Avenue Supermart: a compounding machine?

Stock Opportunities
719

The YoY Revenue growth has been steadily coming down from 50% for FY13 to 30% for FY18 (perfectly logical as you cannot grow by 40-50% YoY once you attain a certain size). So, a somewhat optimistic estimate of Revenue CAGR over the next 5 years would be about 25%.

Next, lets come to Net Profit. The NPM has been steadily increasing, from 2.8% for FY13 to about 4.8% for FY18, resulting in Profit Growth being higher than the Revenue Growth during this period. This is also logical, as increase in operations create certain operational synergies resulting in increase in margins up to a point. However, margin increase has it’s limits, and beyond a point it becomes stagnant or might even decline as increased size of operations tend to create certain operational inefficiencies.

So, a safe assumption would be that NPM cannot increase significantly beyond the current levels. Hence, the Net Profit CAGR over the next 5 years would be similar to the Revenue growth, i.e., about 25%.

Next, lets come to valuations. As the expected growth beyond 5 years is unlikely to be more than 20%, the market is unlikely to assign a P/E of more than 30 at the end of 5 years. So the combined result of tripling of EPS (25% CAGR) and P/E falling to one-third of the current levels (of 100+) will result in the Share Price 5 yrs down the line being the same as it is today !

Disclosure: No Investment - Unlikely to invest even if it falls by 50% tomorrow :slightly_smiling_face:

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720

This is quite debatable & majority of boarders may disagree with this. I am aware that TIME has the best answer for such debates / assumptions & willing to wait.

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721

Well Putted. Moreover if there is Lehman like crisis happen and DMART, Page other quality stocks fall 50% from here then relative valuation of other stocks in broader market will be in range of 2-3 PE. Like Page was quoting at 15 PE on 2009 which was relatively extremely expensive on those days because other renowned stocks also were quoting at below 5 PE.

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722

I don’t agree to your point - market is too huge and along with Dmart’s pace of opening new stores; YOY revenue is bound to increase. Why you didn’t considered this major point while commenting with figure of 25%?

723

Alok is looking at the trend of decreasing revenue growth over the past few years and seeing this 25% purely in that aspect… without aspirations and biases of those that are invested.

724

I reiterate the sentiments expressed by @AlokBhola. Sometime back when I looked at this counter, and studied the book value growth of around 15%, the frequent capital requirement and so on, I concluded that only novices purchase at such prices. I second alokbhola who wouldnt purchase even at half the price and consider him an astute investor. This auction driven market will throw up great bargains from time to time for those who are willing to wait.

725

Do you guys know - Avenue Supermar numbers post GST - do not include GST in the topline, prior to that taxes were included. Now you may continue the debate with this additional input.

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726

Can you let us know where to get that info?

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727

Usually you would assume market is efficient in the long run and will value stocks properly

I agree there is no margin of safety but to say that its overvalued is not correct

I have attached a simple dcf, with growth in next year 29% and then growth tapering 1pc every year. So for 10 years it grows at reducing percent.

Then after 10 years, it continues to grow at the rate of inflation, say 5%

If I calculate future cash flow and discount it by a discount factor of 9% (bank is 8% currently) I get a discounted future cash flow of 103,742, compared to market cap of 90,539
Enterprise value after removing borrowing and adding investments comes to 103,455

(disclosure: not invested, will consider if it falls considerably)

dmart
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Based on simple growth model it looks fine and market looks like its valuing quite well

The problem comes when you divide revenue/number of stores and then check how many stores they will need to add to get to that revenue in 10 years. (10 year revenue/revenue per store)
Multiple that by cost of per store fitout. This is easy to get or calculate backwards from some figures.
You take stores before IPO, stores after IPO. Total stores built from IPO money
IPO money was also used to pay some debt and there are also profits from operations during IPO so deduct net debt before and after IPO and add profits. You get rough estimate of per store fit-out

When you do these calculations, you realise that there will be some debt or dilution for that to happen.

Having said that, if you are sitting on 40-50% gains then I wouldnt sell it to get some other junk. Right now they seems be borrowing to add more shops and its unlikely this will fall unless they make some big mistake.

Knowing that Dhamani is behind it, he probably knows what shareholders are after and feeds it accordingly

The last quarterly p&l although good was played down by management saying not to expect this kind of growth from the next 3 quarters. Most managements would aggressively promote it

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728

" The last quarterly PnL although good was played down by management saying not to expect this kind of growth from the next 3 quarters. Most managements would aggressively promote it"

This is critical. In 2007-2008 when infra was the darling of the investor community, L&T chairman NAIK came on Moneycontrol and said something like - India’s infrastructure is very primitive and L&T can continue to grow at 30-35% for a ling time. I thought whoa…and took a position in L&T. Good thing was I sold out when the dreams or claims did not come true.

Since then I do not like managements which make such claims. Infosys used to give forward guidance and they do it in a very scientific manner. Before a project starts executing the PMs were given a spreadsheet (later changed to a system tool) where they plug in the most realistic revenue and cost numbers. All these fed into the finance systems to project the revenues and margins. PMs were always asked by the Delivery Managers to go for a conservative estimate. I did this for some time. They never gave revenue projections based on some opinions like what Naik gave.

Since then I stopped following managements who feed into investor greed. If Damani is pouring cold water on expectations then all power to him. We need such managements. As someone said the Fed should take away the punch bowl when the party is getting good. Managements should put their head down and work rather than prop up share price giving growth projections.

