Avenue Supermart: a compounding machine?

Stock Opportunities
1094

The current store count as per wiki & DMart is 177, I take it as typo on “About us” page. Dmart being mostly focussed on offline sales (I am aware of Dmart ready http://dmart.in), its acceptable also.

Few boarders had raised concerns on trusting wiki being crowd source data, which has the correct info in this case.

The thrust on exact store count at end of FY is important for investors to calculate growth & expected targets for investing decisions.

I find very interesting “Quarterly Sales per Sqft” numbers from tijori, which shows drastic change of almost 8% in hardly one month(its quite possible that they updated at end of quarter or FY). Still If it turns out to be true (at present, I don’t have a way to cross check from other source & need to wait for dmart to share details) then its really a great sign for bright future.

New store opening growth of approx 15% on top of new stores having more area (sqft) & further improvement in sales per sqft. Let us cross fingers & wait for numbers in coming week.

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It also shows that Shoppers Stop is aggressively expanding, which can put a check on Dmart plans in apparels

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1095

Really good observation, personally I prefer to shop from big bazar, if at all I go offline, only because dmart at my place is extremely crowded 24 * 7. Makes more sense to invest in dmart out of two. Now coming to the Big A … The Big Ambani, for whom I have tremendous respect as a businessman, visionary and executioner…he seems to have the perfect plan for every business he enters and certainly cash burn and throwaway prices like Jio would not be his strategy for retail…having said that mr damani is equally capable of handling any disruption, at least so far, because of his focussed no nonsense meticulous approach…it will be an interesting and more difficult and more strategic face off than telecom…with the likes of a what buffet calls a miracle…the Amazon and the good big basket of the world…it will be even more interesting…evolving consumer needs is another item in the plate…
Disc: not invested in any retail stock but closely track. Interested in Trent and dmart.

1096

Price, Quality, Convenience are the deciding factors for customers.
Online only retailers have edge in pricing especially in FMCG and other off the shelf products.

Last time when I went to bigbazar, I noticed that “TRESemme Hair Fall Defence Shampoo, 1000ml” is billed for INR 650 which is also the MRP. I’ve returned the product immediately bought from Amazon for INR 455 which is a 30% discount on MRP.
on Big basket too it’s available @ 455.
in ‘More’ it’s sold for MRP
on Star quick it’s MRP
on Avenue11 (Dmart) it’s MRP

But last time when I went to More, I bought few Alphonso mangoes which tasted great. So, if at all I’ve to give up on price advantage of online retailers and visit physical store (or their online platform), I would visit ‘More’.

Online retailers offer convenience. You save hell lot of time by avoiding traffic, billing queues and parking charges (in some locations). The delivery charges of 30 rupies you pay is nothing compared to the amount you save on the whole.

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1097

Company is expected to announce fund raise plans in coming weeks in May’19 via equity instead of debt (CPs) this time ? Is there an expectation of rights issue from DMart - Is that the reason for fall in stock price?

1098

The BSE announcement says that it will be a QIP, not a rights issue.

1099

Promoters have to bring down stake below 75%. That can be done either by selling down stake or raising money in the company.

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1100

Trying to come with a different perspective with regards to returns that an investor can have from D-Mart.

The top 3 retailers (primarily offline) by market cap are Costco - 107, Home Depot - 220, Walmart - 300 Billion USD.

Let us say that India manages to grow at 8%@ 20 years, reaching, in terms of GDP, where China is today & possibly the 2nd largest economy. Let us also assume that D Mart maintains this operational superiority & becomes India’s largest (market cap wise) retailer & possibly the world’s 3rd largest(?). That is a CAGR of 12% over a period of 20 years. In case D-mart become the 2nd largest retailer, it will generate a CAGR of 16% over 20 years. This seems like a tall mountain to climb.

Obviously there are a lot of other factors but for hyper-simplicity, this is how I’m thinking about the opportunity.

