Avenue Supermart: a compounding machine?


(newrb) #764

The lesson I learnt by switching from page to other companies when page was ~13K (after coming down from 16K) is that it is better to keep ‘overvalued’ high quality businesses than fishing for ‘undervalued’ businesses. page looked expensive at that time and has become more expensive since then!

My view is that until the growth momentum continues market will continue to give the super premium. There are very few businesses that can grow at 25%+ for a very long time to come.

Disc - invested.


(Bheeshma Sanghani, PhD) #765

you could go to

http://www.dmartindia.com/feedback and click on customers. The dropdowns give data on the store count but there is some manual work involved.

This is the count as on today from it, dont know whether its updated or not.

AP 10
Hyderabad 19
Chattisgarh 3
MP 6
D&D 1
Guj 30
Karn 13
Mah 64
Amritsar 1
Jalandhar 1
Mohali 1
Ajmer 1
Bjilwara 1
Jaipur 3
TN 3
Ghaziabad 1
TOTAL 158

Best
Bheeshma


#766

But if the past growth cannot be repeated in the future and we have overpaid, whatever may be the plans of the management, if the growth is subdued, despite some earnings wouldn’t the price remain constant for some years?


(newrb) #767

Yes, there is risk of time correction where price may wait for earnings to catch up.

There are two main reasons why growth would slow down -

  1. Demand issues - I don’t think they will have a demand issue in the near future. There is a long runway for organized retail.
  2. Competition - which other retail chain is able to offer the kind of value to customers? when I go to d-mart in Bangalore (which is typically in the weekend), there is often a queue even before the store opens.

This is not to say there could never be a black swan event or a jio moment due to which their business could be severely impacted. but investing is about of probabilities and right now the way I see probability is stacked in d-mart’s favor.


(phreak) #768

Assuming there isn’t much same store sales growth and the margin improvements are at their peak, is the understanding right that further growth will more or less directly correspond to the percentage of new stores added? This of course assumes that the new stores would be in similar location, similarly sized, catering to similar demographic and will be received the same way. But for simplicity, let’s assume that.

If the above assumptions are right, sooner or later base effect will come into play if they continue to add 20-30 stores per year, going by 131 Stores in FY17 (21 New - 19% new stores) and 155 stores in FY18 (24 New - 18% new stores). From here on, base effect itself should slow down the growth and in addition to it if any of the assumptions in the beginning of this post w.r.t margin deterioration or de-growth in same stores or new store revenues lower than current mean would only adversely impact numbers. None of these would be a problem if this were even trading at 60 P/E.


(Bheeshma Sanghani, PhD) #770

Yes, a higher base of mature stores will impact the growth rate. However, it should do an earnings growth of 20% -25%. Every time it adds a new store, the unit economics improves and it has recently entered some new clusters.

The reason for the margins that dmart has are structural in nature rather than market led. Low debt, low rent etc are all conscious choices and the quality of margins is much superior so I am not convinced about peak margins. They can improve further is my view and could be wrong about it as well.

The other aspect of dmart is that it pays its suppliers super fast. In essence it funds the working capital needs of its suppliers. If you are a supplier to dmart and it constitutes a major part of your business then you are likely to have a low receivable period and are cash flow positive. This would enable you to grow quickly. The supply chain of dmart is very stable for this reason. The importance of a strong supply chain cannot be highlighted enough in retail. In many cases the main source of working capital financing is not a bank but dmart.


(Krishnendu) #771

Normal same store sales growth rate for a retail store is 10-12% at an average D-Mart same store growth stands at 14% considering the base effect of 2.2% for GST [so without GST we can consider it at around 16%]. Their historical average was very high which is at 20% but obviously that is not sustainable we all know. But we the reason behind this high same store sales growth is most of store is very new and yet to mature and their strategy to open 20-30 store every year will not only add to new store growth but also as it’s maturity will take 1-2 years at least so it will add up to the high same store sales growth as well.
As I have already mentioned about the valuation I am not very good at specially for a quality company but if market is giving it a PE of 100 even after same store sales growth at 14% which is sustainable if we consider the economy is growing at 7% and consumer staple easily get a growth rate of 14% i.e. 2 times of GDP. So I guess market is having something in it’s mind.
I have already mentioned why black swan effect like Jio is not possible here because this business is a low margin business and having a very high delivery cost compare to the low ticket size so anyone trying give online delivery of a consumer staple is not very sustainable for very long since they can’t offer it at a discount. Also D-Mart is having various moat like low cost producer, strong trusted stable supplier network, hub and spoke model [which I believe the most important for a Retail chain to grow], culture inside the business house [this is very much important to run a low margin business]


(Krishnendu) #772

See no one can predict if they can open 30 store every year or not. But considering their history they have always done better that what they have committed so for this part of concern we have to give benefit of doubt to the quality of the management.


