Avenue Supermart: a compounding machine?

(Darkwanderer79) #328

Dont have the report but heres what it says in Mint

(shreys) #329

Dmart- the gem of India’s rapidly emerging retail sector has been trading at a premium over its peers ever since its listing. It’s rich valuation is justified by the consistent growth it has shown in its performance. It’s often termed the Walmart of India. It’s currently trading at a market capitalisation of around 84000 crores.
As an academic exercise I decided to study Walmart’s performance in its years of rapid growth and assess the valuation it was trading at.
Walmart was established in 1962 and listed in 1972.
It’s currently the world’s largest revenue generator and operates in the same sector as Dmart.
Explanation: The sales have been adjusted for inflation.
Numbers in Indian rupees are post adjustment for purchasing power.
For purchasing power parity 1$= 12 Rupees

Sales: 78 Million $
Sales( Adjusted for inflation): 464 Million $
Sales ( Adjusted for Purchasing power parity): 557 crores
Net income: 2.9 Million $
Net income( Adjusted for inflation): 17 Million $
Net income ( Adjusted for purchasing power parity): 20.4 crores
Number of stores: 51
Square footage: 16 lakhs square feet

Sales: 478 Million $
Sales( Adjusted for inflation): 1.963 Billion $
Sales( Adjusted for Purchasing power parity): 2350 crores
Net income: 16.5 Million $
Net income(Adjusted for inflation): 67.8 Million $
Net income( Adjusted for purchasing power parity): 80.5 crore
Number of stores: 153
Square footage: 65 lakhs square feet
Market Capitalization (1977) : 0.23 Billion $ ( Adjusted for equity dilution, not adjusted for inflation)
Therefore, PE multiple: 13.93
Remarks: The company was growing at a scorching pace between 1972 and 1977. It was on its way to becoming one of the leading retailers. Tripled store count and quadrupled square footage. Yet, available for 14 times earnings.

Sales: 2.4 Billion $
Sales( Adjusted for inflation): 6.19 Billion $
Sales ( Adjusted for purchasing power parity): 7420 Crores ( Similar in size to Dmart. Compare the earnings multiples)
Net income: 82.8 Million $
Net income( Adjusted for inflation): 213 Million $
Net income( Adjusted for purchasing power parity): 256 Crores
Number of stores: 491
Square footage: 2 Crores 39 Lakhs square feet
Market Capitalization: 1.01 Billion $ ( Not adjusted for inflation)
PE multiple: 12.19
Remarks: Yet again, from 1977 to 1982 Walmart grows by leaps and bounds, Yet, PE multiple is less than 15.

Sales : 11.9 Billion $
Sales( Adjusted for inflation): 26 Billion $
Sales( Adjusted for Purchasing power parity) : 31000 crores
Net income: 450 Million $
Net income( Adjusted for inflation): 986 Million $
Net income( Adjusted for purchasing power parity): 1180 Crores
Number of stores : 980
Square footage: 6 Crores 33 Lakhs square feet
Market Capitalization: 9.06 Billion $ ( Not adjusted for inflation)
PE Multiple: 20.13
Remarks: Yet again, despite a tremendous performance available at reasonable valuations.
Now, jumping to 1997.
Sales: 104 Billion USD
Sales( Adjusted for inflation): 161 Billion Dollars
Sales( Adjusted for purchasing power parity): 1.92 Lakh crores
Net income: 3 Billion $
Net income( Adjusted for inflation) : 4.65 Billion $
Net income( Adjusted for purchasing power parity): 5580 Crores
Total stores: Around 3000 stores
Market Capitalization: 35.52 Billion $ ( Not adjusted for inflation)
PE multiple: 11.81

In the year 2000, at the peak of the massive tech bubble Walmart was trading at 39 times its earnings. It didn’t cross its 2000 highs for 12 long years.
It shows that if good business at purchased at sky high valuations returns can be dismal.
Analysts have been justifying Dmart’s stratospheric valuations by citing tremendous growth.
Walmart, the epitome of enterprise and tremendous growth never traded at such mind boggling valuations.

When Walmart was similar in size to Dmart in the mid 1980s it was trading at 12 times its earnings.
And, it was growing incredibly fast.
Launching store after store. Yet, multiple was 12.