Surprisingly, there seems to be no Chinese retailer that has a market cap greater than USD 25 Billion, even as China has become the largest retail market in the world.

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1101

It will be interesting to observe impact on our company, although flipkart already serves in 4 other metros Bengaluru, Chennai, Hyderabad and New Delhi

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1102

Have been doing some scuttlebutt on Dmart.

I questioned some female collegaues as to what they think of D-mart vis a vis other retail stores

Colleague 1: Aged ~38, Has 2 kids

Shops at Big Bazaar during weekends. Primary reason is that the stores are large enough and have enough variety for everybody in the family, unlike Dmart which is short in space. The most important reason is the experience of shopping in a mall (quality time with kids + entertainment + food + shopping).

However, she shops from Dmart during weekends and most purchases in terms of value are from Dmart. She or her spouse realise that Dmart is cheaper and shop from Dmart when they’re alone.

Doesn’t shop online. Doesn’t want to.

Colleague 2: Aged ~36, Has 2 kids

Shops at Hypercity. Primary reason is that stores are huge and rush is less and so the shopping experience is more enjoyable, unlike Dmart where the whole thing is more rushed.

Even though she realises that Dmart is the cheapest, she prefers Hypercity.

Doesn’t shop online. Doesn’t want to.

Colleague 2 is more affluent than Colleague 1.

Such interviews conducted with other people have yielded similar results. Seems like Dmart is the choice amongst people whose primary preference is cheaper products, while for others who prefer an experience of shopping, retailers such as Big Bazaar, Hypercity & Reliance are the choice.

Planning to conduct a short poll on Twitter to understand customer preference towards these retail chains.

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1103

When many of the people who purchase for discounts and the educated people who visit for an experience are different, I think they should not be compared at all. Even for the people who get decent salaries, a discount of 5% is no less and for regular folks like me, a discount round the clock is a blessing, particularly for groceries. Hard working people who have no other means of income except their salary will look for discounts, Dmart or any other retailer will exist and thrive, until these kind of people form the majority. And then there are some who purchase because there are discounts. Like you said even people who can spend might want to visit from time to time, depending on their convenience.

Regarding your poll, if most people who would vote in your poll are not discount-seekers, they would obviously choose the stores with ambiance and they don’t mind spending a few more bucks and many of the regular folks who shop at Dmart are far from these online polls. Instead of an online poll which caters only to an educated group, I have this idea of conducting a face-to-face survey, with a questionnaire involving all classes.

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1105

i think a simple look at the parking lots of Dmart and its competitors like Hypercity or big bazaar will give you a idea about the affordability of the people who visit these stores.
No need to run a survey and then fall a prey to the fallacy of small numbers or improper sample size.

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1106

Individual customer behaviour & experience does matter in retail business. I do visit both Dmart & Big Bazaar frequently.

My personal experience says that once you visit Dmart, you get addicted to them based on discount on almost all items & on other hand if you visit Big Bazaar they chase you with promotional messages (every wednesday they send sms with offer for the day) & make effort to keep the customer intact.

Dmart lacks that aggressive promotional scheme. One day or other, you need to reach customer & shouldn’t wait for them to reach you themselves.

Dmart offers flat 6% discount on most of the daily needs other than special promotional offers having varying discount on almost all items in the store.

Big Bazaar provides 5% discount using futurepay app via cashback / additional ways

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1107

I’m quite new to this company.

I have a few queries

  1. They tend to buy Real estate for most stores if im not wrong. This enables them to save on rental and offer better prices than most. However this is not scalable. And I have read that they have started the traditional model as well of taking space on rent.

  2. To arrive at a better measure of Dmart’s profits shouldn’t we account for some notional rent on their owned properties? I do not know to what quantum they own space. But I think one needs to find out the true margins and for this using a notional rental number will show you if Dmart is truly different from the rest or they are simply passing on the rental expense saved plus change to their PAT.

