Avenue Supermart: a compounding machine?

whose theory

Anyway you accept that the return is better than fd although its not going to be better than other stock or the index as a whole

Thats good enough for me, I dont see the risks of dmart as high as the risk of rice exporters where you are invested. As a family I used to consume 10kg rice a month, today I consume zero due to carbs and diabetes associated with rice. Dmart is relatively less risk free for me as I assume people will always buy groceries

2 Likes

@bheeshma, in just one chapter, seth kalrman, who has made millions of dollars for his investors, places the value of Esco anywhere between $4.7 a share to $14.76 a share

This is just one person having a range of value on his analysis of a company

And you are advocating he stick with one value (not a range) and Warren Buffet has to arrive at around the same value +/- 10%

I am rofl

1 Like

In Quality investing the greatest challenges is giving Importance to hard numerical data over subjective analysis.Focus of quality investing on subjective aspects of business presents a challenge in investing culture which is more inclined towards quantification. So much of investing is number/data driven : performance is quantified,accounting is numeric and market moves are stated in percentage terms.Quantitative orientation attracts individuals trained to analyze and trust numbers. While a quantitative background might works good for some days for an individual but the resulting culture often undermine the rationales which is based on qualitative analysis.

"The process of business analysis usually leads to a set of numerical assessments such as growth forecast and valuation measures . While they appear to be rigorous truth, they are riddled with innumerable obscure and subjective judgement,ranging from accounting line items and subjective Judgement . The figures in fact what reveal is suggestive but what they conceal is vital like Building Blocks,Patterns etc. Earning Models are a channel of expression of Biases.For example ,as an important aspect of an investment decision,a model’s earning forecast can be moved by confirmation bias -the desire to interpret information in a way that confirms an existing hypothesis " : Lawrence A.Cunnighum

Despite the charm of quantitative analysis ,we should be aware of their limitations. The more decision maker are involved in an investment process the greater tendency to transform the subjective analysis into figures ,which are easier to circulate ,compare and comment on. Most Investors defend/argue an investment thesis more readily in terms of EPS,PE than by outlining a company’s industrial positioning.It is easier to explain that a stock is cheap than that a company is great.

I don’t know about others but will restrict myself from using Valuation Model during analyzing Dmart,Page,Gruh,Britannia kind of business . I will use excel only to calculating Return on incremental capital,equity as demonstrated by @bheeshma but definitely not more than that.

6 Likes

It should not come as a surprise that, even after all this discussion, you’re still trying to cherry-pick your answers.

Mr. Klarman clearly states that $4.7 is a pessimistic estimate and he is simply doing a stress test:

image

He concludes by saying that he did it to prove that, even after such a pessimistic estimate, the Value was still above the Price:

image

I did a similar “stress test” on D-Mart myself:

But of course, like I already mentioned, everything lies in the balance of probability. I wouldn’t mind at all if someone told me D-Mart is Valued at Rs. 4120. All I request are the projections related to that estimate and the justification related to those projections, which is exactly what I’ve been asking you to show from your side (i.e. If you believe D-Mart is not overvalued, tell me why).

7 Likes

Its beyond valuations right now… its the story of a Great Indian Middle Class…

See what happened with the launch of IKEA store in Hyderabad…

Same is the case with DMart everywhere…

In case you didn’t notice, the assumptions I’ve used to Value D-Mart are no slouch.

  1. The projection period is 20 years, which talks about management capability. Most companies (Excluding BFSI and FMCG companies) peak at about 10-15 years.
  2. The Sales Growth starts at 35% and slows down to 25% during that period
  3. The Margins start at 7.2%, increase in the middle upto 9% and then fall back to 7.3%
  4. The reinvestments, as I’ve shown, are roughly in line with the CEO’s strategy.

If these numbers do not capture the story of the “the great Indian Middle class”, please help me understand what kind of numbers will and how.

My contention isn’t that DMart is a bad company or it doesn’t have the pedigree to grow according to their strategy. The company can and that’s what my assumptions are in line with that as well. My contention is that (Much like an opposite version of what Mr. Klarman was trying to prove) the resultant Value is still 46% above the Price.

If you’d still prefer to ignore this under the pretense of “Growth Investing” or “Quality Investing”, then I don’t think we should continue this conversation anymore. I kept my end of the bargain to Value DMart, hoping to start a constructive line of enquiry. Clearly that’s not happening, so there’s no point in anyone involved dragging this out.

Ciao.

7 Likes

You are not going to find a discount on popular stock
Stocks that are overlooked by the many usually have hidden value
If you read the initial comments on page industries thread you’ll find people found them expensive at 2500 with high Pe

1 Like

Maybe do a same analysis for Apple stock and compare your output to Buffets decision
You are welcome to prove him wrong as his assumption is likely to be very big growth numbers for Apple since he is a “value” investor. As the “herd” as picked and rallied so much into that stock I doubt any other value investor is likely to find value. Maybe he is getting old

I don’t see a point in meaningless challenges, I did this, you do this

I bought into Dmart as I find value at current rate. Your analysis doesn’t show value so you don’t buy. There is no reason to challenge us to prove something on excel sheet.

