Avenue Supermart: a compounding machine?


(msahani) #350

Thanks. How has been your experience with DMart Ready? Any idea whether the 57 odd locations in Mumbai are owned or leased? If executed well, this can be scaled quickly and compliment the main B&M stores v well brining in operating leverage.


(shreys) #351

Dmart Ready has been a very good experience. It’s quick, effective and conveniently located. In Mumbai, they’ve grown quickly in recent past. Regarding the ownership of their Dmart Ready stores, I’m sorry, I’m not aware of it.


(Gary) #352

Hi @shreys,
Wonderful parallel that you draw here. I do think that in last few years the pendulum has swung to other extreme where people start to justify any valuations in name of quality. I remember making very tentative buys into Gruh two years ago worried about its valuations and am sitting at over 2x returns.

I think three things have happened in last thirty years in our risk perceptions -

  1. People believe (I’m not arguing right or wrong) that eventually stocks give better returns. Even after 2008 crisis, equities have generated superior returns as a class. And therefore, Premium has gone up. I don’t think any value investor would have touched a stock at 50 PE twenty years ago (even in dot Com Era, the PE were inflated because of low or negative profits…but general valuations were largely in line)

  2. In India, marquee investors have argued and shown in recent memory thst value pays. All of us have read Prof Bakshi’s blog and seen likes of Eicher or Gruh command unrealistic valuations… To draw a parallel, this reminds me of our property prices until 2012. People coming from US etc. used to get bamboozled at Manhattan kind of prices with Sub-Saharan infra (I live in urban disaster called Gurgaon!).

And we know that deep down we are all lemmings :stuck_out_tongue_closed_eyes::stuck_out_tongue_closed_eyes::stuck_out_tongue_closed_eyes:

  1. I guess third is more technical in terms of inflow of capital. Most of us have absolutely no Avenue other than equities to park savings.

I think sooner or later, Avenue will go into a long time correction… Retail is a tough business and technology is disrupting like never before.


(Gary) #353

I use BB profit club. The jury is out on this. I get about 20% value by paying upfront and thus almost like a working capital loan to Biyani. The quality seems good and they keep bringing new promotions and therefore I have switched from More / Big Basket to BB.

Why I say that Jury is out - 2/3rd of merchandise is from future consumer… And that is generally priced higher for similar quality. I consciously avoid in my buys but still end up with far more future consumer products that I would like. It may happen that eventually this creates a negative connotation in minds of consumers and people start to avoid BB


(shreys) #354

Dear @Gary24,
Many thanks for the compliments. Also, I’m in complete agreement with you that over the past few years there has been an increased appetite for high multiple stocks, willingness to pay a premium for perceived quality. And, as you rightly mentioned, that high PE stocks have performed well and rewarded their shareholders. I’d like to share an anecdote-
My grandfather, who had been investing in the 1970s and 1980s explained to me that the investment for him during those days depended on simple criteria-

  1. Low PE multiple
  2. Dividend paying company
  3. Decent Book Value
  4. Reasonable track record of promoters

Paying elevated valuations for growth was unheard of.
But, it’s very likely that the relatively low population of high PE stocks in those days was due to the lack of growth opportunities during those days.
As its rightly said- Change is the only constant.
Times change, people change, brains change, cultures change.


(weblinsolutions) #355

Hi Gary. Yes. It’s like a working capital loan to Biyani but this has been the best saver for our family in last 3 years. We are about to complete our third year with profit club card in a few months. We have always got additional worth 1000 rs of free items when we subscribed as well as renewed for the profit club card. We have got free items like pears soap, rin advance, biscuits, etc and other useful items. So that is additional 10% discount. Moreover, profit club members have got additional free 1000rs of worth shopping once every year in these 3 years. That’s more 10% discount.

It has worked out to be 40% value every year for us. We have 6 profit club cards. Plus the cards can be clubbed on all the offers, promotions and sales of Big Bazaar. This is most interesting. We use 1000 rs value from the card right away if the promotional is like 10% discount on 1000 rs and if the offer in Bigbazaar is like 10% discount on 2000 then we don’t use a card for 2 months and then use it together to get further discount. So total value I am getting is much higher.

Some of the future consumer products are decent from the desi atta and kosh brand and some are junk. We keep on trying future consumer products as they are some times selling them too cheap to build their market. Some things are there which no company will be able to replace for me like let’s say Kissan Jam and Sauce. For no discount in the world, I will switch to another brand of sauce and jam.

Some times I am not able to believe how Biyani is able to give such discount. But then their number of stores [volume buying] and low margin [future retail] speaks for it. Future retail margin would be much lower if we also factor in the debt on the books of Future Enterprise. I like Dmart business model. It is simple and focused. I will prefer Big Bazaar as a customer as no body else can give such discount to me. I have noticed more and more people in our family and friends are now getting profit club cards after noticing how we are using them.

Best regards,
Himanshu

Discloure: Not invested in any of the company mentioned above.


(Darkwanderer79) #356

People coing to Dmart are not coming there for a shopping experience per se. They get much more value than BB and that’s what they are coming for. Be it weekends or weekdays, Dmart is always drawing a fair share of customers. It seems a fish market because of that and as long as it looks like a fish market I’ll keep on holding to this stock.


