Avenue Supermart: a compounding machine?

(weblinsolutions) #370

I am not sure which card you are checking. BB Profit Card Club is 10000 rs upfront deposit card which gives you 12000 rs. Limitation is 1000 rs spend per month per card. if you don’t use the card for one month then you can carry forward the 1000rs of this month to next month.

There is a 5000 rs variant also available.

(Varun) #371

Rs 10000 to load. I get Rs 12000 credit. I can use only Rs 1000 per month. That means 20% discount = Rs 200 per month only.

(weblinsolutions) #372

Your calculation is correct. 20% on 1000 = 200 rs.

Moreover, all the profit club card holders have got 1000 rs free shopping every year from last 3 years. We have also got 1000 rs free shopping when we took this card and on every renewal.

So it has worked out 400 rs per month on 1000 rs from last 3 years for us. That’s straight 40%.

(msahani) #373

(atul1082) #374

In that sense, I have to load 10k in advance and make 12 visits to claim the incentive.Moreover if my buy is more than due in a month, that would HV to be paid without any incentive.its too much of a complication and forces you to buy items from them whether you like them or not.As I said earlier, they HV a high %age of own labels which may or may not be good.At the same time, their price wr to branded items can not b ascertained.

(Julian) #375

Company is free cash flow negative. It constantly requires addl. capital. Return on book value is nothing noteworthy. Majority of the share is in the hands of the promoter resulting in low supply and heavy demand. Sales growth and profit growth are excellent but already factored in the price. No stock sells at 100 pe in a true bear market. Not invested.

(msahani) #376

Packed parking lots, long queues in the 3rd largest Ecommerce mkt. B&M is here to stay especially in a country like India where organised retail is in it’s nascent stage. ALDI is the #dmart of Europe giving a solid fight to the other Top 4 supermarkets in the UK.

(atul1082) #377

Which company you r referring to? Big Bazar or Do Mart?

(Julian) #378

If you were asking me, the company I was referring to is Dmart.

(shreys) #379

Dmart, optically is obscenely expensive. But, it’s pertinent to note the size of the opportunity we’re dealing with.
China, an 11.2 Trillion$ economy. It’s without an iota of doubt a behemoth.
Chinese spend around 4.35 Trillion $ on food and allied products. It amounts to almost 40 % of the GDP. A major portion of that business is in the organised sector.
India, which is a 2.2 Trillion $ economy has a retail sector of around 455 Billion $(0.45 Trillion $).
Our food and allied products sector is around 20% of the GDP.
As the economy grows the spending of people will increase.
In China it’s believed that good food equals good life.
As India prospers a major source of pleasure will be good quality food.
And, who’ll cater to this demand?
Retailers like Dmart, Food Bazaar, etc.
The market is big enough to accommodate multiple companies.
I won’t comment on the valuation but the potential for growth is extraordinary.
In China, around 10% of the total retail spending is online. China, where electronic payments are ubiquitous online spending is restricted to 10%. Agreed, the online spending is growing at a rapid rate. But, the entire pie is getting bigger. In India, threat from online retailers isn’t as grave as we may believe it is. People crave the experience of shopping and that definitely isn’t going anywhere. There’ll be a migration from shopping in wet markets to shopping in air conditioned stores. The choice is easy to make.
Here, I’m not making a case for Dmart’s valuation. But, just highlighting the room of growth in business.

But, when will the anticipated growth in retail materialise?
When enough jobs are generated in India.
If you believe in the Indian growth story, the retailing sector, especially food sales will skyrocket.

(Julian) #380

Thanks for the good write up shreys. Nobody denies the scale of opportunity. Nobody denies that Dmart is doing exceptionally well. The only doubt is whether Dmart will be the Walmart of India. The Ambanis, Birlas and Biyanis are also there and they do not stand merely to watch and applaud Dmart. Can’t their business model be replicated by others? Who can say with certainty that Walmart will not be permitted to entry multi-brand retail. Dmart has done well on a small scale. Jury is still divided on whether they can repeat the success on a larger scale. Market believes Dmart and given sky high valuations. It can even go to 200 PE. But market can be very brutal if earnings are missed, in which scenario I pity the pigs who will get slaughtered.

