ValuePickr Forum

Avenue Supermart: a compounding machine?

I haven’t seen any Dmart open and then close down. Probably there are but never seen one in the places I know of. I’ve seen reliance close stores. I’ve seen big bazaar close stores and and every other retailer. Never DMART.

Does that mean anything for reliance? Probably not. Does that mean anything for DMART. Definitely. It shows how meticulously they have planned their store locations. I might be biased but DMART has captured the mind space of shoppers. People assume they are the best.

As for reliance their advantage is the ability to throw money, loads of it at a problem. But sitting at a net debt of 200,000 crores can they afford to throw vast amounts of cash at problems? If so why are they talking of being a zero debt company in 18 months?

I think reliance will continue to do well over a period of time. But hopefully we will get into a level playing field where reliance will not need to depend on the support of government and regulatory bodies to compete with the others. It will be good for the society if that happens.

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Hi

I agree with you. I don’t think most of the people on the forum or outside have any reasoning as to why Dmart is an average or inferior business. But when its a question of valuation we have clearly defined two sets of people. The first set justifies that its worth paying 90 times earnings and the second thinks the first set are fools, haven’t they read Graham.

So I try to avoid this stock specific valuation discussion. I like looking into some history. It wont repeat as they say it will rhyme.

Walmart listed in 1970 at $16.50 with 200,000 shares outstanding. In 1971 they had an EPS of $0.3 and in $0.47 in 1972. The stock split and both in 1971 and 1972. Both the years in December the closing price was roughly $45-$50 a share. The PE was 150+ in 1971 and 100 in 1972. The peak PE in 2018 was roughly 60 still for Walmart I believe and is now 23 (forward in the 20s)

Now this is survivorship bias. But lets see what the future holds. At the end there will always be regret in the both the above two sets of people - first one will say I should have added more or I shouldn’t have bought any and the second set will be I should have bought or could have I shorted somehow if I was so sure.

Thanks & regards

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Walmart’s business model was new for its time and hence had very little competition. Due to which it could press upon its suppliers, from world over, for low-cost good quality, and sell at a handsome profit to not so price conscious Americans. It sold everything from small packs of milk, baseball bats, fertilizers to construction material and guns. Dmart is nothing quite like it.

Other disadvantages of Dmart.

  1. Its customers are lower/middle class for whom price is most important. Therefore Dmart does not get pricing premium. Just quantity discount due to bulk purchase.

  2. Dmart has healthy competition from
    a. Local Kiranas, who are really smart people themselves. Their purchasing power is no less compared to Dmart. In my locality, local Kiranas are usually packed at certain hours during the day.
    b. Online retailing is giving Dmart, if nothing more but a temporary hitch.

  3. Dmart needs real-estate to grow, which is expensive. It could rent, but yet getting space in prime locations is expensive. Walmarts are huge warehouses, located at outskirts of a town, with never-ending parking space, acquired at low cost and managed by fewer people per square feet.

Point is, in case of DMART the demand is absorbed by competition and the basic requirement for expansion is real estate is expensive. Therefore, I think the management will be hard pressed for growth sooner than the investors at 110PE imagine. This might be the reason why its TTM EPS is showing negative growth. Something to worry about for 110PE stock.

And given the harsh economic environment, paying 110PE is a tough call.

I am ignoring:

a. Low OPM%
b. No Free Cash Flow, hence a possibility of increasing debt which is the case for most companies which are on a strong growth path but require a lot of money to grow and hence cannot do it organically.
c. Ok-ish ROE

Because I am not really a numbers guy.

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There is a Dmart near my house which gives 6% off. To compete with it, a local chain called Grace has started giving 10% discount on all items. Another advantage over Dmart is the availability of vegetables. Customer always wins!

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Rating Agencies keep on upgrading trust level on D’Mart.

Credit Rating Agency, CRISIL Limited, has assigned its “CRISIL AA+/Stable” (pronounced as CRISIL double A Plus rating with Stable outlook) for Non-Convertible Debentures of Rs. 200 crore of the Company.

In earlier assessment during March’2019, they had assigned CRISIL AA for Non-Convertible Debentures of Rs. 416 crore.

Finance experts : Do we see such upgrade based on amount as well? I see this rating is for NCD of 200 Cr, while earlier was for 416 Cr & prior to that was for 800 Cr. So rating is upgrading with reduced amount.

5c1bb217-89b6-4eaa-89d1-2cd03658276c.pdf (543.8 KB)

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Hey

My point of using Walmart was to showcase historically that people paid up in excess in past for a business and then we had statements like 'If you had invested in Walmart 100 shares druing IPO you would have…" you can complete the rest . In other cases we thanked the stars we didnt invest in some solar business etc.

I am using it as an example and not comparing businesses.