(shunz) #357

I think dmart valuations are not sustainable. We are yet to see the full face of online retail in india. Recently (about a month ago) I purchased stuff worth 3k from dmart. I then created the same basket on big basket and compared final bill. To my surprise, big basket was cheaper than dmart by rs 200-300. Add to this the convinience of sitting at home. Since then i have stopped going to dmart.

Amazon was a bit costlier but am betting they will work on it and once that happens dmart will find it increasingly difficult to hold on to its customers.


(Rohit) #358

I went to a dmart store in Indore last week on weekdays and it was v crowded, I dont have any dmart shares and thought of buying a few but when I checked the PE multiple it was trading at 115+ PE. Did not have courage to buy at these levels. The problem with many good companies like Dmart , Page , Pidilite , Asian paints etc is that they always trades at v v high PE… No matter how much the market corrects they always looks expensive.

I remember few years back , I sold pidilite industries for a small 30rs profit @ 170 rs and still waiting for the correction to enter but I never found it cheap , today its 950. Point is we will never get such quality stocks cheaper. Better to add few whenever results are good or thier is a 10-20% correction (more than 20% seems rare to me).


(shreys) #359

In my humble opinion, a stock like Dmart will seldom be available in the valuation territory of a value investor. By value investors I’m referring to those investors who are inclined to invest in stocks with a low PE multiple, BV multiple, dividend multiple, cash flow multiple,etc.
A major reason for lofty valuations could be the high growth shown by the company. In the next 5 years, if the company continues to grow consistently the PE ratio will lower significantly, depending on the sales multiple accorded by the market. But, I feel that it’s valuation will still be beyond the comfort zone of value investors.
At its current price, the market discounts consistent growth and elevated margins from the company. If the company, due to any reason, fails to register growth or they experience pressure on their margins there definitely is a possibility that there’ll be a significant impact on its valuation. There will have to be executional excellence to sustain this growth rate and generate shareholder wealth.
Years down the line it’s also possible that the company has grown by leaps and bounds but the market is unwilling to accord a high multiple because of the emergence of other retailers,then the returns generated will be ordinary.
To my mind the shareholder wealth generation in Dmart is dependent on

  1. Consistent sales growth and maintenance and/or margin expansion which in turn depends on executional capabilities.
  2. Sales multiple the market is willing to assign years hence
  3. Luck- Sometimes despite the best intentions company strategies fail and spell doom.
    So, consequent luck will play an instrumental role.

(msahani) #360

Indeed luck is playing a much favourable role for early investors with skills to get in. Luck + Skill, a highly potent pair. Amongst all the noise, it hits a new 52 week high sometime back.


(shreys) #361

A couple of days back I purchased the monthly groceries from a Dmart close to my home. The exact savings percentage was 16.5%.
I thought of sharing an anecdote relevant to Dmart.
Until 6 months ago my family acquired the groceries from local grocers. Reason being long standing relationship and trust. But, the prices they charged were a bit higher than supermarkets. However, at the insistence of a friend my parents decided to shop at Dmart for their groceries.
And, they’ve switched from the grocer to Dmart. Savings are real, significant. And, my parents have developed an affinity for the store. Unless the discount offered by other stores is huge my parents refuse to try any online grocers or other stores. In a matter of 6 months they identify with the Dmart store and there’s a sense of loyalty. All ingredients for a long relationship.
Also, what we’re probably not taking into consideration is the scope for Premia( Dmart’s own brand )growing bigger. From other companies we’ve switched to Premia for rice, pulses, sugar. And, the quality is top notch and the prices significantly lower than competitors. For example: We bought Pulao Basmati for 59 Rupees/ Kg. The nearest competitor is much,much higher priced than Premia. And, I must say with all honesty that the quality of rice is extraordinary. Low price and high quality from Dmart have made me an admirer of their products.
Premia, as time passes and people try their products could play an important role in improving margins.
From the valuation point of view I dont know much but from the customer point of view I think that the company is performing remarkably . They’ve captured precious mind share which is difficult to erase.


(RedEPS) #362

Good businesses at high valuations may not give the best of returns.


(atul1082) #363

I too tried D Mart few times in Mumbai and found it to be a good bargain.compared to this, I find big Bazar has a much higher Pvt label items with low quality stuff which upsets me.I HV bn waiting for their store to come up in ncr region to experience the same


(Maunil) #364

Dear @weblinsolutions

Your point about BB Profit Club Card is a good one. Even i hold one of their cards, as the store executive allowed me to load the upfront card using sodexo coupons.

I regularly shop at both Big bazaar and D Mart. However, in my observation when i go to shop in a Big bazaar i never see the rush seen in a Dmart store. When i started using Big Bazaar recently, after a gap of few years, it gives the feel of a semi-up market store with lot of Future Consumer merchandize in the premium category. And not many choices in the basic day to day category.

Also, as someone mentioned above the quality of D-Mart’s in house premia brand is far superior than Future consumer items in most of the basic grocery segment ( Dal, Rice, Pulses,Toilet Cleaners, poha, flours etc.).