(shreys) #381

I’m in complete agreement with you.
I’m fairly certain foreign retailers will participate in the Indian retail growth story.
China, as well, has multiple leading foreign chains in business. All of them exist in equilibrium and flourish.
It’d be a sheer waste of time to try and predict who’ll emerge victorious in the retail war that’ll ensue.
The only solution is to periodically assess Dmart’s performance and keep an eye on their growth figures. Also, job generation will be an area to focus on. Because, it’s the employed who’ll play an important role in improving sales.

(sincyvarghese) #382

I have been a late entrant into both DMart store and stock. In fact our family used to shop at Food Bazaar and never had the intention of moving to DMart for groceries. But then it is a very common adage at least at the place I live (Navi Mumbai/Panvel) that where DMart goes Food/Big Bazaar closes down. The merchandise at the former Big Bazaar is nothing compared that at DMart. We get 99% of all that we want from DMart which was not the case at FB. We do not ant to make multiple visits for groceries.

We go to DMart once in 1.5 months and spend about Rs. 8-10K. Initially we thought we will never go to DMart on weekends because of the horde of shoppers. Then we said we will never in the evenings on weekdays. These days there is no good time to go to DMart.

In the meantime we went to Future Bazaar for the first time and they almost convinced me to take a Future Card by paying 10000 or 5000 but I did not relent. The second time I acquiesced and actually got a card thinking I will save 20% over a period of one year. I get to shop for Rs. 500 every month. We have two cards and we spend about Rs. 1000.

After about 6 months we have concluded it was a waste of time. Generally the merchandise is expensive at Big Bazaar. Also I see that their billing is quite slow despite the queue being not long. The variety is also limited at Big Bazaar. Their loyalty systems are so messed up. One evening we spent 30 minutes to buy stuff worth rupees 1000 because our card numbers simply would not be accepted. These are hassles most people do not want to get into. Also from the look of it I felt BB’s cost structure is not very efficient. Lots of employees and many of them getting enough free time to socialise. As they say an airlines make money only when it is flying. Similarly retailers make money only when they are billing.

I do not see the single minded focus in the running of BB. Another thing to note is the employee turnover is much less in DMart compared to other retailers. Right from the top management to regional managers DMart employees have stock options which motivates them to perform at a higher productivity.

As for dealing with suppliers, DMart is right at the top. My friend who progressed from being a department manager of a store to a regional manager told me that clearing supplier dues within 48 hours is a very important KPI for them.

So all these things (employees, customers, good merchandise and supplier goodwill) add up to the efficiency of the model. I never apply for IPO and naturally did not apply for DMart IPO, but after considering all these factors I took some positions (about 5% of my portfolio) in DMart after it went up 60% from the IPO price. If it goes down significantly I will add another 5%. This was the model I followed for all the good companies in my portfolio and it has helped me protect my capital and give me some returns over the years.

(Julian) #383

Thanks for the scuttlebutt. You seem to use what you already know to make money in the market. This is the Peter Lynch way of investing, though he warned against overpaying. We will follow your advise and shop only at Dmart. While wishing you all the best in your investing, personally I wouldn’t invest for one major reason. The market cap of this company is already 80000 crores and even if we assume that you got a 10 bagger and the market cap goes to 8 lakh crore ( almost impossible since there is no other company in India with such market cap) the return to investors will be still less since there will be further dilution of equity (company being free cash flow negative) and price earning ratio will moderate in the process. Barring some modern day miracle, all those who buy this stock at this level will surely see financial pain. Peter Lynch in “One up on wall Street” will tend to support my view. Sorry to disappoint you dear. Perhaps I would buy at 50% discount from present price. Pl. make your own decision.

(sincyvarghese) #384

Sir, You have a point. DMart is an expensive stock. Its current market cap is bout 88000 crores. I am not looking at a 10 bagger in 10 years which actually works out to be 26% CAGR. I am ok with a 5 bagger which is about 17.5% CAGR. This works out to be 440000 crores. That is about 67 billion USD. I agree there are hardly companies which have that kind of mcap in India. But we are looking at 2028.

