Since Dmart has become one of the poster boys of over-valuation in this bull market, it would be great if someone (on the bull side) can post a DCF valuation that incorporates future dilution and assumes a realistic terminal value/exit multiple. We will know what numbers the business has to produce to be a worthy investment at CMP.
You seems to have taken an opposite view personally, what I have clearly stated is that , those who are entering NOW atleast should know what they are actually buying. No one is telling D-mart is a bad business or a bad management . There is no need for a challenge to show you are correct or Mr Rajeev so just chill and if you are comfortable you buy let others hear out others views and take there own decisions.
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Just have a look at some of the stocks in PPFAS and their PEs:
Company Sector PE
Zydus Wellness FMCG 41.73
Maruti Suzuki India Automobile 35.28
Maharashtra Scooters Automobile 55.64
ICICI Bank Financial 42.42
Lupin Healthcare 147.81
Axis Bank is of course in negative.
On a 3 & 5 year basis, the fund has struggled to beat NIFTY 500, its benchmark, despite having Google & Facebook as top stocks in its portfolio.
Listening to such Gurus, I sold Page at 16 K.
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This is a great presentation and he has articulated the facts very well. Basically all the structured inputs have been analysed very well. I personally feel along with the structured (quantitative as well as well known qualitative) inputs, there are lot of unstructured inputs (mostly qualitative inputs which are not very obvious) which goes into analysing businesses and share prices. As time goes many of these unstructured inputs become structured and new/fresh unstructured inputs will surface.
I started investing in 2004 and I suffered massive losses in 2008. Most of my holding were in low P/E stocks. Agreed some were commodities but the valuations were reasonable. My view is that the non-measurable, non-quantifiable, below the surface - unseen, inputs have a large bearing on stock prices. Maybe we need a different model which does not disregard, rather builds upon DCF, moat, risk free rate of return et al. How else do we predict the success of DMart, Facebook, Asian Paints, HUL and the like?
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To be or not be dilemma :- This has always cause me the greatest harm although savior for sometimes. My inability to judge a perfect potential for sales growth like for D-Mart when I have sold it at 1450 with a whooping growth of 157% which I have bought on the listing date at 565. My decision has been triggered by couple of factors :-
a. Lesser SSG growth and gradual decreasing trend in SSG.
b. Faster than expected competition from Amazon Pantry , Big Busket etc.
c. Damani has to liquidate his shares as per SEBI norms.
d. Change in business strategy by Neville Noronha of leading to Franchise led growth which will impact the margin.
e. And obviously the steep valuation.
Now the point I have missed is about the current scenario and their trade off between the price.
a. 14 store already opened and hence 25% revenue growth is foreseeable with sustainable margin in coming days.
b. future growth till 1 year at least intact.
c. customer retention and new customer is still on the growing side
d. faster delivery time than the online retailer which is the most important thing for consumer staples
e. lower cost from local kirana shops which ensure the growth sustainability
Although I have bought the share considering those factors but certainly misjudge the trade off between the valuation and expected growth rate . Honestly speaking even now I wasnât very sure hence will safely let it go. But one thing I definitely missed is that management capability to register this sustainable growth for last 10 years. I forgot to ask me the simple question i.e. if they can do it for last 10 years why will not they be able to do it for coming 10 years as well? Since nothing significantly change in their business apart from the fact of Franchise led growth which will impact the margin definitely but for a high growth & high quality stock like D-Mart should that be a concern ? After all Market normally give 1.5 times valuation to the management of a business than itâs peers. So if I have to compare it with itâs peers then it is still fairly priced considering there was no downside risk of sales and pat growth.
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Another thing i noticed after going through the latest filing which seems to be in line with what the data indicates is the trend towards larger Dmart stores.
