ValuePickr Forum

Avenue Supermart: a compounding machine?

I remember you as stating that you are happy with 15% returns in the long term. Ben Graham warned investors not to buy companies at PE above 15 or 20. He said that there lies the way of sorrow. That was written 50 years ago and it is still true today.

As a value investor, I personally would not pay more than 45 PE for Dmart and do not care what the world is willing to pay. 100/15=6.67 which is the bond yield at present. Hence the end game PE was taken as 15 as per present experience and this is the maximum PE to pay for companies who have reached saturation stage.

However I agree that the end game PE could be higher when our nation becomes advanced and growth comes down.If the bond yield should go down the PE should go up. The question is whether I should pay upfront for such an eventuality.

So the end game PE is taken as 15 and this is the maximum PE to pay for companies who have reached saturation stage. ? Did not get saturation stage remarks.

Food for thought:-

1.In market capacity terms, Dmart is just 0.3% of available opportunity as on march 2019.
2. DMart’s stores generate more revenue/square foot than Walmart – $530 versus $450 for Walmart Inc (WMT) in F19.Given that unit cost in India is about one-third that in developed markets, the throughput for DMart is 3.7x that of WMT.

3.Dmart today is in the same position as Walmart was in 1970s immediately after they got listed and had 136 stores in 1976. From 1976 till 1999 (23 years) Walmart grew at an avg. rate of 22-25% CAGR in sales and also stock price.India is 4 times bigger than US in population.
4. UK is the size of UP roughly in area. Population of UP is 3.7 times more than UK.Tesco has 3433 stores.

Dmart CEO on competition & disruption -
5.The moat for every retailer, not only us, is that there is a reasonably large, almost 50% of revenue where nobody can compare one retailer to the other on pricing. Like a steel glass, what I sell versus what my competitor sells versus what someone else sells - its rim is different, finishing is different, thickness is different, and hence its pricing is different, and hence you can adjust 2%-3% margin. . This is one area which Mr. Damani used to handle in the initial phase, and he kind of built this whole thing.That is a fun side of the business, because that is very difficult to decipher. And I am saying that is the moat for every retailer. And that is where you bring in the differentiation.

6.E-commerce turns out to be more expensive. But this is only in food / grocery. When you talk about cell phones, it is reverse, you talk about books, it is again reverse. And that is what you are seeing, money is like water, where arbitrage is, it flows there. That’s how you see a significant disruption in sub-sectors. Like in electronics, in mobile phone many things have happened. So, wherever that arbitrage tilts, the business will tilt towards that area. So, fortunately because we are in the grocery business we believe the arbitrage is better for brick-&-mortar.
But I am not saying online will not or may not disrupt us, it can disrupt us. But the relative disruption is the lowest in food and grocery (F&G),which is a global phenomenon, you see across the globe, F&G is least affected by online. So, that’s the only data point I will give you. And with F&G, it generally affects those people who have high gross margin, high overheads while we are low gross margin, low overheads.

I am from Bangalore , whenever I go out I see lots of grocery store/supermarket other than our valuepickr favorites BB, Reliance etc…I see this as an opportunity for Dmart to snatch more market share from their existing market & players and when I travel to tier2/3/4 cities in India , I see there is dearth of grocery supermarkets.So they have market share to grab from other small players and also huge opportunity size to grow.Even if they capture 20-25% market in coming 20-30 years it will be massive, and leave the rest of pie for all the competitor out.

Regards,
Rakesh

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Consider the position 30 years hence with Dmart doubling 9 times and the 0.3% becomes more than 100%. Then where is the rest of the pie? And Walmart could come in at any time.

Why should they double 9 times? They can become 15% of the market then. Assume the retail space grows 5% YoY for 30 years (equivalent to long term inflation of India + 2%). Assume DMart grows 20% for 30 years. Still from 0.3% DMart would only be at 16% market share.

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Can I request you to refrain from personal confront and modify the post bit ? We all have more or less ownership bias…

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I have removed ownership biased line, but other things written might be specific issues . and we can generalised, as I am using Future Pay & Profit club since more than 2 years and never faced any issues. So, it was very one . sided post, anyway difference of opinion makes market and everybody has right to keep his/her opinion.

Sometimes maths clouds common sense. If assuming you are right, the present sales of 22000 crores, grows by 20% for the next 30 years, the sales will be 52 lakh crores and profit after tax will be 2.6 lakh crores. Why is there no company in India like that at present? Even if this almost impossible act were to happen, you are already paying 1 lakh crores today in market cap for getting 2.6 lakh crores in profit after 30 years. Imagine paying one rupee today to get 2 rupees after 30 years!

I don’t see any issue in paying 1 rupee to get 2.6 rupees every year after 30 years.

Consider a case if all goes well and dmart earns 2.6 lakh crores profit, going by terminal pe 30 (india becomes developed country and risk free bond rate is 3.3 %) it trades at mcap of 78 lakh crores which is 78 times current mcap, still a decent compounder at 15%.

Yes there are still many companies which are currently compounding at 15% and available at better valuations

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Hi @ash7979

Thanks for pointing out the ownership bias! One of the improvement areas is how to get dissenting voices be heard on a thread which consists mostly of bullish people. I agree it’s a cause for concern. Most people who post on a particular cos thread are generally optimistic about its prospects and sometimes people who have a different view to the consensus are ridiculed for having it and worse they stop posting their views altogether on the thread. I think this impacts the quality of discussion very seriously and some way needs to be devised to prevent this from happening

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I completely agree . Ownership bias is good till the time it can give constructive viewpoints but once a person starts taking things personally, it deters different views . I believe the reciprocal tendency bias ( tendency to reciprocate to personal attack) then works even more to derail constructive discussion altogether . I guess moderators can help

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We are not considering risk margin as one may not be able to execute this feat for 30 years. If we expect 20% probability, then we may have to apply risk margin to reflect it. Lot of things can go wrong in 30 years. Walmart is unique and Dmart may or may not follow the same path.

https://www.bseindia.com/corporates/anndet_new.aspx?newsid=da4da99a-b5a4-4660-a0cc-350fa09e2d61

close to 37L ESOP got vested on sep 14th…too much of supply now?

The ESOPs allotted will come to 0.59% of the total share capital. If this becomes a regular practice, existing share holders will definitely get affected. The option price is just Rs.299 which values the company at 18 times earnings.

Does this help promoters in bringing down their holding, which is a legal requirement and timeline is approaching fast.

I understand that its NOT in shareholders interest but wish to know, if it has any impact on above.

Lower discounts, economic slump take toll: Click-wait for ecommerce as consumers put off buys

The report reads

FMCG, Groceries: Resilient but under pressure
Fastmoving consumer goods, the third-largest category in terms of buyers, weathered the impact better than most, the report indicated. The number of online shoppers in the segment saw a 17% increase over 2018 with spending increasing 91% during this period. Discounting in the space also more than halved over the past year in line with other categories.

Is this advertisement of Dmart in Big Bazaar :wink::wink:

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With no profits yet and higher and higher accumulated losses every year,the slower growth will be a very tough time for ecommerce companies. With models slowly moving towards making profits vs accuring cutsomers… discounts would further decrease I think going forward. relatively better times for offline retail probably.

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This is capital dilution. Hope the practice of esop isnt regular as markets tend to value companies lower that regularly dilute capital .

Well esop is not like equity dilution for raising capital… Infy, Wipro, TCS and many across other sectors have esop schemes running for several years and I don’t think that market ever took these negatively. In fact, as an investor, i am happy that company is taking care of their employees (in addition to their focus on customers). These things help in building a great organization which can last long and is a positive in my view.

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