Some more interesting information:
In 1984:
Sales: 4.66 Billion $
Sales ( Adjusted for inflation): 11.2 Billion $
Sales ( Adjusted for purchasing power parity): 13400 Crores
Walmart’s sales in 1984 were same as Dmart’s sales today. The necessary adjustments for inflation and purchasing power parity have been made.
Now let’s look at the valuation.
In 1984, Walmart’s valuation was around 3.57 Billion $.
Let’s adjust it for inflation.
After adjusting for inflation Walmart’s valuation in 1984 was 8.55 Billion $.
Adjustment for purchasing power parity:
10200 crores
To summarise
1984 2018
Walmart Dmart
Sales 13400 crores 14000 crores
Valuation 10200 crores 84000 crores

The disparity is astonishing.
Despite having same sales Dmart is valued at 8 times Walmart’s valuation.
And, some may say that Dmart has a lot of growth left.
Walmart, even after 1984, quadrupled it’s sales in 5 years. Then again doubled it’s sales in 2 years.
And, rarely did it trade at more than 2.5 times its sales. Walmart’s growth is unlike any other company- Consistent and rapid.

(SD007) #330

(msahani) #331

Interesting. I hope this guy finally gets to decide on what he wants to actually achieve. As he rightly said in one of the interviews earlier, we are exactly opposite of DMart. DMart follows a very simple approach. His lack of focus scares me.

(msahani) #332

ASL’s 154th outlet opened in Guntur on 31/03. Baheti, the CFO is seen in the clip cutting the ribbon. Interesting to see they opening the store in a mall and opposite Reliance Trendz. :blush:

(Bheeshma Sanghani, PhD) #334

Hi @shreys

Valuation is also sensitive to profit margins. You could do a comparison between the margin profile of d-mart and walmart to see how they fare. Net margins for walmart were always thin and going by recent history are even thinner now than they were earlier. D-mart on the other hand enjoys king size margins if we take walmart as a benchmark. That explains the high valuations. In anycase, future growth expectations clearly, are factored into the price - the main job is to have a handle on how much growth is factored in and can dmart better growth expectations.



(shreys) #335

Dear @bheeshma
Sir, Walmart’s margins have eroded significantly in the past decade or so. In the 1980s and 1990s, when it was similar to Dmart in size it’s margins hovered between 3.2% and 4%. Most frequently it was in the range of 3.3% to 3.6%.
In 1984, Walmart was trading at around 18 times its earnings. It’s net profit margins were around 4%. For the entire 1980s and most of 1990s it’s margins exceeded 3%.Sometimes even 4%.
Dmart, in its 9 monthly results reported margins of around 5.5%.
Post 1990s Walmart’s margins started experiencing erosion. Probably because of increasing competition and advent of Amazon. It’s entirely possible that Dmart will experience the same.
The Walmart of 1980s is the Dmart of today.
Distinctive factor being a difference in margins of around 2%. Rest almost everything’s same.
Is this 2 % differential enough to justify 8 times Walmart’s valuations?
In my humble opinion, maybe not.

(Bheeshma Sanghani, PhD) #336

Hi @shreys

An incremental margin of 2% and high asset turns increases the incremental ROE significantly which enhances the valuation accorded. Can’t be definitive whether D-mart is going to be able to continue with the current margin profile in the future but its done a good job improving return ratios. In any case, its an expensive purchase but is it worth paying up for? That depends upon its margins going forward, its capital turnover and how much its able to reinvest and for how long.

(phreak) #337

D-Mart’s FY17 EBITDA margin was 8.3% and 9 month FY18 margin was 8.8% and Q3 margin was 10.60%. If Wallmart’s EBITDA margins were between 3.2% to 4% in the 80s as you say, you can see that D-Mart’s margins are way, way better for being in the same business, especially in a cost-conscious country. When it comes to margins, 4% and 10% are night and day.

If a company has 10% margins and it takes profit from 4 old stores to open one new store and the margins shrink to 4%, it is going to profit from 10 old stores to open a new store! This difference could end up being huge when you compare 5/10/15/20 years down the line because each of those new stores opened are going to spawn more new stores at a far superior rate and that’s the reason why D-Mart is so obscenely valued.

Disc: Wish I owned it.

(shreys) #338

Dear @phreakv6,
I’ve mentioned the net profit margins. Not EBITDA margins.
Walmart’s net profit margins oscillated between 3.3 and 3.6% and sometimes exceeded 4% as well.

(phreak) #339

I think we should look at EBITDA margins because that’s what is going to affect the RoCE and re-investment. For D-Mart, FY12 - 55 Stores and FY17 - 131 stores. This was during a time when RoCE was between 13% to 20% (Wallmart stores doubled between 1982 and 1985 while D-Mart has done 2.5x in comparison to this arbitrary period). FY17 RoCE was 22% and I think this would improve to 25% in FY18. At 25% RoCE, you can expect the rate at which D-Mart will be opening new stores to go up to a much higher rate than what Wallmart managed in 1982. This is of course assuming all their stores are going to be created equal and a whole lot of other things but this is only to discuss the topic of how margins affect RoCE and consequently future growth when the market potential for growth is very, very high.