Larger stores have better economics as expense ratios are much lower which is true for all forms of retail. There is greater product assortment hence volume is greater , more chances to increase realizations from customers and so forth
As on March 2018 - the Retail Business area was 4.9 mil sqft, As on June 2018 it is 5 million sqft and they have added two additional stores taking the count from 155 to 157. So per store size comes to 50,000 Sqft which is much larger than traditional dmart stores. I think its an important development and my guess is that it will contribute to the improvements in operational efficiencies going forward.
The thing about dmart is that there is a lot of scope of improving its operational efficiency and even minor improvements in operations are magnified because turns of all kinds are very high & they add to the bottom line dispropotionately. With larger stores and lower gross margins ( more discounts ) we can expect lower expense ratios and more volumes ( due to discounts ), strengthening ROE further.
Perhaps, these kinds of things may not priced in as yet is my view and will be if they play out in future. So i am betting on operational efficiency playing out in time for dmart as reflected in the ROE
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Also, they are trying to call doomsday scenario, based on rising bond yields⌠have heard this yields rising and qe ending story from last 5-6 years, the doomsday scenario hasnât come yet, meanwhile people have made tons of 
just focusing on choosing right companies.
question to them is: if you are so sure of bonds yields rising - why not play in the bond market and generate huge alpha for your investors.
10 Year yields today are at 2.96% and that is a fact- rest all speculation.
Analysing numbers alone without referencing the context is an exercise in futility. Are we looking at inflation to rise to double digits especially in the US? Food, education and transportation and healthcare are the only things which have inelastic demand. Apparel, electronics, recreation etc are fully elastic. Housing though inelastic has not seen much inflation for some time. So inflation going up significantly is very unlikely. The US treasury yields seen in 1980âs were so exceptional seen not even during WW I and WWII. The other thing is the amount of capital floating around. Since WWII there have been no significant destruction of capital. So the days of 6% yield and P/E of 10 for good companies is gone unless another 2008 type of meltdown happens.
if DMart falls 20% or 30% I am willing to increase it to 10% of my total from the current 5%. The same goes for all the quality companies. Bajaj Finance was available for Rs. 1600 in Feb/Mar 2018. Now see where it is. Capital is waiting to be deployed in quality companies for as little as a 5-10% fall.
The best antidote to such an environment is invest for 5+ years in good quality companies. Even if I can make 15% CAGR it will be good.
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Everybody should go though below link to understand about DMART supremacy . The Gloom & Boom in Offline Retail by Raunak Onkar PPFAS . How the presenter started by describing the doom days of Offline Retail and then moved How DMART is superior than his global peer/ established global retailer ? We should be thankful to PPFAS for this gem .
Providing Valuation is totally Arts,not science and should be individual call . Every intelligent investors and experienced minds know that from Business Model perspective , forget Indian Companies , Even few Greatest Global companies can only match with DMART . To understand just go through above video. It is worth spending 1.5 hours âŚ
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In my opinion we should see investment in two styles 1) value investing 2) Growth Investing.
In Value investing you find a quality stock but curretly trading at cheap price due to some headwinds or temporary issue in the company. And then patiently wait for it to turn into growth story again.
Whereas DMART which is high P/E stock should not be considered as value investing rather think that no one controls P/E and no one knows right data to do DCF rather we should think a stock price is driven by demand and demand follows earning growth. So consider DMART high stock price is due to growth in its earnings. So It is a Growth Investing, we should not bother about high P/E rather concentrate on future earning prospect. As long as good growth is their you will make money.
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My humble Question is , Who are we to decide which is Value investing and which one is Growth Investing ? What is the valuation framework to fit a stock for this? Now a days , who are new to the market they think investing in Low PE and Low PB is value investment , which is utterly no meaning in my opinion. It has been observed that Low PE stocks have definitely some issue with either Business Model /Management Issue or the nature of Business and that is the reason market is pricing like that . Now if it is value investing that to invest in a stock which is cheap because there is either promoter/business issue then better to stay away from value investing .
