I sold out of DMart couple of months back. I still believe it is a fantastic business and the management is terrific. In a free and fair competitve business environment, DMart will come out the winner. In fact we can assume the growth tragectory of DMart to align with that of Walmart of the USA. Obviously DMart will take a long time to get to a market cap of US$ 100B (Wlamart might be US$500B), I’d stick my neck out and say that in a free market environment unbridled by regulatory constraints, DMart will stay it growth course.
Having said that I’ve become a little jittery about regulatory constraints that could come up. The last few weeks where the government brought out regulations, primarily to curb competition from Amazon and Walmart, have actually made me a little fearful about investing in companies where the government has the capacity and motivation to put in regulatory hurdles. From about 10+ telecom companies we just have two profitable ones now and I feel government regulations have a lot to do with it. A more mature market like the US has more than 5 profitable telecom companies. So India could accommodate a few more telecom companies.
I personally think this might be the future of the retail industry. My opinion is that there is no point in being in an industry where Reliance operates. Not because they always have a better operating model. These days I have taken a more active interest in government regulations before investing. The general consenses is that where the government is involved like resource industries and PSUs the chances for minority shareholders making significant money is limited. I feel we need to expand the thinking to those industries where government has some motivation to regulate.
At this juncture I do not see much value in DMart. They might perform well despite all the competition and future government regulations. But it is too big a risk to take for a company which is valued to perfection. Historically in well managed companies people will make money over the long term even if we buy the stocks at high valuations. But many well managed companies have seen lot of pain due to government policies. In telecom we have seen wealth destruction in Airtel and Idea. Real Estate and NBFCs are also examples. Similarly we have seen short term pain in Titan a few years back when the RBI brought out policies against gold leasing.
So DMart is a toss up for now. Even with the best operating model and best management possible, regulatory policies can make an industry less investment worthy. Corona will be tamed in 6 months or one year, but regulations are here to stay and so the headwinds Dmart is facing are no longer temporary in nature.