Avenue Supermart: a compounding machine?

(Bheeshma Sanghani) #495

Hi ranjan

Amongst other things you have mentioned, the growing ebitda margins are a reflection of the cluster based approach they follow as fixed costs get spread out with more stores in the cluster.

(Bheeshma Sanghani) #496

Hi @kanvgarg123

yes, gst demonitization also impacted ssg. Not sure about the quantum. Some reports indicate that the impact was ~3%. In my view , an ssg of more than 10% is not sustainable as more stores become old over time. Difficult to predict in retail- but there should be a steady downtrend to more realistic levels.

(kanvgarg123) #497

I am not an expert to quantify the impact. I thought of it to be 5-7% because a lot of companies took price reduction as mentioned my them in the conference calls.
I think the SSG can be around 10% because of 5-7% inflation impact and rest the volume growth impact. We have a retail store and the growth is always between 10-15% for the existing products. I am pretty sure that DMART will add more SKUs and can increase the SSG. We are also missing the impact of premiumisation. I was reading about Parle and Britannia and how fast their premium category biscuits are growing. These objects are 20-25% more expensive than normal objects. There are numerous other product categories where the shift is happening.

(Mahendra243) #498

(Advait) #499

Hi, below are my notes from D-Mart Analyst/Investor meet 2018 held this week. Note that this does not cover all points, but is only a summary of key points

Key Highlights

1.Addition of Stores

a. While refusing to give out a number for annual store additions, management indicated that it can comfortably add 20-25 stores annually

b. Targeting over 30 store addition annually will be a big challenge

c. It takes between 24-30 months from identifying a location and getting the store operational

d. Historically, D-Mart has focussed on Owning its stores rather than leasing. However off late, it is also adopting the leasing model

e. Profitability for leased store is better than owned store

f. Preference for owning comes from the fear that once a store is established in a micro market, lease renewals will give undue bargaining power to the landlord and thus increased lease costs are likely to hit margins 10-15 years later when the lease for current stores expires

g. A lot of time and effort is given on getting the location right, company believes in getting the best location even if it is coming at a premium

h. High cost of Real Estate prevents the company from aggressive expansion in metros like Mumbai; there still are some pockets in the suburbs where the model works

i. Revenue per sq.ft for D-Mart stands at Rs. 2,726 psf pm on average

  • This figure is higher for stores in Mumbai and lower for stores in Tier III & Tier IV

  • However, profitability per store is more or less similar (Refused to give numbers)

  • SSG in Mumbai would be low, but sales per square foot is high ensuring margins are protected

j. Company is expanding in clusters. Prefers this approach vs venturing into unchartered markets due to limited management bandwidth

k. All 155 operational stores of the company are profitable and it has never closed a store

2. Growth of existing & new stores

a. Investors had plenty of questions on tapering Same store Sales Growth (SSG)

b. Management believes that SSG is a function of many things and thus complex to predict

  • For Eg, a store opened in Malad continued to grow at 20% for many years until they opened a store in Mahavirnagar, Kandivali

  • SSG for Malad dropped substantially but D-Mart was able to capture higher market share combined

c. For old and mature stores, company guided of SSG to be in line with inflation. Younger stores will have high growth rates until their base becomes high

d. Old stores at prime locations will continue to grow (Like the 1st store in Powai)

3. Pricing

a. D-Mart is extremely confident of delivering on their promise – Lowest Price, every day

b. Has a proprietary algorithm in place which scans product prices across competitors (including Big Basket, Amazon Pantry etc.) and sets the product prices at D-Mart stores

c. Some of the competitors have become aggressive with discounting to compete with D-Mart. The company’s response is “If our competitors drop prices, we will drop our prices further”

d. The company will do everything possible to ensure that it is able to offer a product to the customer at the lowest price

e. If the sales velocity of a product is low, the prices are dropped immediately to clear inventory

f. On asked what is their differentiating factor v/s competition, CEO said D-Mart stores are extremely crowded, AC is poor, Merchandise Display is not the best; despite this people come and shop at D-Mart only because it offers best value for money!

g. It does not wish to compete with Metro, Nature’s Basket and other such premium chains. They wish to continue catering to the value conscious consumers, which are plenty in India

h. Management believes inflation is good for its business as revenue inflation is always > cost inflation

  • Wages are the highest impact on cost while other operating expenses like electricity etc. always grow lower than inflation

i. For FY18, D-Mart reported EBITDA margins of 8.9%

  • Guidance given last year was 8% would be the highest

  • Re-iterated that ~ 9% margins for a value retailer is amongst the highest in the world and the company does not want to improve this further

