It appears as though the market quotes really far ahead prices of growth stocks.
If there is a fund buying DMART at 100PE, then at 20% cagr EPS growth it is factoring in next 13 years of growth. In other words, if bought at CMP only after 13 years it’s (projected) EPS will give 10% returns. (Either that, or the Fund house is speculating that the growth will increase further)
This is just amazing.
Therefore, if I intend to be a long term investor, then I should invest at a PE level from where I have visibility of earnings, or just accept it as plain speculation.
On similar lines, Infy has zero growth. I am being conservative. Then with 40Eps, I would buy the stock at only 400, to get 10% earning power.
However for TCS, there is 8% growth, With 73 EPS if I buy at 1200, it will take 6 years to give 10% returns. But at 1900, it will take almost two decades. In that respect DMart and TCS are equally expensive.
That is how intend to sort good managements/companies in order of price-value.
You can refer to Security Analysis where Ben Graham explains investing in growth cos and the pitfalls, pros and cons. In general, it is the recommended advice that one pays little or nothing for the growth component from an investing point of view.
No point agonizing over valuations. One can revisit it later when one is comfortable.
Dmart has started issuing Commercial Papers frequently to obtain funds to meet short-term debt obligations. Board had approved raising the limit from 200 Cr to 500 Cr on 29th Oct’18 & last 2 months have seen company utilizing it for 100 Cr each, where maturity dates are approx 3 months. Does it mean that company is in dire needs of funds for aggressive expansion / run its day to day operations? Despite having good PAT in each quarter, they are opting for frequent commercial papers.
Do they disclose the utilization of such funds in annual reports? Just being cautious on hearing a different company utilizing huge amount (approx 2200 Cr) for advance / loan to its employees
Big Bazaar is aggressively pushing prices against Dmart now a days. Our local dmart employees were saying they can feel a reduction in the number of shoppers visiting Dmart. KB is taking Dmart head to head but I don’t see it benefiting him as he don’t have the cost advantage of Dmart but I am sure that he will not let Dmart grow at aggressive pace like before by pushing the prices. Big Bazaar is also going aggressive with their cards and future pay based offers in the store. Smart shoppers are moving towards Big Bazaar Profit Club Cards and planning how to shop in advance now a days. I had written a post a month back how Big Bazaar Profit Club Cards is a better deal compared to Dmart. https://www.desidime.com/forums/hot-deals-online/topics/10-cb-on-big-bazaar-gift-vouchers-hurry?page=2#post_5412406
I am sure Fretail is making losses by going aggressive but this will surely stop Dmart from growing at the high rate. I think we are looking at a significant de-rating of the dmart stock just like Shankara in the coming times.
@bhisham@weblinsolutions@jamit05@mrai74@basumallick After Amazon’s intent to enter into offline model - What are the odds of Dmart doing a strategic partnership with ABC Player who is eyeing Indian market? With this partnership the now and then requirement of funds for expansion would also be taken care of + with this Dmart and ABC player would be ready with full ammo to take on Amazon + BB.
Disc. These are just personal hypothesis - but thinking on these lines can provide different paradigm to dmart shares.
Dmart is well capitalized and is generating more than enough internally to fund its growth. It doesn’t need any partnership in my view. I don’t think dmart has any targets for growth market share etc. Its focus rather is to invest in stores where it can break even quickly. If it doesn’t find locations like that it doesn’t add stores. It follows simple basic time tested retailing rules which have served them well. Simple stuff like pay suppliers on time, keep fast moving inventory, pass on discounts to customers, keep employees happy etc
DMart has extended store hours. Sometimes I buy from our local Reliance store. Even a Rs. 500 checkout is a pain. Same for Food/Big Bazaar. I will not extend my loyalty card.
The other thing is in Reliance and other stores you need to watch for the deals even during checkout. Sometimes you pick up things because a deal is mentioned at the shelf, but at billing we do not get the discount. They say the deal expired. This has happened for me in Reliance and in Food Bazaar. They may not be doing it deliberately but their processes are not very efficient. I don’t have time to watch out for every product during the billing. In DMart I know even if the deal is 1+1 I get 50% discount if I pick only one packet.
All these add up. Does that mean DMart is not overvalued? It definitely is. But then give me another quality retailer at better value. I am here for 10 years. I hope DMart falls 10%, 20%, 30%, 40%… I will pick up another 50% of my existing quantity.
If I am a very rich person then I might invest some money in Future Retail also. And if it makes big I get a great return on my investment. But I am an ordinary man and hence I will not invest my money in a potentially great investment instead of a boring but steady one.
Views on DMART shared on CNBC by SiMPL
Somebody recently asked me about Avenue Supermart (DMart). I said it was a valuation challenge. Amazon was a valuation challenge earlier, as it had strong growth but was not generating cash. But the difference with DMart is that it is generating cash. Last quarter, they had sales of Rs 4,000 crore, so let’s say the annual sales are Rs 16,000 crore. Their net margins is about 6-7 percent, so they can make profit of Rs 1,000 crore. To generate Rs 16,000 crore of sales, they only require Rs 2,000 crore of capital. Let’s assume that they can grow at 25 percent for the next 10 years and maintain these margins and capital turnover. So the sales will reach Rs 160,000 crore and they will generate Rs 10,000 crore cash in 10 years. They will also have some cash on the books, as they will not invest all the cash flows. A company like this, which generates Rs 10,000 crore of cash, can easily be valued at Rs 250,000, plus they will have cash. The current market is Rs 80,000 crore. So it can be 3-4x in 10 years – which is better than keeping money in the bank – but I think there could be better opportunities over time. But you have to keep thinking and valuing businesses. If you think 10 times, you will know what to do when opportunities come.
So if you break up the value of the business – the first is how much sustainable money they are making. Like DMart is making Rs 1000 crore profit now, and you think that is sustainable. Now if you put money in a bank today – you get 6 percent interest rate, so the value of that Rs 1,000 crore is at least 16x (~100/6 percent), so Rs 16,000 crore. The second is, what is the minimum growth that you can project over the next many years? I take that at a nominal GDP growth of 12-15 percent. That will give another Rs 15,000-20,000 crore of value. So you can attribute Rs 30,000-35,000 of value to these. Then there will be other opportunities that the company can exploit – that the market is valuing at Rs 45,000 crore today. The composition of these three changes over time. At some time, the first component accounts for 70 percent of the market capitalisation and the second component accounts for 35 percent of the market capitalistaion of the company. Which means the third component is negative 5 percent, which the market is not willing to value. In bear markets, the capitalistaion might even be lower than the first component of the value, and you find that the second component definitely has some value. So one can wait for situations where working backwards one has to make less assumptions on the second and third components. If one has to make detailed calculations to justify valuations, then it’s probably not worth it.