan Damani. Ignatius Noronha is the current MD and CEO. Famous veteran investor Ramesh Damani is the Chairman of the company. They have the crème de la crème of the management at helm. Dmart`s market position is reinforced by steady same-store growth and retail productivity, and short gestation for new stores. Strong procurement abilities, Every day lower priced products along with strong cost control are key driving forces of growth. At the same time, high inventory turnover (Inventory turnover ratio of 14.4) and revenue per sq ft translates into higher retail store productivity. Fixed Assets turnover has steadily increased from 3.4 to 4.4 over last 5 years of operations.
Operating 155 stores in 12 Indian states with a total retail area of 5 Mn Sqft. They own the stores and land they operate out of which is a strategy management believes in and has executed well. Dmart`s retailing operations are largely concentrated in South and West India geography. Dmart follows a cluster based expansion approach. Their operational credo is “Every day low cost/ Every day low price” which they stick to in execution. Both of these cluster based expansion and every day low cost are success mantra Walmart follows still.
Good Credit Ratings by the leading rating agencies and can avail competitive cost of funds. Credit ratings of AA+ for Long Term Debt and A1+ for commercial paper
Now lets analyze and arrive at their valuations to see how much premium market is really factoring in for the rate of return of growth ahead.
Organized Brick and Mortar Retailing – Growth factors & Risks ahead in India:
Dmart is almost completely into brick and mortar retailing although they have small scale ecommerce operations. They have only covered 1/3rd of India so far in just the number of states. Opportunity size is huge. But there can be strong incumbents in states where they are not present.
Every Day low cost and low price is a strong competitive advantage for Dmart due to economies of scale they build in clusters. For a new competitor to enter into their clusters and meet the prices whereas Dmart has the scale advantage. This is the same Walmart strategy Dmart is following in India but will work due to the sheer under penetration of organized retail market
We all know Online/Ecommerce will disrupt the retailing more than anything else especially when Amazon is the leader in India now. They can chew any company that comes its way as I have seen in US. But there is a catch in Dmart`s case since more than 50% of their revenue comes from food and groceries. Lets analyze 3 segments they get their revenues from
Food, Groceries – 51.5% of revenue (Cannot be disrupted easily due to behavioral and emotional connect of shoppers with their neighbor hood grocers. This is why Walmart is still surviving their share in US still when other retailers have shut. But Amazon-Future, Reliance retailing can give competition eventually).
Non-Foods (Home care, personal care, OTC) – 20% of revenue. This segment can be easily disrupted atleast by 20-25% of Dmart`s revenue-share in this segment over next 5 years by Amazon once mobile and internet penetration happens to more than 70% of population.
General Merchandise (Bed,Bath, Toys, garments, footwear, home appliances) – 28.5% – This segment can also disrupt and impact by 20-25% of DMart`s revenue share by Amazon, Walmart/Flipkart, Paytm mall or any other new Ecommerce players entering.
However it does look like Dmart`s growth to be slowing down though not drastically in next 3-4 years but beyond that is anybody`s guess when we compare precedence of brick n mortar retail death in US and China due to digital disruptions. But Price to Earnings market multiple is at bleeding levels of 115. So if the rate of return of growth reduces due to slowing, de-rating is imminent. Again the million dollar question is, for a company priced at Rupees 1 Trillion which is 100-120% premium to the underlying value, is the current growth really sustainable and will the premium pricing by the market hold for long?
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