But then who would have thought that a paint company’s mcap would grow 10 times in 10 years. Agreed it was going at a much lower P/E. Sales growth is impressive, profit growth is also impressive. I am not saying it will not go down by 25-30%. If you get that opportunity then please go ahead and buy. You will get much larger returns.

The problem in India is there are not many companies where I think I can put money. In the past I invested in value companies like Ador Fontech, ABC bearing etc and at the end those turned out to be value traps.

Companies have a DNA. It is very difficult to replicate that. Two companies may look and feel almost the same. When I joined an IT major its sales and revenues were comparable to most other companies but its valuations were steep. But unfortunately or fortunately most other companies are not even on the radar of investors. Again I am not making a case for investing in DMart and I may even get out of it. But then I do not see myself taking a position in Future retail unless there are more compelling evidences about their operational efficient and management focus and integrity.

(Julian) #385

Wow! What a reply. I must kick myself for thinking that you were a novice. There is no dearth of quality companies in this country. I myself have commented on some of these companies. The 5 bagger you were talking about is only possible if Dmart becomes a Walmart. Buying a 100 pe stock for 17.5% returns. Hope everyone understands this.

(shreys) #386

Frankly, those who are believers in Dmart’s and India’s growth story should stay invested as long as consistency in growth, margins are maintained. It’s possible that there’ll be a significant reduction in valuations. But, can we predict it- No.
I feel that companies like Dmart will rarely be available at valuations palatable to value investors. It’s because of the tremendous growth they’re experiencing. A stock that’s painfully expensive today may be available at better, reasonable valuations because of the rapid growth in the next 5 years.
And, Dmart becoming a 5 bagger may not be as far fetched.

Dmart in 2018:
Sales:2.2 Billion$
Market Capitalisation:12 Billion $

To become 5 times it’s current market capitalisation the returns will be around 17.5% CAGR.
DMart in 2028:
Market Capitalisation:60 Billion$ ( Assumption)

And, let’s assign a fairly reasonable 2 times sales.
So, sales will have to grow to around 30 Billion $ by around 29.5% CAGR
It’s indeed very difficult. But, possible.
Only time will tell.

But, as @Julian sir mentioned in his previous message it’ll become a much better buy if it corrects from current levels. I too am waiting for better levels to enter.

That doesn’t seem to be happening at least now. Continues to touch new highs.

(sincyvarghese) #387

Walmart today is US$ 260 B dollar mcap. I’m expecting Dmart to be US$ 65 B in 2028. Let us see how it goes.

(Maunil) #388

As we are comparing D Mart and Big Bazaar, again Mr. Biyani seems to have changed the model to replicate D Mart kind of success and has launched a campaign based on Walmart, Dmart’s EDLP model terming it as “Har Din Low Price”.

EDLP is not a pricing strategy but its a retailer’s DNA and is extremely difficult to successfully emulate the same, as it needs fundamental/structural changes in the cost structure of an org. The one’s who start with this mindset are the only one’s who can genuinely succeed at building a scalable business on top of the same.

Big bazaar had earlier moved to a model, where consciously they were increasing Private Label (Future Consumer Products) to build a high margin business. Now changing it to EDLP will need a mindset shit in the entire org.

As someone pointed out, seeing BB employees having time to chat, whereas D mart firstly doesnt have full time employees and secondly they dont even have time to serve customer as they are busy refilling the empty shelves (Observed this multiple times at various times of the day). This is one of the examples of a structural change in cost model. Let us wait and watch Mr. Biyani’s strategy… as i think Dmart and BB are not comparable at this stage.

Disc. Invested in Future Consumer and Dmart from lower levels.

(shreys) #389

Mr. Biyani’s consistent inconsistency could augur well for Dmart.
Mr. Biyani is without a doubt an incredibly smart entrepreneur. However, Future Group, despite being one of the pillars of India’s modern retailing industry seems to be still exploring the right segment it belongs to.
Dmart, on the other hand, has done very well for itself and positioned itself as the provider of good quality goods at even better prices.
To draw parallels Jet Airways at one point used to suffer from this predicament. Whether to position itself as a full service carrier or low cost carriers or a blend of the two. Fortunately, they resolved it.