Avenue Supermart: a compounding machine?

(Amit Jain) #963

Views that show the negatives of a company that is perceived as super-good are absolutely invaluable, because a company which people are vehemently justifying paying 110 PE for, anything negative cannot possibly come to their minds.

Here we see that profit has been dropping for three straight quarters. Revenues may be increasing, but this is the trend these days with the new-agey retailers. They give hefty discounts to keep the numbers well dressed or let the customers get a feel for their way of retailing; And when they stop the discounts, revenues often dry up too.

I dont know how 110 PE types companies have behaved in the past; has the profits growth slowed down? And when they have, has the high PE sustained?

(Gurmeet) #964

I think 33% sales growth is due to festive season but there is no profit growth due to more discounts are offered to retain customers because intensity of competition has increasing as Dmart strategy is being adopted by Food/Big bazaar & Reliance retails of everyday low price offers.
This is a third quarter in a row without meaningful profit growth.
A couple of more quarters without profit growth and stock price may start going south.
Views of other participants required on the topic.
Thanks.

(phreak) #965

Appears to be a classic double-top, coming on the back of below average results. Page took a 40% beating from the top (as of today, can’t say bottom has been found) on the back of tepid results which couldn’t back the valuations. I suspect same could be the case here. 40% from the top would be around 1000 levels. I see value around 800-850 levels but doubt if it will get there as the 1700 high will act as a price anchor.

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(sumit680) #966

I would like to highlight following points which have emerged after discussion with my equity adviser-

  1. We all visualise that market is ready to pay a particular high price to a particular stock. But this high price is a result of demand and supply equation. Prices can go high due to excessive demand or short supply…the later may be a case with D-Mart…we need to quantify the availability of its shares in the market…as i know its much less as compared to other stocks as majority is being owned by the promoters…The balance 15% or so which is available in the market may be in the hand of very few who might be creating a artificial short supply…so with the reputation of a great business along with a short supply creates a recipe for high valuation. Those very few might be people with very deep pockets who have the capability to influence the market and if these big bulls do not release the supply, high valuations will continue.

  2. If promoters have recently sold the shares at a PE of 40, this gives us a hint about correct valuation for the stock. A lot of clarity emerges when we compare the stock with the real estate. If a person is selling a land at some particular price and the seller happens to be a savvy investor himself who is well versed with the future prospects of the Indian Market, he will not certainly sell his property at a huge discount. Only in the situation of great financial distress, he will opt so. But this does not seems to be the case with D-Mart promoters. For them, they needed good money which can be utilised for the expansion of the business. So they must have not sold it at a great discount to its intrinsic value.

Promoters of India’s favourite drink frooti have never bothered to launch an IPO because they have ample money…

  1. I wonder which are those institutes and professional money managers who have purchased at a PE of 100…i think mostly they will be retail investors and as always retail investor will lose money in the game.

With these thoughts, a 1 year past PE below 40 is suitable to enter which in turn means a long drawn patience. Even a 1 year fwd PE of 40 with a visibility of 20% EPS growth currently means a price of 688.

This a hypothesis of mine as i have not really collected any data but just went through the threads of fellow investors on this forum. I request for your views as D Mart present a good learning lesson for us…( not invested but resisting hard to not buy at an overvalued price…:blush::blush:)

(ranjan rakshit) #967

Hi @bheeshma

Management mentioned that

  1. Operating costs inched upwards due to pre loading of certain expenses primarily around capability building across infrastructure and people.
  2. We also overspent a little to manage the festival season better through longer operating hours.

But

A) if we see Expense ratio perspective it is 6.4% compare to 6.1% which is not a big rise . How management is claiming that Operating Cost get increased?

B) Purchase/Sales is 83.6% q3 fy19 compare to 77.8% of q3 fy18 which is huge increase . Seems due to price Cut . This actually reducing the Gross margin . How can FY19E Gross margin will be still in 15% level if this trend continues?

(Bheeshma Sanghani, PhD) #968

Hi @ranjan_r

This is the trend of Dmart Gross Margins over time. The average gross margin of the last 8 years is ~15%. Gross margins are just reverting to that.

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Operating expense % has gone up by a few basis points as highlighted by you but not by a great amount but in retail a few basis points is meaningful esp in dmart.

The gross margin is expected to bob around 15% as far as i am concerned.

Best
Bheeshma

(Hitesh Patel) #969

The reaction to dmart stock price is typical of a very high PE stock undergoing valuation compression. At these kind of valuations a lot of quarters’ worth of high growth is priced in. Markets usually forgive lacklustre results of these kind of companies foar a quarter or at the most two quarters and that too if there is clear reversion to high growth post these lacklustre quarters.

Here in case of d mart no one is sure about when normalised margins will be regained or henceforth what will be normalised margins.

When high PE stock suffers valuation contraction its often a painful ride for shareholders. And many a times the pendulum doesnt stop at the centre. It often swings to the other extreme. (Though in case of dmart i think there still might be buyers at some levels where the pendulum is close to centre.)

(ranjan rakshit) #970

Got it now Thanks but Historically if you see,Q4 tend to be week quarter for dmart. Have doubt whether dmart will achieve ~15% margin…

(Yatharth) #971

One may run a screener for 17%+ CAGR and relatively high PE 7 years back. Despite ups and down, one may be surprised.

(mrai74) #972
(RamanTiwari) #973

Story of Dmart stays Intact: High Quality + High Growth + Extra Large Opportunity

Topline grew at 33%, bottomline 2%. Last year same qtr operating profits were abnormally high and are now reverting to the mean

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Now as it is the most expensive stock, valuation have come down as market had priced in the best.