But Market is not fool like us and we need to be humble to marketâs judgement . Mr. Market found value in Dmart at 1300 on mar,18 (quoting at 120 PE)so it went up from that price also. But the so called value companies just got decimated in the recent correction. 15 PE became 5 PE. And those who predicted dooms day that DMART will collapse like House of cards Hope they got a lesson that Low PE does not mean Under Valued neither High PE means over valued . We need to stay Humble and learn from market, it will be good for us .When everybody and analysts are giving sell call in valuation of DMART etc in Jan,18 , we observed in Mar,18 that PAGE,GRUH,DMART,BAJAJFIN,HDFC,KOTAK,BRITANNIA,PIDILITE,ASIAN PAINTS stands steel despite of exuberant valuation and made ATH continiously. Why ? We observed that Mr. M found value on those companies not to those Low PE,Low Pb and SME stocks etc etc.
Believe me this is happening in Indian Market for past many years in Indian market that only quality stands in bad time despite of valuation where as other companies got corrected 50-60% of value .As Livermore says that âhistory repeats itself all the time in Wall Streetâ. It happened this time and will happen in future also no doubt . Let people argue with each other on valuation of this companies but Market will again reward them who patiently hold those names for years.
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I donât understand your point I am saying lets not look at DMART from the P/E, high valuation, etc points. Rather look at it from earning growth perspective. And i also made a point that who knows what is correct P/E ratio. It is just the demand which follows earning growth is driving the price. When stock price increase stock P/E also increases but no one really buys on P/E basis it is just the derivation of high demand.
Now I am saying it as Growth Investing. Do you think name of Growth Investing is a wrong reference. May be but you should elaborate why? Otherwise there is no point in writing my views it was solely for learning further.
Hi @bheeshma , I want to learn more on incremental ROE and Return on Incremental Capital and their significance to value the business. Will it be possible to share any Web Link or Book for study purpose?
Sorry @ruffles if it hurts you. my intention is not that. above post is just my observation as per my experience in markets.
To me growth investment is subset of Value Investment . And there is no value where growth is absent.
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"But how, you will ask, does one decide whatâs âattractive?â In answering this question, most analysts feel they must choose between two approaches customarily thought to be in opposition: âvalueâ and âgrowth.â Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing.
We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.
In addition, we think the very term âvalue investingâ is redundant. What is âinvestingâ if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value â in the hope that it can soon be sold for a still-higher price â should be labeled speculation (which is neither illegal, immoral nor â in our view â financially fattening)." - Warren Buffett.
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At a 100+ pe, one pays Rs. 100 for a Rs. 1 of earning. This is not just overvalued but exorbitantly expensive.
Even if one argues that the high price is bcoz of âfutureâ growth outlook,how does one benefit from future growth if you are already paying for it today ?
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Hi @morigh82
The best resource is VP itself. Some of the threads of good cos have been started in 2012 - 13 and the initial posts on those threads provide some great material to consume and imbibe. Fundoo prof blog is excellent. Rest is all youtube, google, tinkering around in screener, buffett letters etc. Pidilite and HUL AR provide some paragraphs on shareholder value added i think. members have created excel sheets on valuation if you are quantitatively inclined and helpfully shared them here. Everything is available and accessible.
As far as dmart valuation goes, ultimately it will trade at a multiple of 20-25 at some point in time in the future. One doesnât know when it will happen but it will for certain. So the growth period in between is what we are interested in and paying for. How long will it continue its growth trajectory and at what rate can it grow is the main call which one has to estimate & then use this exit multiple to calculate expected returns. If the calculation doesnât yield satisfactory returns then one should walk away from Dmart.
As indicated by Prof in his relaxo lecture - one can use volume and price realizations to create a projection of 10 years ( or any period one is comfortable with ) to estimate these things. In the case of Dmart ,volume consists of bill cuts and average amount per bill is the price realization.