(shreys) #340

Walmart, in the mid 1980s, when it was similar to Dmart in size had pretax margins of 6.5-7.7%. Their net profit margins seem weak because of the high tax on income they had to pay.

(phreak) #341

D-Mart definitely has higher margins (Recent quarter over 10%) than that (around 7%) and the improving trajectory as well gives a confidence (8.3% to 10%). 50% higher OPM roughly means 50% higher profits and roughly about a similar difference in reinvestments and corresponding growth. I think the market is pricing in that. If they maintain their current return on capital, they should have about 400-420 stores by FY22 (triple stores in 5 years). At that point their rate may slow down to where Wallmart was in 1982 (double stores in 5 years). Also, lets not forget SSSG (Same store sales growth) which has been improving as well.

However, I think there is one crucial thing that is making the market price D-Mart the way it has and that’s one thing not many of us are talking about. Its just the Supply-Demand situation for the stock. Although the market cap is about 85k Cr, only about 15k Cr is with the public and we are extremely starved of new high-quality issues. In all the IPO frenzy in the last couple of years, nothing can hold a candle to D-Mart’s quality and growth prospects. It is yet to lose mindshare and probably will remain so for another year or two. I am hoping that past that point, when the promoter reduces his stake and gets it to 70% levels, the supply will improve and with it, the valuation will become reasonable as well.

(shreys) #342

Retailing- one of the pillars of every country’s economy.
In the United States, Walmart, the largest retailer generated almost 500 Billion $ in revenue in 2018.
Almost 25% of the revenue was generated outside the United States. It contributes almost 2% of the GDP of the United States. Since 1962 it has compounded its sales at more than 20% per annum. No mean feat. Walmart’s is an iconic story of entrepreneurial spirit.
India too has a wonderfully growing retail sector.
Dmart, one of India’s leading retailers has grown tremendously in the past few years. It’s a brand that’s associated with value, reliability.
Dmart currently generates sales of around 2.2 Billion USD. Its sales contributes almost 0.1% to India’s GDP(2.26 Trillion $)
Companies that are today mega caps typically grow rapidly for 4-5 decades and then slow down.
The same happened with Walmart.
The same can be assumed for Dmart. It’ll grow rapidly for many, many years to come. Looking at Dmart’s past trajectory there’s reason to believe that Dmart could be India’s Walmart by 2052- 5 decades post establishment. It’s expected that by 2052 India will be a 28 Trillion $ economy- 28000 Billion $
I’m presenting some calculations. Please guide if I’ve erred.


Sales- 2.2 Billion $
Net profit: 0.12 Billion $
Net profit margin: 5.45%
Market capitalisation: Approximately 12 Billion $

Let’s fast forward to 2052. India is a 28 Trillion $ economy (28000 Billion $) - Dmart has become a retailing behemoth.

Case 1:
If Dmart contributes to 2% of the GDP of 2052 like Walmart:
Sales : 560 Billion $
Net profit: 30.5 Billion $

If Market capitalisation = 2 times sales= 1120 Billion $
CAGR= 14.27% ( from 2018 to 2052)

If Market capitalisation = 1 times sales= 560 Billion $
CAGR= 11.97%

If Market capitalisation = 0.5 times sales= 280 Billion $
CAGR= 9.71%

Remarks: Excellent compounding stock performance.
To develop an intuition how massive 2% of GDP is -
Reliance Industries currently contributes somewhere around 2% of GDP.

Case 2:

If Dmart contributes 1% of GDP of 2052

Sales: 280 Billion $
Net profit: 15.26 Billion $

If Market capitalisation = 2x sales= 560 Billion $
CAGR= 11.97%

If Market capitalisation = 1 times sales= 280 Billion $
CAGR= 9.71 %

If Market capitalisation = 0.5 times sales= 140 Billion $
CAGR= 7.49%

Currently, in 2018, TCS contributes around 1% to GDP

Case 3:
If Dmart contributes around 0.5% of GDP of 2052

Sales = 140 Billion $
Net profit: 7.5 Billion $

If Market capitalisation = 2 times sales= 280 Billion $
CAGR= 9.71

If Market capitalisation = 1 times sales= 140 Billion $
CAGR= 7.49%

If Market capitalisation = 0.5 times sales= 70 Billion $
CAGR= 5.32%

Currently, ITC contributes somewhere around .5 % to the GDP.

Case 4:
If Dmart contributes around 1% of GDP of 2052
Sales=28 Billion $
Net profit = 1.526 Billion $

If Market capitalisation = 2x sales= 56 Billion $
CAGR= 4.63%

If Market capitalisation = 1 times sales = 28 Billion $
CAGR= 2.52 %

If Market capitalisation = 0.5 times sales= 14 Billion $
CAGR= 0.45%

To develop an intuition for 0.1 % of GDP, Dmart, in 2018 contributes 0.1 % to the GDP.

