Avenue Supermart: a compounding machine?

Sell if you are a value investor, buy or hold if you are a momentum investor.

A true value investor should always be ready to see the stock sold go up further by an inordinate amount as there is no end to insanity of markets. It is easier said than done to sell your stock at 20% loss to highs seen because of anchoring bias.

I don’t think a legendary investor like Radha Krishna Damani who I respect a lot would have offloaded stock at 300 bucks if the true value of the enterprise was more than 1000 bucks but well even he couldn’t appropriately gauge the insanity of markets. So what makes you capable of predicting the highs possible!! Investing is an area where one be right and still be wrong and vice-versa.

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Is there anybody who attended the AGM and would like to share discussions?

Got these AGM notes as a forward and do not vouch for its authenticity/accuracy:

Key Highlights from Avenue Supermarts (D’Mart) AGM
• D’mart is raising Rs.10bn by way of debentures as the company can use the IPO funds of Rs 3.6bn for construction and purchase of fit outs for new stores but cannot purchase land from that money, D’mart believes that due to stress in the real estate market it can use this opportunity to buy land for future store expansion.
• Store opening in Q4 at 14 stores was accelerated as bunching of store opening happened in Q4, the construction of stores usually slows down in Q1 and Q2 due to monsoon because of which store opening in Q4 always remains high.
• Of the Total 131 stores 113 are owned and balance 18 are on lease.
• D’mart is looking to open 20-25% of the new store addition in new geographies, though these store in new areas are margin dilutive, however D’mart believes that it is necessary to open pilot store in new areas for increasing geographical reach. D’mart also believes that since these stores in new areas are very few it won’t be margin dilutive to a great extent.
• D’mart has opened 40 D’mart Ready stores, the avg store size is between 200-500 sq.ft and all of them are on lease. Dmart ready is right now run on pilot basis and is only operational in Mumbai. The initial traction from these stores has been reasonable as D’mart is experiencing initial Inertia from consumers in the pick up model.
• D’mart has started private label in FMCG space in Coffee and Toilet soaps, however the contribution to overall sales in negligible and is a non focus area.
• GST impacted sales for 15 days of July however business is now back to normal, at present the company is not able to quantify any positive benefits from GST

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http://www.bseindia.com/xml-data/corpfiling/AttachLive/6b52cee9-4cdc-4520-b07b-ba4bb835950a.pdf

Dmart is planning to borrow 1000 Cr. This changes the capital structure of the company in a meaningful way and in my view makes it more suitable for value creation. This infusion will add several points to the base PE multiple and if the growth remains intact the possibility of a further re-rating remains very real.

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Please can anyone share a copy of the latest GS report on ASL?

Here’s the report…

Dmart_GS.pdf (2.1 MB)

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Many thanks. Much appreciated.

Hi, I am new to this forum and have a major vested interest in D-mart having more than 50% of my portfolio in it. As it has been mentioned before in this thread, I too am mentally ready to sell this stock 20% or maybe 30% lower than its high. However, on separating the business from the stock, I am seeing D-mart get the kind of dominance that Wal-Mart had once upon a time in USA. My friend works for a company that sells probiotic drinks, and he supplies it to other stores at 54 while the MRP is 60 (being a diary product the margins are on the lower side). However, D-Mart arm twists him to get the same product for 44 bucks wholesale price. This is because of the size of their orders and the prompt payment within 7 to 10 days which no other retailer does.

So the share might be highly extended in knowledgeable opinion, but the company is now in a dominant position to call the shots with the manufacturers. Today it is able to arm-twist a small manufacturer of probiotic health drinks, just imagine its muscle and heft when it reaches 500 or maybe 1000 stores across India however late that may be. It will be able to bring the big FMCG companies and even be able to procure direct from farmers in quantities and purchase costs justifiable enough to store and transport these perishables.

My entire point being, we are already seeing dominance over suppliers which could only grow in the years to come. Would definitely appreciate inputs from the other respected members of this forum. Please enlighten me if my hypothesis is right :slight_smile:

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Deleting the post, wrong message.

Its very very overvalued on all parameters. Disc. i am holding on.

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Arm-twisting smaller players is much simpler than doing the same thing with FMCG giants like Unilever, P&G, Colpal, etc. These are well established players and they have well established processes for managing their P&L and Balance sheet. Even the relatively smaller guys with well established national presence might not compromise on margins

Disc: Not invested

Has anyone noticed Dmart is going at a PE of 170 and Prataap snacks at 288? They are rising still. I fail to understand such valuations. Is there a bubble about to burst?

Disc: Not invested

Hi @shaswat49

The reason behind this is the explosive growth rate in the entire sector. When growth rates are upwards of 40%-50% , the PE ratio becomes exponentially large.

To give you an example - in its heydays - Infosys used to trade at a PE multiple of 319 i.e on an EPS of Rs 43.23 and a CMP of Rs 13813. In that year its sales & profit growth was an incredible 79.71% & 97.59%.

Here is a screenshot from its 2000 AR

Best
Bheeshma

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Hi Bheeshma,

What was Infosys’s CAGR for the next 5 years from this point?

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Details are easily available by googling, this thread is about Dmart and not infosys. However, here is the CAGR for infy from that point onwards. The broader point is about the high PE ratios of companies mentioned by @shaswat49.

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Hi Bheeshma, it seems @Akhil_7306 was referring stock market return CAGR and not revenue CAGR :slight_smile:

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During March 2000, Infosys was trading at very high PE as you said. Its adjust price was around 280-290 during that month. For the next 5 years, its revenue and EPS grew at very high rates and even after such a high growth, the stock was still trading near 280 during March 2005.

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Dear @Akhil_7306

Your observation that infosys did nothing for the next 5 years is absolutely correct. But I would think that had nothing to do with its PE ratio of 300+ as mostly all stocks did nothing during that period - high pe or low pe it didnt matter. Due to some unprecedented events in the US - the dotcom bubble burst & 9/11 attacks - during that period - there was widespread turmoil and it took time for markets to recover. It would have been interesting to have an alternative reality where none of these events took place but we can only hypothesize! My broader conjecture is that a very high PE is not necessarily bad and a very low pe not necessarily good . Would be happy to hear alternate views. for now, lets get the focus back to Dmart

Best
Bheeshma

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Please bear with one more Infosys post.

Infosys’s current price is around 930. In March, 2000, it was trading at a high of 290(adjusted). So over 17 years, Infosys’s share price increased by 7% annually. While its net profit increased from 293.5 cr to 14353 cr, which is an annual growth of 25.7%. Meanwhile Nifty has returned almost 10% CAGR over this period.

So Infosys not only underperformed its own profit growth but also Nifty over a period of 17 years despite its underlying business reporting significant growth over this period. This shows that Infosys’s price ran much ahead of its fundamental in FY-2000. And I hope you will agree with me that we can’t blame external factors for that long of an underperformance.

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On a lighter note, lets look at the broader Infosys story.

  1. The one who put in a large chunk of money in the Infosys IPO probably has a sea-facing apartment in Juhu/Bandra.
  2. The one who entered the stock in 2000 is still stuck in his 1 BHK in Mira Road.
  3. The one who invested in 2003 has been able to upgrade to a 2 BHK in Oshiwara/Lokhandwala.
  4. The one who entered in 2011 is still wondering if he would have been better off parking his money in a SBI fixed deposit.

Same stock, different stories :slight_smile: Same will be the case with DMart.

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