Avenue Supermart: a compounding machine?


(bimalb) #743

Comparing Maruti to dmart is not right.

Maruti has good resale value. Good dealership network. Low maintenance and low spare parts costs etc. Maruti sells Maruti cars and not cars made by other manufacturers.

What can an retailer have as an advantage other than lower cost ? If I get same products lower than what dmart sells I will opt for it.

The same products which dmart sells are also sold by others retailers.

Maruti is a brand and has brand value. Dmart is not a brand. It’s just an reseller, selling products at lower cost due to its cluster store strategy and self owned stores that save rental cost.

Disc - no holding in either dmart or Maruti.


(thecroc) #744

I was looking at Page Industries PE multiple history. It has spent most time around 50 PE but it hit 92 PE in 2015 and doubled in price since then , now almost at the same PE multiple again. The expansion or contraction of PE multiple can go on is what it looks like, it is up to the market to say I am ready to pay double the price for double the earnings at an elevated PE multiple as there is more of this 3-4 year cycle doubling of profits to repeat itself.


(phreak) #745

@thecroc - Page Industries has branded products with pricing power and a proven track record of being able to expand and capture market share while also being able to pass on RM price increases. In essence, it’s a product company that’s recession proof.

D-Mart on the other hand is dependant on the economy doing well and at this stage of its expansion, is conscious on passing margin improvements to customers to capture bigger market share. Its growth has to mainly come from store expansion which is dependent on economy doing well. So I don’t think you can directly compare Page and D-Mart although the two do get mentioned in the same breath where overvaluation is justified by quality.

I still view recent IPO stocks with a lot of suspicion so I will wait and watch what happens here. If 50% profit growth drops down to 40% and then 30%, how does the market value the company is what I am most interested in. I have seen serious de-rating in expensive stocks as the perception of growth came down even before the rate of growth came down. I might be wrong. I don’t mind being wrong.


(Krishnendu) #746

Lower procurement cost is the biggest moat for an industry where switching cost is very low. D-Mart operating model is such which will provide sustainable low cost moat to the business but other organized retailer can’t . Building a retail business is the most difficult one so even if I consider big guns like Amazon investing a lot in this industry but where is the business model to provide a continuously at low cost to the customer ?. Now for a least speculative scenario I considered that expansion has stopped for D-Mart but even in that case it’s existing network will become a cash cow. And it will start of paying dividend since lfl growth will be there. Consumer staple is the most secular business in this world and even at the time of recession we have seen them growing quite comfortably and in near term with Indian economy I have not seen any such downturn is possible but even if the recession comes it will be difficult for the local Kirana shops to maintain their business due lack of strong supplier network where D-Mart is having a niche by paying them upfront or settling them in within 15-20 days to secure less price from them and that too in a high volume. So in any case it is very stable business no doubt but yeah obviously valuation is concern but isn’t it always has been? And the company is kept on growing at more than 40% since last one decade, nothing has change in the business so far, opportunity size is very big, only 5% of the pie is with D-Mart and more the industry will mature more this pie will increase , also projected GDP growth rate of India is 7-8% and this sector is directly linked to it. So I don’t know why so much concern about it’s business prospect and about the valuation obviously on which I am not good at but may I have a proper level for this stock with quantifiable justification.


(thecroc) #747

Dmart is volume power and monopoly in operating area. With gross margin erosion but net margin expansion , there is a winner on both sides of the transaction. You are playing with lot many levers here to propel growth, but most important as you said is store expansion. The floor space expansion is the thing to look at though, due to very high returns per sq foot. It’s hard to predict right now when the growth levers will be turned full throttle and peaked, also what’s the peak going to be like is something no one knows. So I stay put to let that play out for some more time.


(Bheeshma Sanghani, PhD) #748

Dmart pays its suppliers in 8.4 days on an average and not 15-20 days.


(sushilkc) #749

Please can someone help to know/track the new stores opening for DMart. I am trying to find out how many new stores are opened in 2Q. Tried to find it out from their website but could not find that.


(vij) #750

Discount with Volumes work well for DMart but that is hardly a MOAT.

And speaking of volumes, why don’t other Supermarket chains like MORE have that, and why are they unable to replicate these margins that DMART enjoys? Having wholly owned stores doesn’t seem impossible to replicate… Whats really the secret sauce?


