Avenue Supermart: a compounding machine?


(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.

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

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.


(MHS) #1005

@jamit05 Please justify by giving some info/analysis/Backup/examples why the numbers don’t justify. May be not based on Quarterly results but why dont we look how the company reached this far…

If we just see the past numbers, profits grown from 6 crs to 901 crs (150 times yes that’s true) in less than 10 years, sales around 30 times and they built a brand D-MART, in a very difficult retail industry.

They are very few businesses in this world especially in Indian Retail who has grown like this…very few… mostly importantly profitably.

I am still waiting(almost 20 years) for Future group aka Biyani companies, which are in retail business, one of the first entrants in retail…make sustainable / decent profit for all their businesses except diversification and spin offs and entering new businesses and coming with new story every time.

There were ‘N’ number of retail businesses in India with well know investors backing , started with a bang, but still disappeared in no time.

Here is a company making inroads into one of the toughest Indian industry- retail where profit making is very very difficult made a brand for themselves and slowly but surely expanding profitably.

If we dont get comfort at valuations we have to wait…wait…wait…wait…patiently till it reaches our comfort levels and invest…till that time…just admire/track the business how they are building/growing…and admire/learn from the brave hearts who are invested.

By the way if stock price crashes by 50% one only looses if u sell, if u keep invested if u r a long term investor(5+…infact 10+years)…these things wont matter…will teach all of us a lot about investing why is it tough…infact damn tough.

PS: Sold PAGE and ASTRAL just because they are high PE and only saw the business growing and stock going higher and higher, unable to reenter and still waiting from more than 3 years.


(Manish Vachhani) #1008

Before posting, everyone is requested to think whether the post adds any value. I have seen many posts which adds little value. Any future violation may lead to strict actions.


(mrai74) #1011

Reliance Retail, one of the competitors for our company came up with following nos

Quarterly sales : 35000 cr
EBITDA : 1700 cr
Store count : 10k
Cumulative Store Area : 20 million+ sqft.

It has more stores than all other organized retail put together.
12 month revenue higher than all other organized retail together.

I know that it has bigger pockets & are here to stay for longer run.

Can we compare nos & come to an understanding if they are also facing similar pressure, which forced our company to post a subdues quarterly result?

Moderators : please feel free to delete if it doesn’t add value to this thread. I am aware that the details are for a separate entity, but being competitor, wish to have opinion of seasoned investors


(Shailesh) #1012

By Nos

Reliance Retail is 8X Dmart in Revenues and in EBITA is near 4.5 X ( with current run rate ) . But Reliance game is different . It is not a pure low discount player .

It will try to get Jio to hook consumers - give them Jio prime membership - which will then offer retail media , data , consumer goods , petrol etc … The plan they have is to go high tech way - when 5G gets launched with VR - they will help you shop @ home just like the way you do in shops and with AI they will get into customised segmented offers on retail products . At least that this what they say in communication.

Dmart is traditional retailer l with focus on being low cost - less differentiated - making consumer shop like good old traditional mandis - with lot of rush and consumers hunting for goods and offers . This works perfectly fine for groceries and some consumer discretionaries especially for consumers who have time for shopping . But underinvestment in technologies and creating consumer experiences might hurt DMART in future .