Avenue Supermart: a compounding machine?


(phreak) #787

Looks like this is the slowest they have grown in their existence. 18% PAT growth with margin compression and only 3 stores in the quarter - Looks like a potent cocktail to me with the current valuations.


#788

Quarter Wise Stores in FY18

1 Store was added in the Q1FY18
4 stores were added in the Q2FY18
5 stores were added in the Q3FY18
14 stores were added in the Q4FY18

5 stores were added in the H1FY18
Total = 24 stores were added in the FY18

Quarter Wise Stores in FY19

2 Stores were added in the Q1 FY19
3 stores were added in the Q2 FY19

5 stores were added in the H1FY19


(Himadri Roy) #789

I think DMART must undergo some correction considering we are valuing DMART at par with Amazon. DMART is super efficient etc, but the fact is, to grow its business it will need constant capital feeding. The compression in margins are here to stay considering peer pressure from both offline and online. Moreover, DMART is nothing but institutional version of my nearby Kirana Store (more than 70% sales from daily needs). Also many people look at YoY of these kind of business which is again wrong in my opinion. It should be seen as sequential SSG with some approximation of base period.

2017-06 2017-09 2017-12 2018-03 2018-06 2018-09
No of Stores 132 136 141 155 157 160
Area (sq ft) 41,00,000 42,00,000 44,00,000 49,00,000 50,00,000 51,00,000
% Food 51.55%
% FMCG 20.03%
% Merchandise 28.42%
Total Income From Operations 3,598 3,508 4,095 3,810 4,559 4,873
Other Income 23 21 14 15 14 14
GP 556 566 671 567 712 698
EBITDA 303 318 422 294 423 390
PAT 175 191 252 167 251 226
EPS 2.79 3.02 3.97 2.64 3.96 3.56
GM 15.46% 16.13% 16.39% 14.88% 15.62% 14.33%
EBITDAM 8.43% 9.06% 10.30% 7.73% 9.27% 8.00%
PATM 4.83% 5.41% 6.13% 4.37% 5.48% 4.62%
% Seq Gwth 26.13% 1.78% 18.56% -15.55% 25.64% -1.93%
% YoY Gwth 26.25% 22.62% 22.48% 26.72% 38.89%
Rev/sq ft 8,776 8,353 9,306 7,775 9,119 9,554
GP/sq ft 1,356 1,348 1,525 1,157 1,424 1,369
EBITDA/sq ft 740 757 958 601 845 764
PAT/sq ft 426 455 572 341 501 442
Incremental Area (Sq Ft) 0 1,00,000 2,00,000 5,00,000 1,00,000 1,00,000
Incremental Revenue (Rs Cr) 487 -90 587 -285 749 313
Area/Store 31,061 30,882 31,206 31,613 31,847 31,875
Q2 FY18 base Revenue 3,508 3,909 3,266 3,830 4,013
Seq SSG 11.4% -16.5% 17.3% 4.8%
YoY SSG 14.4%

(ranjan rakshit) #790

Does it not result actually good? 40% increase in sales.Expense increased due to increase in Change in inventories of stock-in-trade (-225 from -335) which can be sorted out in coming quarters.


(Bheeshma Sanghani, PhD) #791

Happy navratri everyone. Navratri and the various forms in which it is celebrated across india signifies battle. The battle of good over evil with the good emerging victorious.

The conscious reduction of gross margins by 2.1% ahead of the festive season which all retailers plan for should be viewed as a strategic move. The net effect is the improvement of sales and further reduction in the expense ratio. Lowering prices ahead of the festive season may hit Dmart margins a little bit but the effect it will have on the margins of other retailers is far more dramatic and potentially life threatening to them as Dmart expense ratio at 7.4% is the lowest in the industry.

Dmart uses gross margins as a strategic tool and its cost structure allows it to lower prices as and when required.

In a near commodity like marketplace, prices of products are set at the cost of the NEXT most cost efficient competitor. In dmarts case the healthy improvement in the cost structure should be seen as a precursor to a more sustained earnings growth.

In my view, these are all strategic moves ahead of a very competitive festive season.

Best
Bheeshma


(Varun) #792

As you have said the prices are set at cost of next most cost-efficient competitor, is the margin reduction not a sign of increasing competition… may be from online / offline… against private labels which are cheap… or against retails (online) which are offering investor’s money (losses) to reduce prices… how can one fight profitably with such competition?

Point to think is that is this margin reduction is permanent/long-term (maybe 3-4 years) in nature or is it just to attract festive season demand?

I personally feel it is a mid to long-term issue since such price cuts were not taken by the company in previous years.

Disc: Tracking position


(ranjan rakshit) #793

Hi @bheeshma, this is almost clear the they are preparing themselves for upcoming festive sessions as per ‘change in inventories’ parameter .How to know that Gross margin is effected due to lowering prices ? Is there any way to get that from income statement other than Management Commentary.

Edited Note: Got the answer on expense ratio on net.