In 2018, bill cuts were 13.44 crs and average bill value was Rs 1116 per bill. Bill cuts have grown by 26% in the last 5 years and price realizations have grown by 6.3%.
I feel Rs 1116 per bill can improve further. If your monthly income is Rs 25k and you spend 10% of this amount per month shopping at dmart - your bill can come to Rs 2500. There is much more scope of improvement in realizations though it will happen slowly.
Revenue per store in 2014 was 62 cr while in 2018 it is 97cr per store. This is due to steadily increasing store sizes from 28533 sqft in 2014 to 31613 Sqft in 2018. Over time store sizes have increased by 2.6% but revenues per store have increased dispropotionately by 11.7%. Now we are seeing larger stores of 50k sqft.
I think the overall volume growth and realization growth can be maintained for at least 10 odd years and improvements in operational efficiency can also improve PAT margins as we have seen in the past. I think Dmart can squeeze out a net margin of 7.5 - 8% over time. I have used an exit multiple of 30. Calculations indicate an expected return of 22.4%. If exit multiple is dropped to 20, the expected return comes to 17%.
Best
Bheeshma
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Thanks for you selfless guidance. Your substance full posts in this thread increased our learning Lot and Made the thread more informative. Will surely go through those and get back in case of any difficulties.
Two things which I have different opinion from your above post they are mentioned below
-
Exit Multiple : I think it will be dependent on future cost of capital/available of number of quality business in future in India .
If we consider HUL as reference, I observed that PE keep getting increased year after year for quality companies . There are few quality secular growth companies in Indian Market and market are paying scarcity premium to them. So will it be there in Future also?
Many of my friends argued and gave the example of 1970-80s US market incident when PE got contracted for quality companies (1972-74). Honestly speaking I donât know whether It will happen here or not but my hunch feeling says that till there is shortage of Good quality Bushiness in India,these companies will always trade at premium. -
Long Term CAGR : Now if above point will have become true then automatically CAGR return will also be higher. I was going through various threads in VP specially in PAGE , I observed in 2014-15 people were forecasting 12-15% CAGR of Page Industries for coming years due to High valuation but practically what we saw it gave 25% CAGR as per the earning CAGR . Moreover at that time 90 PE was considered extremely High valuation but it is now normal.Same happened with Gruh.
I always wandering about Market and try to decode it behavior towards the Quality Companies and try to find out How market is Valuing them ? I always consider myself a humble Student of Market and try to learn from it.
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Hi @morigh82
The exit pe of 20-30 is just a conservative estimate keeping in mind that there are many things that could go wrong in future. In reality, cos that have a high roe and can regularly deploy capital at those roes have a much higher multiple than 20-30.
To achieve all the numbers that i have projected - dmart will have to produce an incremental roe of 28% over 10 years something that it has managed to exceed in the past. If it indeed does that, it is unlikely it will be getting a multiple of 20-30. It will be much more. But one never knows and to throw caution into numbers i have taken 30 ( prof has indicated that he never takes an exit multiple of more than 20 and munger took an exit of 17 while valuing coca cola)
Investing in cos like dmart is not easy as one doesnt want to miss investing in a great business which comes once in a lifetime but at the same time one is unsure about how valuations will behave in future. So allocations have to be measured based on ones temperament. Some businesses deserve optimism and some dont. Lets see how this pans out!
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What is the biggest margin of safety? Low valuations? Cash in hand? I tried everything. The best margin of safety is a great business in a growing sector run by a competent and principled management.
I am not saying throw caution to the winds and buy at any price. But looking for cheap valuations in below average companies and industries is an exercise in futility. Maybe bonds and certificate of deposits are better when stocks are expensive, but then who knows when to switch.
If I have to bequeath a significant amount of money to my children and grandchildren I will do that either in the form of gold or house in a very good locality or stocks of very high quality companies. We know that even good real estate is going at 1% yield (equivalent to P/E of 100) in many good localities.
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