The only way to confirm who is right is not shouting at this stage. The loudest person only wins here on the thread not necessarily on the market. You have made your point and I have tried making mine so next is just to wait for a few years and see how the story develops

4 Likes

What eventually one realises is that if the stock is trading at a bargain on a simple analysis like dcf it becomes more obvious to other investors and the discount doesn’t really last that long.

I believe every other investor is atleast a bit smarter than me

So either of these has to happen
1-you have to dig deeper, work harder to find stocks that have considerable value left on the table
2-understand complex transactions that most have not or don’t want to and enter the stock before value is realised or
3-the entire market has to selloff like in 2008

If a simple analysis shows value there is usually a chance that something is wrong within the books or company or the sector. Applying this outside of stocks say in properly, if you are looking to buy something in Pedder road and the usual rate is 10cr, but you find one property selling at 5cr, you will not put an offer. You will try to find out why it’s trading at such a discount.

If that is not the case and you have ruled out any problems then there is a chance of a huge gain. I am not saying companies with substantial margin don’t exist. They do. I am invested in dhanvarsha finvest and it’s a bit complicated story but it’s making 5pc every trading day. Just that they are impossible to justify on pure dcf analysis.

1 Like

Was reading Howard Marks’ book and came across this section and was reminded of discussion here of buying quality stocks at elevated valuations. Nothing that most of us don’t know of course.

Although am posting in this thread where this has been a point of contention, this is meant for current valuations of other quality companies as well that are around 80-100 P/E like Page Industries, HUL, Britannia or NBFCs like Bajaj Finance trading at nearly 10 times book.

7 Likes

You are right and all of us are uncomfortable at these valuations.But in the fastest growing economy there are very limited choices for good quality companies.Most of them either have management issues or industry headwinds or execution issues. Scarcity premium is driving these valuations as all of us know.Maybe these may go for a long time correction-who knows? At the same time some of these companies are growing very rapidly so once cannot get Mercedes at the cost of a Maruti. If these cos start trading at reasonable valuations, then most the mid and small caps need to trade at low single digit PE. Is it possible-only time will answer.

6 Likes

Indian Market gave good success to many of us by just doing opposite what Howard Marks and contrarians says. I will keep buying High Quality and avoid low quality which is just opposite of Howard Marks saying . Thanks for sharing it :pray:. Who knows better than us in recent carnage and earlier cycles of indian market.

Many HM fans may find rudeness in my post, but if advocation of buying High quality stocks and avoiding low quality stocks hurt anyone then let it be . It will be good for new investors. Still i am maintaining my stance that buying High quality at elevated price is far better than buying junk stocks in low price . Atleast for the first one if i wait for 2-3 quarters i will get my capital back and for the second option i could loose my entire capital.Multiple cycles in Indian Market gave me this hard lesson. Lost more money in Low PE stocks than HIGH PE stocks.As Basant says no body lost money due to High Valuation, it is due to bad corporate governance and low quality Buisness. Exeperinced it through hard lessons.

18 Likes

value usually is difficult to find
You can find a Low Pe stock but the company will operate in commodities

It’s like searching for a similar size property in central Mumbai with money you get from property you sell in Bhiwandi

Most who search for value assume because Pe is low there is value not realising they might be buying a property in Bhiwandi after comparing properties in central Mumbai.

So you go through thousands of 2 beds in central Mumbai and they are selling for upward of 5 crore. One day you visit Bhiwandi and find a property for 50 lakhs and lo and behold you have found great value

Ofcourse you can buy 10, 2 bed properties in Bhiwandi so you assume you get a bigger value for your money

The problem is when the market crashes

Recent Brexit ongoing property collapse has not touched prime central London properties - the ones that are around Buckingham palace. Those around London and further into suburbs are back to 2008 prices. This is observed everywhere not just uk and Brexit when a market crashes a property with right “location location location” does not fall

Back to Bhiwandi:
Let’s say the government decides to build a direct train link from Bhiwandi to central Mumbai cutting travel time to 30mins with trains every 10 minutes. Now you have value. Even if prices crash you are sure that once the train link is up you will atleast get your capital you put.
Pe will start getting high and if you have done basic research say check schools around the area, local markets, place of religious worship, communal mix (balance sheet) your investment is likely to be safe.
At this stage even if you pay double the Pe it will still have a margin of safety even if everyone says Pe is high.
At some point prices will exceed or be nearer to central Mumbai prices and that is time to sell.

That is margin of safety.
Not the cigar butt margin of safety. Cigar butt margin of safety are extremely difficult to find in a mature market. I think even Graham found it difficult to find these companies towards later part following the recovery after the crash

Most people assume a commodity stock has a chance of 5 pc growth and Pe is low so have found a great value stock not realising there is really no margin of safety

9 Likes

Who can forget those golden words from RKD when someone asked why he was buying truckload of HDFC Bank in 1998 quoting at 8 PB instead of SBI, the PSU behemothat quoting at Low PB.