(Ashish) #751

Secret sauce to me is relentless execution profitably.Anyone can have Grand Strategy but without say/do ratio nothing works

As a consumer of Dmart, I know there prices and quality (having tried wholesaler’s as well) are best in majority of daily items like ketchup,dal, rice, oil etc plus own private brand premia for poha, rava, groundnut etc but not so in Diapers, apparel’s and its inherent cross selling as a basket for customer purchase that helps in improving margins

I have used big basket/amazon as well but somehow online works only for repeat set of items but you miss something always which is always an add on in store based on visibility and kid and wife discretions as well and your total amount spent is always more


(sincyvarghese) #752

Nothing in this world is impossible to replicate. Brands, knowledge, continuously innovating products are all duplicated. Most products of HUL are replicated. In fact every industry has a few dominant players. Even those we think have strong moat like HUL and Britannia have others closing on in their heels.

The point is if there are 10 challengers how many will succeed? There is something called virtuous cycle for any business. In case of DMART I think they have entered the virtuous cycle. Higher Efficiency will result in more efficiency. It is easy to repeat success across stores. Also the kind of rates they get from suppliers will be better than what their competitors get. Then they can give better pricing and so on.

Very high operational efficiency in a low margin industry is a moat in itself. If a new player misses their cost by 4-5% either because of higher input cost (higher supplier cost, higher employee churn), higher operational cost or any other factor can render them extremely vulnerable and a few quarters can put the business in a vicious cycle. I do not know if DMart will necessarily win, but they are showing a few signs of becoming a very good business.


(Dinesh Sairam) #753

That’s the exact definition of a moat. Purchasing groceries and household items is a commoditized service. In a commodity business, being the lowest cost service provider is the only way to stay at the top. As DMart scales more, the moat will only get wider. Look at what happened to WalMart.

Location strategy could be another type of competitive advantage, although at a much lower level than the cost advantage.


(Deepak Venkatesh) #754

Hi

Nicely put. This reminds me of Amazon’s flywheel. I think a decade or two ago similar questions could have been asked of Amazon’s ‘moat’.
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Rgds


(vij) #756

On the surface the moat appears weak (to me). “Wholly owned stores and deals with manufacturers due to volume play”. That is what I meant. It is unlike a patent or a true technological advantage or a new breakthrough that cannot be adopted by others.

But Damani reputation and company performance has been faultless till now. And the stock price has outperformed company performance :slight_smile:


(Dinesh Sairam) #757

The CEO had announced that they’re planning to switch from a ‘Own and operate’ to a ‘Lease and operate’ business model. While I reckon that’s going to take a bit on the Return Ratios, it will make them more nimble and enable them to open many stores at a moment’s notice (For example, look at what the Discount Chain Five Below did in the US during the past 2-3 years).


(ruffles) #758

Can you give examples of de-rating and How do you conclude they are de-rated?


(Krishnendu) #759

Well as far as I remember that the CEO says they have a target to open 30 store every year with ownership model and this will continue but in those cluster where D-Mart was not present yet they might go for a leasing basis if this helps them to accelerate growth. Also the leasing is the reason for not getting the right property due to ownership model as he mentioned. So if they go for leasing even though it will impact margin but the growth will be high as well as give the company to save the cost upfront which will indeed help them to cater enormous under penetrated retail industry.


(Dinesh Sairam) #760

Yes, precisely what I intended to imply. The CEO has expressed that they’d like to grow at 15-20 stores a year, from the current 10-11 stores a year pace. Such a drastic jump definitely requires them to either take on debt or switch to a leasing model for some of their new outlets.


(Krishnendu) #761

In the last Fiscal year ended they have opened 25 stores so reaching to 30 is not a difficult task to get. Moreover as I already mentioned this retail sector in India is highly under penetrated sector so the opportunity size is very big. Even though there are stiff competition coming from online grocery segment but online delivery for grocery demand a high % of the cost for online retailer specially when the ticket size is less so sustainability of those online retailer is very much questionable.
Having said the there is absolutely no doubt about the business or the growth opportunity my concern still remain on the valuation of it as I still don’t know how should we actually value this company? What PE we should give to it? May be some senior person can help. This is a high quality business in growing industry which is having a tailwind so tough for me to estimate the valuation using some normal DCF.


(Dinesh Sairam) #762

I may not be exactly right, but this was possible due to the IPO. I’m pretty sure one of the reasons they even went for an IPO was to utilize the money for store growth. Can they grow stores at the same pace using only internal funding? I highly doubt it. If they can, that would be extraordinary.

I’m not going to start another conversation on this one again. But like most of us, valuations remains my sole concern in Avenue Supermarts.


#763

Much has been talked about the Valuation in this thread, in case you have not read all the comments in this thread, do it, you may not come to a conclusion but you will definitely get the picture.