(shreys) #344

Yesterday, I had shared some calculations in which an attempt was made to predict the CAGR Dmart could generate. But, I realised that hardly anyone will hold shares for 30-35 long years and it’s too distant to be able to understand the ecosystem at that time. We’re living in a time marked by constant change.
But, we can, with reasonable confidence, predict that changes won’t be very drastic over the next 4-5 years. Also, a holding period of around 5 years seems plausible. Hence,I’ve performed some calculations on the sales growth and return generation in various scenarios. Please guide me if I’ve erred.

In 5 years India is expected become a 3 Trillion $ economy. To attain this target the country needs to grow at 6.4% CAGR, which today, seems fairly attainable.

In 2018:
Sales= 2.2 Billion$
Net profit= 0.12 Billion $
Market capitalisation = 12 Billion $

All CAGR figures mentioned below are calculated from 2018.

Case 1->In 2023- If Dmart contributes 0.1% to the GDP
Sales= 3 Billion $
Net profit= 0.165 Billion $
Sales CAGR= 6.4%

Market Capitalisation = 6 times sales= 18 Billion $
CAGR= 8.45%
PE= 109

Market Capitalisation = 3 times sales= 9 Billion $
CAGR= - 5.59%
PE= 54

Market Capitalisation= 2 times sales= 6 Billion $
CAGR= -12.9%
PE= 36

Case 2->In 2023- If Dmart contributes 0.2% to the GDP
Sales = 6 Billion $
Net profit= 0.327 Billion $
Sales CAGR = 22.22%

Market Capitalisation = 5 times sales= 30 Billion $
CAGR= 20.11
PE= 91

Market Capitalisation = 3 times sales= 18 Billion $
CAGR= 8.45 %
PE= 55

Market Capitalisation = 2 times sales= 12 Billion $
CAGR= 0 %
PE= 36.69

Case 3->In 2023- If Dmart contributes 0.3% to the GDP
Sales= 9 Billion $
Net profit= 0.49 Billion $
Sales CAGR= 32.55%

Market capitalisation = 5 times sales= 45 Billion $
CAGR= 30.26%
PE= 91

Market Capitalisation = 3 times sales= 27 Billion $
CAGR= 17.61%
PE= 55

Market Capitalisation= 2 times sales= 18 Billion $
CAGR= 8.45%
PE= 36.7

Case 4->In 2023- If Dmart contributes 0.4% to the GDP
Sales= 12 Billion $
Net profit= 0.65 Billion $
Sales CAGR= 40.4%

Market Capitalisation = 5 times sales= 60 Billion $
CAGR= 37.9%
PE= 92

Market capitalisation = 3 times sales= 36 Billion $
CAGR= 24.5%
PE= 55

Market capitalisation = 2 times sales= 24 Billion $
CAGR= 14.87%
PE= 37

(msahani) #345

Since I do not live in India, it will be difficult to do a scuttlebut to check the effectiveness of this new strategy by BB. Anyone sharing their views/experiences will be appreciated to really assess if the prices of the groceries and other daily consumables are in line with or lower than ASL.

(kanvgarg123) #346

Nope! Big Bazaar is no where near to DMART. I have used both. You will save more money in DMART than Big Bazaar on a net basket. Their prices are similar to that of Amazon hence Amazon will have a bigger time beating them.

Invested from 800 levels

(weblinsolutions) #347

Big Bazaar is much cheaper compared to Dmart if you use their profit club cards. Profit Club Card benefit can be combined with any other promotional scheme running at Big Bazaar. Dmart might be a better business but as a customer I will not prefer Dmart as it is like a fish market in our place. Shopping experience, ambience and service of Big Bazaar is much better compared to Dmart.

(shreys) #348

The promotional material prepared by Big Bazaar is definitely impressive. I haven’t shopped at Big Bazar for quite some time now. For me, savings at Dmart are typically in the range of 12-14% on MRP. It varies from person to person since it’s dependent on the products purchased. But, I’ve been observing my shopping pattern and it has emerged that I spend significantly more than required when I’m present at the physical store. It’s difficult to resist the wonderfully arranged packed products. A person may save money as a percentage of the bill but a holistic view will show that we’ve spent a lot more than required.But, when I shop online the tendency to overspend is curbed to a great extent. Hence, I order online and collect it from Dmart’s local centre.
I definitely am planning to try Big Bzaar’s online shopping soon.

(msahani) #349

Really enjoying some hardcore comedy clips over the last hour or so. Not able to make out of the ad itself whether one needs to register or not for a concept called as Kitchen Stock Exchange. Aree Biyani Sahab, yahan logon ko normal stock exchange or markets samaj me nahin aati aur aap, kitchen stock exchange le aaye ho.