Anyways.

Some of the inferences on the numbers you have made are misplaced.

OPM:
Dmart has one of the best operating margins. Infact it has better margins than Walmart has ever had (not that we are comparing here). Walmart since IPO has never touched 8% I believe.
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PE:
Not sure how have you calculated 110 PE. Screener says 93.xx. Not that 90 vs 110 has anything a lot different.
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EPS:
Negative growth? There is not one quarter in the last one year in which EPS is lower than the quarter of the previous year’s.

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FCF:
I see positive cash flows for Dmart in my calculations. I use the following formula
FCF = NOPLAT *(1- (NOPLAT Growth/ROIC))
More here VP CHINTAN BAITHAK GOA 2017 : Bheeshma Sanghani : INVESTMENT JOURNEY/PHILOSOPHY
Aside its negative for Future Retail for instance.

ROE ROCE ROA:
They seem quite appreciable infact.
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Aside competition in India is not consistent on these metrics. Walmart though not comparable had 15 years of over 30% ROE. Also they had like over 30% ROE in their initial years.

Debt:
Dmart is good here too. A Future Retail has 0.7 DE.

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Rgds

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Actually that is a wrong way of looking at things. At DMart the minimum discount is 6%. But on many things I’ll get much more. I got a container of muesli for a discount of Rs. 120 like 30% off. Ghee for a discount of 100, like 20% off. In detergents you get 200 off for a 4+2 kg box.

Even if a grocery shop gives me 10% on MRP it will be much less than what I get from DMart. In fact the MRP is not even a consideration for me when I shop from DMart.

In Saffola gold I got Rs.20 off on a Rs. 150 pack. I usually get deodorant at 50% discount. So Dmart discounts can range from 6% at the minimum to 50%.

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Don’t want to jump into & divert the discussion but I have heard lot of debate on high PE. Refer below snippets from different sources (tijori & screener) surprisingly there is huge difference (& yes these are captured just now). Is it that screener adjusts it for quarters & Tijori adjusts it on annual basis? need to play with the numbers :slight_smile:

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No doubt that its on higher end but do we (read so called analysts) use them based on their convenience as most of the retail investors consume the data presented and don’t go inside for minute details.

Having said this EPS is inching northwards & prices remaining stagnant for almost a year… PE has cooled down.

Wish we start discussing valuation from other perspectives.

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That is what I meant when I said:

I am ignoring:

a. Low OPM%
b. No Free Cash Flow, hence a possibility of increasing debt which is the case for most companies which are on a strong growth path but require a lot of money to grow and hence cannot do it organically.
c. Ok-ish ROE

Because I am not really a numbers guy

I only wanted to bring avid investors’ attention towards the fact that good businesses are sometimes bad equities as they are acquired at top prices, which imply high growth rate, which is often difficult to meet.

Dmart is there in 1) Electronic City, 2) Hongasandra/Bomanhalli 3) Extreme end of Bannerghatta Road 4) Whitefield [Nothing in North & Central Bengaluru]

Costco also follows the same model; on the max. 3 private brands [own or outside]

What I have experienced - they stack up the products keeping in mind the local crowd [not whole city]

Initially, before 6-7 years, I found vegetables with them but they have stopped it. [Source: I used and shopped from 6-7 stores of Dmart in Ahmedabad and Bengaluru]

Avenue’s profits for Jun quarter are Rs 335 crores. Just for the purpose of calculation if we multiply it by 4 without considering any growth, annual profits come 1340 crores.
ROE = 1340÷5594=23.95℅,
PE = 95164÷1340= 71.
If you consider growth, moat in business, in September 2020 no one will say that Avenue is costly if the share price is same. We forget that Avenue share price has not increased for one year and so PE is contracted. ROE is improved a lot. Time is very important iin Market. I consider it a super compounder from here.
Disclosure-I have been investing continuously for one year in this scrip. Now it is big portion of my portfolio.

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If we look at from market cap perspective the top companies are TCS, Reliance, HDFC and they are in range of 6-8 lac crores. With 1 lac crore DMart doesn’t offer multibagger opportunity (at least for me)

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“With 1 lac crore DMart doesn’t offer multibagger opportunity (at least for me)”

It depends person to person. Each investor has different investment approach and different goals/expectations from market. For people who are happy with 15-20-25% CAGR safely for next 10-15 years, Avenue is sure shot multibagger. For others who want more, even HDFC Bank is not investment worthy.
Time will teach to revisit investment thesis for many.

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Nice read…may be somewhere I can relate American Costco of 1980’s to Indian Dmart of 2019’s.

