Avenue Supermart: a compounding machine?

That’s a great question. And it’s important that you ask that question. In my model, Growth and Capex are linked. So, it holds that I have to justify at least one of these figures (I personally find Growth easier to justify than Capex). Here, I recall watching a lecture by Prof. Damodaran, where he addressed the question of justification of assumptions. One of his students had valued Netflix, but he felt like something was wrong, so he consulted the Professor. The Professor was of course quick to point out that he had simply projected Growth out for many years, without justifying the figures, so much so that his assumption meant that in 15 years, almost the entire world would be subscribers to Netflix. It’s not even funny how dangerous projections can become if you do not justify them.

Coming back to answering your question, yes I did, in my head. But since you asked, let me demonstrate with actual figures from D-Mart’s financials vis-a-vis my own projections. Here’s how I went about doing this:

  1. I calculated the ‘Invested Capital’ of D-Mart for the last 10 years. I define Invested Capital as ‘Equity + Debt - Cash’. D-Mart has historically used the buy-and-operate model, so we know that a majority of the capital they invested went to acquiring newer land/buildings.

  2. According to D-Mart’s CEO, D-Mart grew at 10-stores-per-year in the last decade or so. There are no exact figures given anywhere, so I have assumed that D-Mart grew at around 8 stores per year in 2009 and gradually reached 12 stores per year by 2018.

  3. Dividing #1 by #2, we get Average Capital required per Store. I understand that this is an over-simplification. “Stores” can range from tiny to the huge ones like the one in Bangalore or Mumbai, but we have no other way to get any more accurate.

  4. Based on #3, we can calculate the growth in the land/building acquisition cost. This could happen due to a number of factors, the primary being inflation in land/building prices.

  5. Now, I can fill up the figures for ‘Invested Capital’ (#1) from 2019-2028 from my own model.

  6. Working backwards, I can use the average percentage of #4 to project #3 from 2019-2018.

  7. Dividing #1 by #3, we will get Store Count growth per year (#2) from 2019-2018.

Here it is:

Again, according to the same article, DMart’s CEO plans to boost the store growth per year from 10ish to 15-20ish for the next decade. We can see both of those opinions roughly correlate in the ‘Average Store Count Growth per Decade’ column.

You can download the excel and see for yourself: DMart Growth and Capex.xlsx (11.7 KB). Numbers were taken from Screener and my model.

For the remainder of 10 years, it is simply a question of enacting the universal truth that as companies become huge, their avenues for growth decreases and hence, their revenue growth rate itself. Eventually, that growth slows down to half of the long-term Risk-free Rate in India (The reason for which I attempted to explain a few posts back).

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