And, regarding BB Profit Club card, the majority of middle class ( of what i know from personal family experience) usually buys grocery for the month in the first week post salary credit in their accounts. There are very few privileged households who can afford to put in 60K upfront in 6 BB Profit club cards to get discounts for the entire year. Add to that the notional loss of 6-7% interest which you might have earned in the bank FD.

In Short, i feel Big Bazaar is currently not really catering to D mart’s core segment which is happy with EDLP ( Everyday Low price model) model where there is a discount everyday and no commitment/ offers only for specific periods.


(shreys) #365

There’s one observation I’ve made that I’ve been wanting to share for some time now.
Before I present my observation I must express clearly that my information collection approach is absolutely informal, anecdotal. My source of information is members of my immediate, extended family and friends.
They’re the urban middle class family which is comprised of a homemaker, breadwinner and teenage children.
In my interaction with them- One question I asked was that would they give up shopping from malls( especially groceries) if they could shop everything online.
Their response was frankly surprising- Unless, the discount online grocers offer is substantial they wouldn’t switch.
Reason: Shopping at malls is also about the experience. Visiting stores, seeing new products, eating out are pleasurable experiences. For a lot of families a visit to the mall is in itself an outing.
And, one intriguing response I received was that it would be ideal if families could visit the store, select the products that you want and they’d be home delivered.
Most people in my interaction were in the age group of 40-50 years old. For them, savings matter but what also matters is the experience, cherishing time with one’s family strolling down the aisle of a store.
They have some firm beliefs and it’ll take a long time for them to switch entirely to online shopping.
Yes, online shopping is growing but it definitely doesn’t spell doom for offline stores.
Driving factors for stores could be the millions of families that still visit malls to spend time together, eat, purchase goods and have a good time.


(nowin) #366

We cant expect multibagger returns ,but i believe dmart is a good hold for 5 to 10 years prespective. Remember that Dmart has amazing focused management , consumption theme in one of the fastest growing economy. Why just India , try to find a comparable listed company like this globally ,it wont be easy. It fits in all criterias by peter lynch. It definitely deserves premium.

Disclosure :- Invested from 1080 levels


(Gary) #367

We are missing one major factor here - if you see last 5 years, the retail business in India has moved from utility to experience, from need to want and an aspirational angle is attached.

Example - I live in Gurgaon and we have high end retail stores like Le Marche. 5-6 years ago, if I used to step in, I would only buy what was not available at Easy day where I did most of regular shopping. Today at least 20% of buying happens from such stores… Variety of reasons. Imported food like cheese, many innovative products get first launched in such stores, experience etc.

But what’s truly interesting is that I probably spend upto 40-50% of my grocery bill on such stores. Simply because you buy more expensive products there…

Now here is game changer to me - future group has clearly moved from utility to aspirational. Brands like Atta Company or Karmiq are innovative, attractively packaged and priced higher than competition. And that creates a sense of wanting to buy, test etc.

And that’s why I decided to invest in future consumer…


(weblinsolutions) #368

@Maunil1

No doubt they are promoting Future Consumer products a lot but I can see all usual day to day products. Bournvita, Amul Butter, etc. What products you did not find there?

Taste is subjective. My family is using many mixes of desi atta company and we are satisfied with the product and quality. They manufacture a lot of product in houses at their Tumkur food park and get other products from good 3rd party manufacturers. I am using Coffee from Fresh and Pure brand of Biyani which is produced by CCL Products. It will be difficult to say which brand products are better without an un biased testing of Dmart and FCL products over a period of time.

I don’t see the point of shopping every day. Shop once in a month when sale is running. Big Bazaar runs a sale every month. I got 286 rs [750 gm] bournvita packet at 220 rs in sale last month Big Bazaar. Now add the 13% [20% - 7% FD interest rate] discount with your profit club card. Net cost is only rs. 191.4. Will Dmart give me products at such rate? I will be happy to switch then.

I have been comparing prices from last 3 years in Big Bazaar and Dmart. I have always found Big Bazaar to be cheaper in sales and much cheaper with their profit club card. I will suggest people to shop from Big Bazaar but invest in Avenue Supermart stock as Dmart is a great company. But only when the stock trades at a sane price. It won’t take much time for all the bullishness to disappear when the growth rate slows down. One of my relative who recently got a credit card shopped from Big Basket when I told him of a good discount. He was happy to get products directly at his home at a good discount. I feel the growth should slow down for the offline retailers. Let us see.

Have you seen many top contributors, founders and moderators of the forum hovering in this thread? I know this is not any indicator but I feel it is an important point to think why don’t they see value at these prices.

Best regards,
Himanshu


(Varun) #369

Regarding profit club card, I see overall discount is limited to Rs 200 per card per month. One can have multiple cards but it will block more money and more hastle. Considering spending on groceries is much more than Rs 1000 per month, using say 4 cards for shopping every month, everytime keeping track of money in each one is tedious… Also, if I get a private label at higher price and then it gets discounted (due to cards) to a reasonable level, I am effectively not getting any discounts. I do agree, that BB must be cheaper in some products… but with Rs 200 limit, can overall basket be cheaper?