My sense is as long as topline growth stays… it won’t fall too much from here… and might trade in a narrow range. I would monitor new store additions. Last year they added 14 Stores in Q4 FY18. Need to see if they can replicate the same next qtr.

(Vinay Taparia) #974

A share can still be over valued even after 20% correction and a share can still be cheap even after sharp up move.

In case of Dmart, market had priced in 40% CAGR for next few year and the same is not happening. Now valuations will be adjusted for lower growth. So expecting more corrections

(MD Razi G Haider) #985

@Gurmeet : I am glad that you at last understand it was sarcastic .

Anyways … Godrej Consumer, Britannia , Marico etc can be killed any day by introducing private label products of DMART(It will not happen I know but there is slightest possibility as DMART have the footfalls and gaining market share ) but till today there is no such Business Model invented which can kill discount retailer like DMART. Infact online retailers also recognized the potentiality of brick and mortar retailers and asking for help to offline retailers for expanding business …So think that way to understand why despite of so much earning disappointment market is willing to give 100 PE to DMART and believe this situation will be sorted out in near future . There could be more counter arguments which anyways can’t be give proper answers in forum as Truth can’t be spoken ,it need to feel from the inside which come from the experience you have in market …

#986

I did not, as I cannot recall having read such sarcasm or I simply failed to understand your comments.

But even Dmart is not invincible, as witnessed after the results. No one questions the business model, management, the point of discussion was and will always be the exorbitant price.

(MD Razi G Haider) #988

Is It? Then you need to study more about retailers…Refer this link at below . It is just for example .Lot of books written on How traditional brand killed by Private Labels …Go through those…

#990

See this, in case you did not already. The writer is a member of this forum.

(Hitesh Patel) #995

Guys make sure any reply or post you make adds value to the thread and we refrain from mindless arguments and one- upmanship.

We will be deleting all posts which we feel dont add any value or appear offensive.

(Krishnendu) #997

Well at least we have a consensus that there is no doubt about the quality of the business or long runway about it. Concern is always about the valuation of it. Well I believe market will give it a high PE as long as it thinks this is a secular business. Secularity of this business/sector will only be questionable if there is any significant event that can disrupt it’s earning potential. At least I can not see any such event but if anyone can foresee let us discuss that.
Also the recent margin contraction is not a big issue for me as long as the growth is intact. Lot of retailer apply the same strategy for killing the outright competition. Let’s take an example of Amazon in their begining year when they offer a lot of discount to the customer to gain the market share and go on to make a 100 bagger.

(RadheyShyam Aggarwal) #1000

Agree with your view point. I always wonder about the customer loyalty towards these super markets in the era of hefty discounts being offered by the online retailers. Even online retailers are having loyalty programs nowadays (eg Amazon prime membership ,even Flipkart is thinking of adopting the same model) . So for physical stores , only resort left to attract new retailers as well as to keep the customers loyal is to offer better prices and promotional schemes. Last 2 quarters result validate this view. Other resort is to open maximum stores as in all of the markets, there would still many customers who are still not comfortable to buy online. But how long the physical model would sustain that is a question mark. Every one has growing up kids, who become the pivot point of the family for shift in purchase behaviour from physical stores towards online stores. Feel may of the so-called big investors are just trying to enjoy the price momentum in this case (I can’t believe that they are blind to online trend)

(Gurmeet) #1004

D-Mart’s biggest edge over other retailers is its strategy of offering merchandise to consumers at a lower MRP.

By Ajita Shashidhar Tuesday, January 15, 2019

Value retailer, D-Mart’s profitable growth story was something every modern retailer envied. When almost every retailer was laden with debts, the Radhakrishna Damani-owned retail company was surging ahead profitably.

The D-Mart growth story isn’t as enviable any longer. The company recently reported its second consecutive quarter of subdued EBITDA and PAT margin growth of 7.5 per cent and 2.1 per cent, respectively despite a revenue growth of 33.1 per cent in the third quarter of FY19.

Read More: Will D-Mart’s exponential growth story continue? Unlikely, say analysts

D-Mart’s biggest edge over other retailers is its strategy of offering merchandise to consumers at a lower MRP. The retailer has continued to do so even at the expense of its margin growth. The retailer in its post results commentary said that its operating costs went up due to preloading of certain expenses around capability building across infrastructure and people. It also said that it overspent during the festival season by keeping the store open for a longer duration which, in return, hit its margins.

The value retailer is certainly under pressure from e-commerce retailers as well as the likes of Reliance Retail, and is forced to work at the cost of its margins in order to get more shoppers to shop at its stores. The likes of Reliance and Amazon have deep pockets and are leaving no stone unturned to penetrate into D-Mart’s stronghold, which is mid-market India.

Also, every store reaches a saturation point after being in operation for 5-8 years, and most of the D-Mart stores are old. The next level of growth and profits always comes from newer stores, and for D-Mart to grow at a rate of 30-40 per cent year-on-year (which has been its growth rate all these years), it will need to open at least 25-30 stores every year, which is a tall task. This leads to margin compression. The retailer has added just about nine stores in the FY19 so far.

The analyst community expects a stock price correction. “We expect stock to correct over near term given a miss in profits. For a flattish year-on-year profits in the December quarter, the stock is quite expensive at 74x P/E FY20 and 43x EV/EBITDA FY20,” says Abneesh Roy, Senior Vice President, Edelweiss Securities.