· It believes that any effort to further improve margins would be at cost of customers which the company would never want

j. Put in place Centralized procurement in the last 36 months – this was implemented category-wise. This has helped improve margins

4. Opportunity Size in Retail & competition

a. Retail spend in India was $616 bn is expected to be $960 bn by 2020 of which D-Mart is able to capture only Rs. 15,000 cr (~ $2 bn) in FY2018

b. Management believes Retail has enough space for everyone to co-exist and still make money

5. How does the company decide category-mix and what does it do to keep increasing sales?

a. Fundamental outlook of the company – Give a customer what it wants, even if it means you are making less money in short term

b. Maximum shelf space is allotted to the product that sells the most and not to the product that has highest margins

c. If you can’t compete in a category, don’t operate in it

  • D-Mart stores are known for not keeping fruits & vegetables in most stores

  • Fruits & Vegetables are sold by roadside vendors who have no establishment costs, pay no taxes and can afford to sell at prices which D-Mart can’t beat

d. Private Labels – Indian consumer wants the highest quality product, should be branded and it should be at the lowest cost

  • Will take time to establish in this segment

e. Keep doing small improvements often, but don’t micro-analyse

6. On E-Commerce

a. “Do your job best, don’t focus on competition” – R K Damani

b. ‘D-Mart Ready’ is the company’s venture into online retail where customers can have grocery delivered to their home or have it picked up from a D-Mart Ready store (Kirana store- tie-ups)

c. Grocery as a category has been a laggard in e-commerce

d. With the advent of Walmart who comes with a grocery background in India, if there were to be a Price War in this segment in future, the losses of Amazon/Flipkart would be far higher than today

e. Cost-cutting in case of E-commerce players will hurt more than for Brick & Mortar stores

f. Currently, D-Mart Ready contributes less than 0.01% of total revenues (insignificant)

7. Incentives & Employee management

a. No targets are given to any employees as there are multiple functions contributing to the topline

  • Eg: It would be unfair on a store manager being given a sales target and management deciding to open another store within 3-4 kms from that store which would affect the sale of that store

b. Instead, they have rigorous systems in place to evaluate performance of employees (Did not elaborate on this)

c. Store manager has the freedom to make changes as per discretion, but most stick to the tried & tested template

d. The top management sees itself as mentors to ensure that no big blunders are done and junior employees are encouraged to take decisions

Discl: Not Invested, only tracking

(Bheeshma Sanghani) #500

Thanks advait for sharing. Good insights. Two things that seem to be important at this point are - guidance given for no growth in ebitda margins and the statement that if competitors lower prices we will lower further. This clearly indicates that further savings in costs are going to be passed on to customers going forward.

(RamanTiwari) #501

Most points show management is here for the long run with focus on establishing trust with the customer.

  • Preference for owning - shows the time horizon of the management
  • Keeping the lowest cost tag(and not higher profits) is the topmost priority shows focus on lower costs - much needed in Indian context.
  • All stores profitable - another example of operational efficiency and management pedigree. I remember in the past reading news about big bazar closing non-profitable stores

disc: invested

(shreys) #502

I don’t have much to add on the numbers front. But, I’d like to share a change in buying habits I’ve personally experienced. Until 20 days ago, most of the items needed on a daily basis like milk, biscuits, etc were acquired from the stores in close proximity since a DMart was quite far away. However, a DMart Ready store opened for business close to our residence and it’s been such a relief. An important product like milk is more often than not available Rs. 6-7 cheaper than other vendors. And, business is brisk. Most evenings, when my arrival at the store is delayed a bit, most milk packets are sold out. Also, I spoke with some fellow residents and they too are mighty pleased with the discounts and the service offered. It could be an excellent way to attract customers. Quite a few people I spoke with mentioned that they’d be delighted to try the full fledged DMart store thanks to the pleasant experience.

(Bheeshma Sanghani) #503

Though not invested due to classic price anchoring bias, Dmart has been a good learning experience from a numbers point of view. There are a lot of stories hidden in the numbers that they put out. Not sure why analysts dont highlight them because they can be extracted. One of them is store count and store size.

In the recent investor conf dmart has guided for opening about 50 stores in the next 2 years and 75% of them are going to be in the same cluster. Dmart opened 45 stores in the last 2 years. However, there is a big difference in the size of stores over time.

The avg size of a store used to be 28387 Sqft back in 2012 while in 2018 its 31613. The incremental size of new stores opened in 2012 used to be 30,000 sqft while in 2018 the new stores opened were 35000 sqft. Basically this means 50 additional new stores opened going forward are equivalent to 63 old stores in terms of sq footage. So all per store revenue projections should be based on this number.