“Dharavi Dharavi hota hai, aur Peddar Road Peddar Road,”

4 Likes

With my experience of almost 30years and seen many cycles, I tend to agree with you

1 Like

Sir lost hard earned money in bad times due to investing in low PE,PB stocks(Got advise from some seniors) dont want anyone to suffer like me. On vice versa high pe , pb quality names were just rising and keep generating wealth despite of higher valuation . Gruh,Page gave me a very bitter lesson. Vouch myself will not do this mistake further.

in 1998, HDFC Bank had a P/B ratio of 4.95, while its ROANW was 23.87%. Hence the elevated P/B.

Source : https://www.hdfcbank.com/htdocs/common/pdf/corporate/10_Years_Highlights.pdf

Ofc all this is in hindsight, but HDFC has maintained its stellar track record of redeploying shareholder funds at that attractive returns for an enormous amount of time and hence all the respect for it.

However in 2000, its p/b did go to 8.32, an impossible highly valuation for a bank. Its CMP was 257.20 in 2000. For the next 3 years till 2003 its Price went nowhere, indicating that valuation matters. However, for those who held on to it till today, ended up with a fine result, the reason ofc being its ability to keep up the redeployment run rate intact.

While this is a thread on Dmart - the central thesis is that if you find a co with these characteristics and if it delivers on that promise you can - without too much valuation know how - can also make it happen to your portfolio.

I am all for being able to value companies and one should certainly pay heed to it.

Dmart is redeploying shareholder funds at an incremental rate of 30%-35%-40% and in my view the market has priced it an ROE of 25% ( Its current ROE is 18%-19%) This is enough to motivate me to hold on to it for a while to see what can happen.

Analysts between themselves are in disagreement with what should be its value. Here is what a sample of them said in May-2018 when the CMP was Rs 1490. I fully respect their views but such a variance leads me to question whatever valuation approach they are following.

My estimate is a fwd PE of 90 which gives an estimate of Rs 2000-2100. I will go with that.

CMP 1490
House May-18
Geojit 1590
Edelweiss 1442
IIFL 1200
Prabhudas 1003
Motilal Oswal 900

Best
Bheeshma

11 Likes

As I said in this thread earlier ,“Statistics are like a bikini. What they reveal is suggestive, but what they conceal is vital” . In 2000-2003 HDFC Bank merged itself with the bank Times Bank (Bennet and Colman Controlled) which cooled ROE at 16-18% level from 25% plus level so it is obvious that market will not give 9 PB to a 16% ROE company. It is HDFC Bank that’s why market did not punished (Price was stable)else if it other bank then Market would punish it severely . This is the problem with us , without doing full fact check we keep providing half baked examples with statistics (Like Infy gave zero return from 2001-2011 etc etc)
Also RKD was invested in HDFC Bank from 1995. The question was asked with the intention why he would keep HDFC when it was quoting at so much High Valuation. Who don’t have long term vision at least 3-5 years it is better to avoid Stock Market in my opinion.

This give me the answers of my Long quest why Market is giving so high Valuation to DMART. Thankful to you for your guiding on this. Addition of this also what other members mentioned about the future prospects and Opportunity Size of the Organized retail industry in India.

10 Likes

Based on simple maths lets say current pe is 115 so market is paying around 8 times growth as follows

A grocery chain like Tesco or Walmart in a developed economy trades at 15 roughly where competition is fierce.

115pe / 15pe, back of envelop market is saying dmart will grow 8 times or have 8 times more stores than what it does now.

You dont need complex spreadsheet for this back of envelope calculation

So the bet really is if you think it will grow more than 8 times

Lets try to answer:
wiki says: As of 2018, it has 154 stores spread across Maharashtra, Andhra Pradesh, Telangana, Gujarat, Madhya Pradesh, Chhattisgarh, Rajasthan, National Capital Region, Tamil Nadu, Karnataka and Punjab.

UK is the size of UP roughly in area. Population of UP is 3.7 times more than UK. In UK, Tesco has fierce competition. Where ever there is Tesco there are others like Asda, Sainsbury
Total number of stores of Tesco alone in UK for a population of roughly 65m as per wikipedia are 3433

So the question is if Dmart can open more than 1232 stores all across India not just UP

Once you answer this question, you get the scale that is possible

8 Likes

That’s a reasonable explanation. However, I’m not sure what happens if it doesn’t grow 8 times and has a fair bit of competition that takes away existing market share, which is quite possible. Would buying at 115 P/E afford any margin of safety? (The P/E ratio doesn’t account for shareholder value, but we’ll go with the argument for now.) No back of the envelop calculation is required to determine that one would lose a lot of money at this P/E in the more conservative case (no growth or degrowth). I’d lean more toward valuation that does not account for future projections/growth and values businesses at their current states instead. I’m curious to learn from you about how you account for a margin of safety. Do illustrate. Thank you. :slight_smile:

2 Likes