I would like to suggest that neither a low P/E nor a high P/E is a measure of quality. There are several businesses with stocks that have expanding P/E ratios in the market and that do not deserve rich valuations. The approach you’re advocating sounds good except it doesn’t account for the situation when the music stops playing.
You have a very good point that if DMart under-delivers over the next 10 years then the margin of safety is very less. Number crunching is good to a certain extend. Many people will not find value in DMart. Every day I feel I might lose 30% of the value in DMart. What do I do? I would want to shift to safer counters. But then I want to own more of DMart. If price goes down by 30-40% with operations remaining intact, I will double my position in DMart. After all it is my money and not my PMSs.
Remember DMart is a very under-owned stock. There are not many of its kind in the Indian context. After visiting Big Bazaar (I have 2 loyalty cards), Hypercity etc for some ad-hoc shopping, I return reinforcing my decision not to buy Future retail. I do not know anything about Reliance Retail. So the only one left to buy is DMart. It is a 100,000 crore company of which about 80000 crores is with the promoter family.
This is a factor the number crunchers are not considering. The under-ownership of the stock. Will you not buy it if it falls 40%? I will certainly double my position. My biggest regret was not buying Nestle when it was struggling during the Maggi fiasco.
There are few other not so obvious factors which give these FMCG companies (and DMart) of India high valuations. Maybe a discussion for another time.
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One should note that Nestlé is in a different league altogether when it comes to quality. I like that you would have considered pouncing when it was down and I hope you do get wonderful opportunities in businesses you like! However, while I believe there is some value in D-mart, it isn’t enough for me justify the opportunity cost in my mind even 40% down because on the other hand I have a value-creating business B that proposes to buy back 1/10th of its market value this year, is drowning in cash, and is available at a P/E of ~15 (I would consider the P/E as a fair measurement here as earnings correlate exceedingly well with both cash and worth; in fact, cash exceeds expectations in this particular case). Would you still suggest opting for D-mart instead?
This is a great forum to learn from people like you. Thank you! 
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The question is not whether people would buy it if DMart fell 40%. I’m sure many people would find Value if it fell 40%. I personally would, if it fell 50%. The question is would people buy it at the current price or anything above the current price. That’s what we’ve been discussing to and fro for so long.
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I just got off from a call with my friend and he mentioned about HCL buyback at 1100. So you do get such opportunities. Basically a 10% return in 3 months. I do not know if it is the same buyback you have mentioned.
Everybody has their own niche in the markets. I cannot put all my money into buyback offers. I already have 20% or so in IT. TCS and Infosys. Retail to me is something where I should have an exposure and which other company other than Dmart.
Yes, Nestle is one of the best companies in the world and DMart is not close. Still you cannot say DMart should command lower valuations than Nestle. My point was just to give an example of how people value businesses.
The question is if after such a fall won’t there be discussions on its fall and further downside and people will still wait on sidelines! Difficult to say if Dmart will fall 50% and oblige many people to enter it. If one is waiting for a 50 % fall why was one not investing when it was available at 600,700,800?
To the question - would people buy DMart at the current price? This is a question which cannot be answered definitely for any stock. If people stop buying DMart at the current price for 3 years the Dmart earnings would have caught up with the share price. But then this has happened for many stocks even when the valuations were not so expensive. After a few years we call that Value-trap.
I am only thinking from what is comfortable to me. Your arguments are also valid and I always strive to sharpen my thinking so as to comprehend and synthesise multiple variables and opinions. If nothing this is what I have learned in the last 15 years of investing. How can you absorb multiple variables and opinions and synthesise them to get a more sophisticated and accurate model.
So I might take a position in HCL tech to take advantage of their buy-back offer. What is the harm in making some quick buck?
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sorry there were some problems with the spreadsheet,loading new one
Moat of any company is understood over time. Retailers don’t have s brand and don’t have a moat is what I keep hearing. But then it is very easy to say anyone can make biscuits - Britannia just went up 40-50% on a silly earnings growth , because ceo will be Varun berry. That is 15000 crores added to Britannia for keeping the good ceo.
The moat is understood over time , remains undocumented for most companies and holds valid until there is a technological disruption.
There is no tech disruption so far in the touch , feel and try facility of brick and mortar. There are no profitable value retailers either. moat is there and hence valuations justified.
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Hi @morigh82
Another way to look at incremental roe is to look at earnings growth rate, payout ratio and current roe. In stable cos with stable margin profiles, roe = earnings growth/(1-payout ratio).
For e.g - colgate typically pays out 70% of its earnings in dividend. Over a long period of time its earnings have grown by 15%. So 15%/0.3 is sustainable roe, which is what it is roughly at currently.
Dmart doesnt pay anything out as of now. It has grown earnings by 43% as per recent quarterly results. So its incremental roe is equal to earnings growth/(1-0) i.e 43%. However its reported roe is 18%/19%- indicating ample scope for improvement. So actual roe will lie somewhere in between 18% - 43%.