There seems to be change in strategy going ahead which i think has been prompted by the falling sales per sqft for older stores due to size limitations per store. Investments in larger stores seem to be doing really well and sales per sqft has grown by 22.4% here over 2017. The sales per sqft in older stores seems to have reduced by 5% as there is a limit to product assortment that can be accomodated in a limited size.

The Revenue per sqft for newer stores ( launched in last 2 yrs) currently is 28,744 per sqft while for the older stores (older by 2 years), is 36,694 per sqft. The differential is a significant 28% , so there is significant room for growth in the newer stores as they are much bigger. One can expect rapid growth ( 25%+) from them due to low base of SBA.

The implications are that the fixed asset turnover ratio will certainly rise in the future from the current 4.43 as stores become larger and contribute more to SBA. This is a well thought out plan as passing on savings to customers by keeping ebitda constant will mean more footfalls and requirements for a larger area are obvious.

(Darkwanderer79) #504

(Vijay) #505

I am not sure if we can use sq ft to predict current revenue unless they can utilize 100% of space. I have been to Dmart in Bangalore and Chennai and my perception is limited. Bangalore has very high utilization rate. However in Chennai, I can see dead space in all floors except ground floor. There are empty spaces all around and dummy counters in each floors. I agree that it can be used in the future but may not yield revenue today. Chennai location is operational for over a year now.

(Bheeshma Sanghani) #506

Hi @Uservijay

I agree with your observations, currently as we discussed, there are only three stores in entire TN, so clearly there may be different plans for stores in chennai which dont have the required footfalls. South has been a tricky market esp Chennai. People behave differently there when it comes to food & grocery and from what i hear - there are several well entrenched local brands with strong customer loyalty and their own distribution networks. Bangalore is probably much cosmo and people are willing to experiment with stuff. Anyways, all this is anectodal.

I was looking at their incremental post tax ROCE and it has been pretty good going there. At 28% incremental returns its been a good run and if they keep up the run rate - it can get pretty interesting from this point on. I think the future dmarts will be 45k - 50k large format stores having all kinds of things that require larger spaces.

(fabregas) #507

Good analysis. I have a basic question - what is FA (first row)?

(Bheeshma Sanghani) #508

Hi @fabregas

FA is fixed assets in the balance sheet or the net block.

(ranjan rakshit) #509

Hi Bheeshma

I have two basic questions.Please correct me If my queries are wrong.

  1. In Q4 result NOPAT is mentioned 80627 . But in the screenshot excel it is 81595 . What am I missing here?

  2. During Half yearly result , though I will get FA,Inventory ,Receivable,Payables but can’t calculate Incremental ROCE because I have to take yearly NOPAT here. Is there any other way to get the approximate incremental ROCE during half yearly result?

(Bheeshma Sanghani) #510

Hi @ranjan_r

Nopat is a little different from pat. It represents the net profit available for appropriation - both for shareholders and lenders. You take operating profit minus depreciation and reduce taxes from that amt by the prevailing rate which is 35%.

If you have the half yearly balance sheet and income statement then change in nopat divided by change in capital employed will give you the return on incremental capital - generally you do this for 3-5 yr periods and not shorter periods because it takes time for capital to produce results.

As far as d-mart goes , it appears that it is able to deploy large sums of additional capital at exciting returns. Valuation will always remain a topic of debate with intelligent arguments from both parties.

However if one thinks that it can continue this trend for a long enough period then there are not many businesses out there who have this ability and valuations should be assigned in line with this view.

(ranjan rakshit) #511

Hi @bheeshma
Thanks for your such valuable input and help.

I was calculating EPA/Sales of Avenue Super-marts but found they are pretty average .Is my calculation right?Or Am I missing anything? EPA/Sales is a future value creation lead indicator which is used in Valuepickr stocks to evaluate the quality of Business. hence I also used this technique to evaluate DMART’s Business Model

(Bheeshma Sanghani) #512

I have a limited understanding of EPA. There was a post by Donald that I remember reading on the same. I think its the cumulative Sum of excess profits after taking a charge for capital, but I am not too sure. I am not the right person as besides a rudimentary understanding - I have done no work - but am sure some members of the community can throw clarity if you post in the thread for the same. In the end- whatever valuation model you follow - if it doesn’t give you reliable input on buy and sell decisions its of no use.

(Mridul) #513

EPA is Economic Profit Earned …meaning real profits after deducting Weighted Average Cost of Capital (WACC). EPS for the most part is an illusion as it doesn’t consider the Cost of Capital we are employing in the business. A business is profitable in real sense if it earns above its Cost of Capital.

An example from Investopedia…


(fabregas) #514

Thanks for explaining in detail! :+1: How do we estimate the cost of capital?