  3. Finding out the numbers behind their lease model would also show if they are truly different from the rest.

1108

Yes, the consumption story will continue and our big country is a huge ground to setup shop and operate. And I have reasonable growth expectations, if this could be a steady compounder for years to come, that will be enough.

My survey was to gauge the pulse of majority of shoppers who belong to a particular group, this particular group of regular people, no matter where they reside will behave the same, it will give insights from the end user point of view, it’s just an idea.

1109

It is just an idea, I am aware of the kind of people who purchase in Dmart, as the commoner groups will be all alike when it comes to purchases, a sample could suffice.

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1110

At a consumer psychology level, Dmart has a done a great job forming the habit of discount shopping. At its most elementary level, retailing is all about forming buying habits. Habits once formed are difficult to break and are a formidable barrier to entry. One can refer to Nir Eyals excellent blog on this although it relates to tech, it has a more widespread applicability

At a more tactical level, every purchase officer in discount retailing is taught two things. Quantity of Discounts and Quality of Discounts.

Quantity of discounts refers to the % of items that are discounted and the quantum of discount, At a overall product assortment level true discount retailers try to reach an average of 12%, which is the gold standard.

The Quality of discount refers to discounts on the most consumed items. Recently during the festive season, Big Bazar did a deep discount on Amul Milk. That’s quality of discount. However Big Bazar cant mount a successful Quantity Discount program. Qualitative discounts drive footfalls while Quantitative discounts drive retention. Dmart is good at both, but its exceptional at retention.

Best
Bheeshma

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1111

Results:

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1112

Total Revenue for the quarter ended March 31, 2019 stood at Rs. 5,033 crores, as compared to
Rs. 3,810 crores in the same period last year, reflecting a growth of 32.1%

Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) in Q4FY19 stood at Rs.
377 crores, up by 27.9%. The company’s EBITDA margin is at 7.5% in Q4FY19 as compared to
7.7% in Q4FY18.

Net Profit is at Rs. 203 crores for Q4FY19, as compared to Rs. 167 crores in the same period
last year. PAT margin is at 4% in Q4FY19 as compared to 4.4% in Q4FY18.
Basic Earnings per share (EPS) for Q4FY19 stood at Rs. 3.25, as compared with Rs. 2.68 for
Q4FY18.

Total Revenue for FY19 stood at Rs. 19,916 crores, as compared to Rs. 15,009 crores for
FY18, a growth of 32.7%. EBITDA in FY19 stood at Rs. 1,642 crores, up by 22.8%. EBITDA
margin is at 8.2% in FY19 as compared to 8.9% in FY18
.
Net Profit is at Rs. 936 crores for FY19, as compared to Rs. 785 crores in FY18. PAT margin is
at 4.7% in FY19 as compared to 5.2% n FY18.

For FY19 Basic EPS stood at Rs. 15 as against Rs. 12.57 for FY18.

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EBITDA & PAT margin compression need attention. Other things look on expected lines.

Update on fund raising plans

Issuance of Non-convertible Debentures up to Rs. 1500,00,00,000 (Rupees One
thousand five hundred crore)

Issuance of up to 2,50,00,000 (Two crore and fifty lacs) equity shares of face value of Rs.
10/- each through a qualified institutions placement

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1113

Issuance of 2.5 Crore shares via QIP - Will cause a Dilution of ~ 4% in EPS. Promoter Shareholding % will fall from current level of 81% to ~ 78%. Which means Promoters will have time until March 2020 to reduce shareholding by another 3% to reach SEBI prescribed level of 75%.

Hopefully till then the ‘Scarcity Premium’ will reduce and the share price will reach a reasonable level worth buying at.

Disc- Not currently invested. Will start buying if Share price falls below 1150 in next few months.

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1114

What makes me wonder is : How QIP is possible if this mental model is basis for investment in DMart? What incentives make big fish to commit the money?

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