(Vishal Bharti) #773

BTW…If you take Rs 21-22 as next year EPS (from research reports of various research houses) - its already trading at that PE( ~60-65). So, its expensive , however not too much expensive also…consider it as a Big & Strong fish ready to eat other fishes just like Amazon, Google etc…it has the characteristics to be a winner…Now its up to you to convince yourself either way…after all its your money… if it rises, you gain…if it comes down…you lose.


(Bheeshma Sanghani, PhD) #774

I think what @phreakv6 is trying to point out that if sales growth slows down which is certain to happen due to the growing share of mature stores in the business and margins don’t expand and contract instead which is also possible, the valuations will nosedive violently. This is definitely possible and one must be cognizant of this valuation risk as it is a real one and can take your capital out.

In my view, Valuations have to be taken more seriously and one cannot brush them aside. We have had some discussions around valuations in various threads but not of the same level that we have seen discussions around business happening.

Those invested in Avanti know what peak margins can do to your wealth.


(Krishnendu) #775

Yes growth will slow down specially the same store sales as I have already mentioned since the saturation level is 12% considering the Industry peers and GDP growth of 7%. D-Mart as per the last quarter stands at 14% but it’s keep on opening 30 store per annum so how can the overall growth will be affected by this at-least in coming 5 years. So the question is how much PE we should give to it? The industry itself having a strong tailwind towards organized players.


(EL) #776

That’s what everyone is saying
In the beginning you have 30 stores, add 30 stores (100pc growth)
Next you hv 60 stores, add 30 stores (50pc growth)
Year 3 you have 90 stores, add 30 stores (33pc growth)


(thecroc) #777

HIn FY20 you will be looking at 57 PE multiple if stock remains at the same price. If the company can grow at 20% for next 5 years till say 2025 , and the PE multiple sustains at 57 , you get 14% cagr returns by 2025 from now. It can be 17% if PE multiple is close to 67. I agree to @phreakv6 and you that we have to be aware and look closely at the growth at all points in time till 2025. Margins surely seem to be close to a peak ( may not be full throttle though) , but I think assumption that store sizes are going to be similar as before is not right. Store sizes are becoming bigger , and increase in total sq.foot continues to be above 20%. I am counting on a slight increase in revenue per sq.ft for next 2-3 years , due to a good amount of recent stores becoming more productive and another assumption is no net margin contraction.


(MD RH) #778

Don’t think that @bheeshma is indicating DMART is in peak margin if you go through his earlier posts. Network Economics is yet to play fully so there is still scope of margin expansion.Most Important question is there any 30% + predictable growth quality consumer story available in Market (Non Financial) ? If there it is then it’s valuation premium will decrease otherwise not .The correction which is going one it is across market…


(kingzeusvj) #779

*** Below points are not in specific order ***

  • Brand of Promoters - their business acumen is idolized

  • Vendor payment in 10 working days: This is the major reason for minimum 5% discount on every item

  • Direct purchase from manufacturers & primary vendors

  • Owned Real Estate: 85% Self, 15% on Long Term Lease of 30 years. Stats as per 131 stores

  • No central logistics vendor - vendors are local

  • 40% sourcing is central

  • Variable employee model - 70% staff on daily/weekly wages

  • Food items account for 54% of revenue, merchandise & apparel account for 26% revenue & FMCG give 20% of revenue.

  • States where Dmart is present account for 55% of total retail spend

  • Input or Appraisal Rating Metric’s is very different for its managers - it totally depends on pilferage, empty shelves & idle cash counters

  • Cluster Approach - this gives them edge in better understanding of local preferences

  • Revenue per square feet is Rs. 29,019; and due to this low pilferage - major reason: knowledge of local preferences

  • Only targeting Lower Middle Class, Middle Class & Upper Middle Class

  • 41 pick up points in Mumbai - volume growing humongous

  • Promoter holding at 82%


(skchamp) #780

Just came home from a Dmart outlet in Mumbai. The sheer amount of customers inside the store filling up their shopping carts is a delightful scene as an investor.


(Bheeshma Sanghani, PhD) #781

Total store count has moved to 160. In Fy18 the store count was 155.

2 stores were added in Q1 , which means 3 stores added since then till today.

source : http://www.dmartindia.com/feedback

Best
Bheeshma


(mrai74) #782

Last two years saw 24 & 21 new stores getting added, comparing that 5 in current year (2 Qtrs) does not go with management commentary.

Although I couldn’t find store count in shared link. Did you select state/ district & manually counted?


(Deepak Venkatesh) #785

Hi

You are correct. Mentioned in the quarterly results too.


da6b69e3-d4e8-4f77-b3be-b5a2039da8fa.pdf (1.6 MB)

Rgds


#786

Any specific reason for this margin contraction in q2 while H1 numbers still look ok but not great in the context of high valuation? What is TTM PE it should settle now given this subpar PAT growth in Q2? I had exited @1100 in some family accounts I manage and looked like a bad decision. Would like to get in at right valuation.