(Tejash Shah) #796

Though no argument on valuation taking a beating, but the problem in this case isn’t with company but with market’s expecations on margins. Dmart’s management has been very upfront and candid in sharing that they don’t want to ‘MAXIMISE’ profits but ‘OPTIMISE’ profits. Their core value proposition to consumer is the ‘lowest price everyday’ and they don’t want compromise on that to meet market’s expecations. In fact, the core philosophy here is somewhat similar to Jeff Bezos - “Customer should be at center of every move” and the rest will be taken care of.

Stock will take a beating becasue the so called “consensus estimates ( read #ME2 estimates) will take a beating”. Later the initiation on the stock by brokerage houses, higher the expectations they set to justify their bullish ratings.


(David ) #797


Unrelated to Dmart but was good to see how these low cost retailers operate.


(ranjan rakshit) #798

Fellow member ,Can you help me out how to calculate maintenance capex (Stay in Buisness Capex) for Dmart? Is it will be equal to Depreciation and Amortization ?I want it to calculate cash profits of dmart in 2017-18?


(fabregas) #799

Good documentary. I was surprised to find out that a major chunk of CostCo’s profits come from their membership fees, not from product margins. Their margins are pretty low. The narrator mentioned that CostCo just about breaks even on most products. I don’t know how true this is. If it is true then it is a very interesting business model.


(sushilkc) #800

@bheeshma Thanks for your help on checking the store count. Do you also have insight into why more stores are added in H2 rather than H1 and that too specially in the 4Q i.e. is there any business reason or seasonality factor involved ?


(Bheeshma Sanghani, PhD) #801

Hi @sushilkc

I don’t the reason behind this but my guess it that stores will need some time for customers to get used to maybe 7-8 months. H2 is typically the festive season and one wants the catchement to be fully aware about the store, prices and products well in advance so store openings are timed accordingly to best suit purchase behaviour skipping summers and monsoons.

Thanks
Bheeshma


(aerofire) #802

(Bheeshma Sanghani, PhD) #803

Hi @aerofire

A good way to assess what has led to the contraction in gross margins is to look at the purchase/sales ratio. My thesis is that that in anticipation of the festive season , dmart has stocked inventory in advance but hasnt sold it just yet. This difference in the extra purchases made but not sold increases the COGS due to the way it is accounted.

The purchase to sales ratio for Dmart has varied in a tight band of 86% to 88% over several years and it is mean reverting.

The gross margins for Dmart have been improving due to scale and net margins have been improving due to lower expense ratios due to this scale. As you sell more , you get better purchase deals. The movements in the gross margin are just due this timing of inventory ordering and should revert as they have in the past.

In my view, one should try and see if gross margins revert, like they have unfailingly done in the past before concluding some structural problem with margins as alluded to in the numerous articles.

Item H1 2019 2018 2017 2016 2015 2014 2013
Sales 9,431.94 15,008.89 11,881.12 8588.119 6439.433 4686.488 3340.854
Opening 1147.04 933.15 660.20 539.60 378.30 276.20 195.70
Purchases 8321.06 12862.78 10368.9443 7439.774 5648.493 4086.528 2937.936
Closing 1446.53 1147.04 933.15 671.6 539.6 378.3 276.2
COGS 8021.57 12648.89 10095.9948 7307.774 5487.193 3984.428 2857.436
Purchases / Sales 88% 86% 87% 87% 88% 87% 88%

Best
Bheeshma


(KunalKothari) #805

Extra inventory shouldn’t really affect margins, except to the extent it increases finance costs or reduces other income due to lesser cash/cash equivalents, right?


(Bheeshma Sanghani, PhD) #806

Hi @KunalKothari

The formula for COGS is Opening Inventory + Purchases - Closing Inventory = COGS.

If Purchases increases due to some reason the COGS also increases. So the idea is to use the Purchase/Sales ratio to derive what is the “normal” purchase level. Ofc if the P/S ratio increases more than the normalized band, one surely has reasons to believe that buying costs have increased and then there would be a structural issue that would most certainly impact margins. However, dont see that yet in Dmart.

Thanks
Bheeshma


(KunalKothari) #807

I beg to disagree. If inventory is built up for the upcoming festival season, the Closing Stock would also increase, hence reducing the COGS.
It is Cost of Goods SOLD, so if something is unsold at the end of the period, it doesn’t reduce the profits.


(ranjan rakshit) #810

Please tell us the right way. .How to know that Gross margin is effected due to lowering prices ? Is there any way to get that from income statement other than Management Commentary.


(ranjan rakshit) #812

Thats fine , Can you please share where Management told that they want to lower margin? In the analyst meet they told that they don’t want to increase margin from here and they will pass the lower prices to customer if further operational performance improves.Do you really think 1% reduction of the grocery bill will attract lot to customers? I am eager to learn mathematically (not by speculating) through Income statement how this gross margin reduction happened due to price cut ?