Some aspects which don’t get discussed much

  1. Apart from being very good in business execution, promoters are best stock market operators (not in a negative sense) this country has.
  2. During IPO, much was left on table for retail investors but within months stock tripled. Hoping just coincidence.
  3. Last stake dilution was as seamless without price movement that it was almost breathtaking
  4. As long as this stock is closely held with such high promoter stake, it is pointless to discuss stock behavior.

Coming to business metrics, highly probable this good business will continue to remain so. It is good entirely because of their execution skills in an otherwise brutal business. Don’t see how execution will deteriorate

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If it was possible to make 25% cagr or more for a long time, most investors will be billionaires. Unfortunately getting even 15% cagr is not easy in the long term. Less than 1% of investors may be able to make 20%+ cagr and they are God.

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For some valuation related inputs one can refer to raja iyers detailed comments about dmart in particular and his way of looking at valuations in general. According to him market is perhaps valuing other sources of revenue for dmart at 45k cr . He is profiled in the book masterclass and one can also read his excerpt for free on the website of the authors of masterclass.

Ofc one is encouraged to arrive at dmarts value independtly using whichever framework that is appealing. Earlier I used to think that valuation could be derived numerically by using financial statements but over time I have realised it’s more of an art rather than science. With experience I guess seasoned investors can Intuit whether something is cheap or expensive. In my interactions offline with some of them I have seen no one use DCF. Raja iyers simple way if looking at valuation has given me food for thought and I use it now to triangulate my own calculations.

On the other hand some ppl I know in institutions use DCF extensively and it’s part of the process of valuation. However they have extensive data available to them from different industries over time and their assumptions all have some detailed reasoning. These are not available to us to formulate assumptions.

What I do know now is that this valuation business rests on some key assumptions. Whether one intuits it using experience and knowledge or bases it on datasets , the quality of your assumptions is what seems to differentiate a good investment from a not so good one

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To add to your point, DCF is like a hubble telescope: a fraction here and there, your entire outcome goes for a toss.Businesses are so volatile and bound with so many intangible factors that its impossible to quantify the future growth for the next 5/10 years.
Lets not go too far; in August 2018, auto sector was growing tremendously, maruti was on the cusp of touching 10000 value; who would have thought in the next 4 mths(by Nov/Dec 2018), its a complete reversal of fortunes.
You are right,most of these folks have a great intuition.
Ramesh Damani said about RK Damani that he could smell which side the market is going to behave.Such was his sense of the market.And he never used DCF etc.

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Hi abhijain

Just to be sure, I fall into the camp that uses DCF and reverse DCF. However, the assumptions that I make I try to validate by talking to some ppl from the industry like how a businessperson would do. Business people are surprisingly liberal with sharing their knowledge and so far business people that I have spoken to all think in terms of simple things like margins, salary, rent, what kind of product will move, credit lines, supplier payment, receivables , discounts , customer service etc. They are also optimistic by nature and believe things will be better tomorrow than they are yesterday. I am trying to inculcate these habits in me while looking at cos. Also business people are respectful of competition and try to co exist rather than get into wars that leave everyone worse off. They want everyone to succeed

Best
Bheeshma

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We buy our monthly quota with Grace (apart from other places like local kirana, Amazon, etc.). Here is our bill for yesterday:

Discount for FMCG items (leaving out private label items, vegetable, utensils) ranges from 1.7% to 5.5% only. Average about 2.5% discount on MRP. Of course there is no DMart but there is a More, Reliance and Big Bazaar near by.

Apart from the discount that Dmart offers, there are bank offers for Dmart (of course some are limited period only and with TnC):

  • 5X reward points for American Express SmartEarn Credit Card
  • 10% cashback for HDFC Bank’s PayZAPP (valid for Dmart Ready only)
  • 7% discount on Visa Contactless card

I have not seen any other offline retailer offering bank offers like the way DMart does. If we are able to take advantage of these offers, the cost for consumers comes down even further.

DMart still does not accept Sodexo card/coupons (maybe due to high MDR?) which if they start accepting, there will be even more sales. I know folks who buy at Nilgiris (and other sales at MRP places) because they accept Sodexo cards.

DMart has good store count only in Maharashtra, Gujarat, Karnataka, Telengana and Andhra Pradesh.

And even in the above states, there is opportunity to open more stores and offer alternate formats like DMart Ready.

I think it is easy to sound smart by being bearish (“expensive valuations”, “Something to worry about for 110PE stock”, “What kind of returns should a retail investor be expecting by investing at these rates”, etc.). It is very rare to see a minority shareholders friendly company who put consumers before shareholders. HDFC group is very shareholders friendly but IMHO, they are concerned more on profits than customers. MNC companies are again not worried about quarterly results but they aren’t that pro consumers.

Avenue Supermarts is one of a kind company and the valuations reflect that. I feel we can’t buy gold at silver rates or Re 1 for 50 paise. :smiley:

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