In the coming quarters earnings growth will most certainly revert to actual roe - one doesnt where it will settle but an average of 18% and 43% indicates 29%. This gives a rough sense of steady state growth in earnings one can expect going forward. Ofc a dividend payout would alter the equation but since its in the growth phase dont expect that to happen in the medium term. Lets see.
One can use this earnings growth rate and apply current PE which is stretched so suitable downward adjustments are required as per ones inclination. Generally 2 times growth rate is conservative estimate of pe. So lets say a pe of 60 to 3 yr forward earnings growing at 30%. This will give an estimate of roughly 1800. Just another quick check on valuations
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Thanks @bheeshma for providing this good insights.It is very helpful.
When I was going through Gruh thread and saw @Rajesh1975’s post few months back . He also nicely explained by this thesis that How Gruh can control his growth and dividend payout in any adverse situation for the beneficial of shareholder . Its Business Model is super strong .
I was already searching to understand that how to calculate incremental ROE for dividend payout company and found this link . But the formula used in this links seems not correct.Might be I am wrong.
http://valueoperations.com/vo2014/incremental-return-on-equity/
Your calculation is more logical and correct to me as it is giving correct result for companies like HDFC AMC ,Hawkins ,Page etc.
On Growth front:
Avenues CEO has said: “even in a city like Greater Bombay where we have several stores now, we could get to 75-100 stores and still see opportunities. This is an industry that has headroom for growth for 40-50 years in India”.
Competitor Reliance retail(with 4x revenues of dmart) has set itself target of 30% growth for next 1 decade. PEs are linked to opportunity size. Dmart has less than 0.5% market share.
Consumer reports have also indicated, Dmart has captured mind share very well. New customers join and existing customers keep visiting them. This along with best operating margins all shows they have got their strategy right.
Valuations:
Now coming to valuations(at high level), Assuming 30% topline and 35% bottomline and limited or no dilution
35% growth for next 10 years would mean EPS growth of 20x.
If PEs drop to 40 you make 7x
If PEs drop to 30 you make 5x
Looking at examples of consumer companies, PEs would remain 2-3x higher than developed market peers.
Any +ve surprises from Dmart ready becoming a bigger platform for online grocery shopping can push growth and hence above estimates higher.
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Which consumer report you are refering here? Can you share the name/the link?
Nothing in public domain but this can be indirectly seen in same store sales growth:
| Dmart | 15-20% |
|---|---|
| Future Retail | 8-10% |
| Shoppers Stop | 8-12% |
| V-mart | 8-10% |
Same sales growth summarises acquisition, retention and churn of customers for existing stores very well. Higher number means existing customers are retained and new customers are joining and in this case at better rates than competition.
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I think higher incremental ROCE actually indicating the Brand strength. **
WB said in 1922 shareholder letter “Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.” .
Higher incremental ROCE showing us that now DMART brand is much strong than earlier . Now it don’t need to wait for months/years to generate high rate of returns from the newly invested incremental capital (New Stores).Whenever people are hearing that new DMART store is opened their nearby area, they are rushing towards it because everybody knows now that DMART gives product at cheapest price. Word of Mouth advertising is also taking place here in this way.
** Editing Note: Higher ROCE does not only indicates Brands Strength, It also shows the quality of Buisness Model , Efficiency in Working Capital management, Strength of Balance sheet etc.
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@morigh82: “I will keep buying High Quality and avoid low quality which is just opposite of Howard Marks saying”.
After reading your post, I was surprised and went back to check what he had actually said. He is merely suggesting buying high quality ‘can’ be risky and buying low quality ‘can’ be safe “within” a certain context. This is different from I ‘will keep buying’ low quality.
Hi
Interesting news snippet on prospective JV between Alibaba and Reliance Retail. Also the news on the plan of Amazon to form a consortium to take over Aditya Birla’s More.
The best part is Goldman Sachs is on both the deals 
Regards
Deepak
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Hi
Too much news inflow in the area these days. Not sure if all are true for instance Mr. Ambani denied the Alibaba meeting. Now we have Mr Biyani getting some funding from Mr Bezos. 
Rgds
Hi @deevee
I think one way to look at businesses in general and retail in particular could be through the customer lifetime value framework. Retailers which incur very less customer acquisition costs and very low customer retention costs have a very high customer lifetime value. One also needs to add the triad of scale, entry barrier and pricing power on top of these costs.Retailing is all about profitable volumes at a unit level while acquiring and retaining customers. Its a very harsh and brutal business to be in and more so if you have a fickle customer base.
I can see many similarities of retail with real estate - where customer acquisition and retention costs are very high. There are problems of scaling up, virtually no entry barriers and limited pricing power. In such businesses capital ultimately flows to the customer and not the shareholders. Though there are exceptions in every business.
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Did anybody attended DMART AGM today ? Can anybody please share the discussion of AGM?