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729

The article published recently in the-ken tries to lay down a case that the price of Dmart does not adequately reflect the future risks that the co is facing. Some of the risks highlighted in the article are

  1. In the rental model it will be challenging to do everyday low prices

  2. Damodar Mall - the current ceo of Reliance Retail - has access to the vast capital of Reliance + an understanding of Dmart due to his initial days with Mr Damani + the customer database of Jio.

  3. Online Grocery Delivery is growing fast and basically can sustain for long periods without profitability concerns.

  4. PE funds also want in on the offline retailing action ( Samara Capital etc )

  5. Penetrating Tier II & Tier III will be challenging due to customer loyalty to existing local retailers

  6. Dmarts online plans may not be able to compete effectively with other online players

There are other data points in the article and many of them have been covered in this thread.

It is worth mentioning though that of the umpteen articles that I have read on Dmart and its success- the tone has always bordered on incredulity. In general the message is , overt or covert, its too good to last. ( only time will tell of course ). The article does provide some good food for thought though.

Last week I got a chance to interact with some Dmart employees. It seems that there is a major decongestion drive going on at the high traffic Dmart stores. The layout has been changed to create more space internally and the store size has also been expanded wherever possible. Store timings have been expanded and now run from 8 am to 11 pm. There are also more checkout counters and waiting time has been reduced.

a 2017 article by Damodar Mall on Dmart is a good read too and gives additional color

Best
Bheeshma

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730

100+ P/E and 19 times book epitome of quality today tested 200 DMA for the first time in its lifetime and successfully close above.

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739

As the name indicates this I think is basically a value investing forum, many are interested in finding value picks, they don’t want to overpay even if a stock falls 30%, they may still think it is overvalued. The growth pickers (if I may call that), look at the story from a growth perspective are admiring it.

I am glad this we have both of them in this thread, and it has been a good discussion covering many aspects of the business model, management, valuation, growth.

I thank all of you for this.

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740

It will help if you can also put disclaimers (e.g. tracking, invested etc.) on your valuation driven comments. It will help fellow boarders to understand any underlying bias you might have in your comments.

Also please enlighten fellow boarders on your understanding of “true” valuation of Avenue Supermart. And hence what % decline in stock price you are very sure will happen.

741
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742

Indian market is very price sensitive & I won’t be surprised if D-Mart will be ‘Maruti Suzuki’ of retail.
When global automobile manufacturer like Volkswagen, Skoda, Renault, Ford entered into small car space, everyone had a feeling that they have better resources/technology to beat Maruti Suzuki easily but here we are, after all these years, it still holds >50% market share.

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743

Comparing Maruti to dmart is not right.

Maruti has good resale value. Good dealership network. Low maintenance and low spare parts costs etc. Maruti sells Maruti cars and not cars made by other manufacturers.

What can an retailer have as an advantage other than lower cost ? If I get same products lower than what dmart sells I will opt for it.

The same products which dmart sells are also sold by others retailers.

Maruti is a brand and has brand value. Dmart is not a brand. It’s just an reseller, selling products at lower cost due to its cluster store strategy and self owned stores that save rental cost.

Disc - no holding in either dmart or Maruti.

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744

I was looking at Page Industries PE multiple history. It has spent most time around 50 PE but it hit 92 PE in 2015 and doubled in price since then , now almost at the same PE multiple again. The expansion or contraction of PE multiple can go on is what it looks like, it is up to the market to say I am ready to pay double the price for double the earnings at an elevated PE multiple as there is more of this 3-4 year cycle doubling of profits to repeat itself.

745

@thecroc - Page Industries has branded products with pricing power and a proven track record of being able to expand and capture market share while also being able to pass on RM price increases. In essence, it’s a product company that’s recession proof.

D-Mart on the other hand is dependant on the economy doing well and at this stage of its expansion, is conscious on passing margin improvements to customers to capture bigger market share. Its growth has to mainly come from store expansion which is dependent on economy doing well. So I don’t think you can directly compare Page and D-Mart although the two do get mentioned in the same breath where overvaluation is justified by quality.

I still view recent IPO stocks with a lot of suspicion so I will wait and watch what happens here. If 50% profit growth drops down to 40% and then 30%, how does the market value the company is what I am most interested in. I have seen serious de-rating in expensive stocks as the perception of growth came down even before the rate of growth came down. I might be wrong. I don’t mind being wrong.

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746

Lower procurement cost is the biggest moat for an industry where switching cost is very low. D-Mart operating model is such which will provide sustainable low cost moat to the business but other organized retailer can’t . Building a retail business is the most difficult one so even if I consider big guns like Amazon investing a lot in this industry but where is the business model to provide a continuously at low cost to the customer ?. Now for a least speculative scenario I considered that expansion has stopped for D-Mart but even in that case it’s existing network will become a cash cow. And it will start of paying dividend since lfl growth will be there. Consumer staple is the most secular business in this world and even at the time of recession we have seen them growing quite comfortably and in near term with Indian economy I have not seen any such downturn is possible but even if the recession comes it will be difficult for the local Kirana shops to maintain their business due lack of strong supplier network where D-Mart is having a niche by paying them upfront or settling them in within 15-20 days to secure less price from them and that too in a high volume. So in any case it is very stable business no doubt but yeah obviously valuation is concern but isn’t it always has been? And the company is kept on growing at more than 40% since last one decade, nothing has change in the business so far, opportunity size is very big, only 5% of the pie is with D-Mart and more the industry will mature more this pie will increase , also projected GDP growth rate of India is 7-8% and this sector is directly linked to it. So I don’t know why so much concern about it’s business prospect and about the valuation obviously on which I am not good at but may I have a proper level for this stock with quantifiable justification.

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