Avenue Supermart: a compounding machine?

[abhijain]

While the Q2 results have been very nice, today’s volatility in the price was surprising.
From +10% in the morning to -8% finally. Got a chance to add some more
Curious to know the reason for wild swing today, though whether its Axis Cap sell report or some instituational invrestor selling his stake.

While physical stores will be at full swing, I think they need to step up big time on Dmart ready(online version). I placed an order via DMART ready first time and they have evolved their delivery big time.
Like Big basket, they have dedicated delivery slots which is same day or next day. All the items were delivered.
Price wise, all the items were reasonably cheaper than Big basket or amazon fresh.This is where the USP of Dmart is. For example, Himalaya hand wash pack is Rs 84 compared to Rs 115 at amazon/BigBasket.
But, UI of the mobile app needs a big improvement. It is very basic at this point of time.
Tie-ups with credit cards/wallets need to be strengthened so as to get discounts which they are doing for sure.
I can see a seriousness in their online business now in the last 1/2 quarters which was missing earlier.
In Q2FY22, company did soft launch of D-Mart Ready in cities of Surat and Vadodara.D-Mart Ready is now available in seven cities: Mumbai Metropolitan region, Ahmedabad, Pune, Bangalore, Hyderabad and now Surat and Vadodara.
The business has got a huge runway. The way they are opening big hypermarts now like In Haryana recently, coupled with Online, I think 25% to 30% growth looks certain for the next 5 years.Lets see.

For all the valuation conscious folks, please do read this article.It made me stay with D-Mart since its listing. And I keep adding on at intervals.
Disclosure- holding and adding since IPO.

Wal-Mart’s 1974 Annual Report: Sometimes You Get What You Pay For

[vnktshb]

Avenue Supermarts hits valuation hurdle, stock at 124 times FY23 earnings

Ram Prasad Sahu 18/10/2021

After hitting its all-time highs intraday, the stock of retail major Avenue Supermarts (Dmart) slipped over 8 per cent. While revenue growth was strong, the margin performance was lower than street performance. The biggest concern for the street is valuations which is in the expensive territory. The stock is trading at 124 times its FY23 earnings estimates as compared to the retail sector average of 65 times.

Analysts led by Anand Shah of Axis Capital highlight that at the current price the stock trades at a market capitalisation (Mcap) to store and Mcap to square feet of $187 million and $4.8 billion respectively which is at 5-13 times premium to Walmart. It is also at a 4 times premium to Walmart’s peak valuation in December 1999 of $48 million per store, they add.

Despite the sharp fall on Monday, the stock has gained 49 per cent over the last three months and is up 133 per cent since the start of year enriching investors. Among those that benefitted are the company’s CEO Navil Noronha whose 2.02 per cent share is now worth Rs 6,400 crore.

Most brokerages have downgraded their ratings given the jump in stock prices. While Kotak Institutional Equities has raised the fair value of the stock to incorporate higher growth for offline and separate value for Dmart Ready, Garima Mishra and Shubhangi Nigam of the firm believe that the stock is pricing in perfect execution and limited competition.

While the company posted an expansion of margins both at the gross and operating profit levels, it missed the street estimates. The improvement in share of the non-essential or general merchandise was positive though it was not enough to push the gross margin beyond 14.3 per cent while analysts were working with a range of 14.6-15.1 per cent.

HDFC Securities says the lower than expected gross margins suggests non essential contribution remains lower than at the pre-pandemic levels though it is improving. Tight cost controls helped the company drive a sharper 253 basis points rise in operating profit margins to 8.8 per cent.

On the revenue front, growth at 46.6 per cent was robust on the back of store additions and higher revenues per square feet. The company opened 8 stores in the quarter taking the store count for the first half of FY22 to 12 while the overall count stands at 246 stores. The overall revenue per square feet is at 90 per cent of the levels two years ago. As footfalls rise due to personal mobility, unrestricted hours of operations, pent up demand for products/general merchandise, revenue growth and per store metrics should reach pre-pandemic levels over the next couple of quarters.

While a strong balance sheet, expansion both of its offline and e-commerce (Dmart Ready) units and large market opportunity (unorganised to organised) should keep growth run rate strong, the stock is factoring in most of the gains. Investors should await further correction before considering the stock

[nikrod12]

My post might not be adding value, but someone needs to say this. Dmart as a business is very good and we can compare it with Walmart’s growth. But did Walmart ever traded at even 2X sales? Did Walmart ever traded at 8 times the index valuation? Dmart is currently trading at more than 10X sales. The valuation we assign to FMCG, fashion retail and for new tech businesses (there it’s much higher).

And I am not taking trailing 12 months sales/profits. I am just considering last quarter run rate which would be realistic if pandemic were not to happen.

Is there scope for margin improvement from here? I doubt it. Neither Dmart, nor any other grocery business in world has ever gone beyond Dmarts current margins. We are then talking about business which can comfortably grow at 25% for at least 5 years and 20-15% for next many. And we are totally discounting the online retail threat here. Is PE of 200+ and Mcap/Sales on 10X good valuation for it? As per me, this is in insane valuation territory.

Basically Market is valuing it at 100+ PE on numbers of 2024. How far this will go, no one can tell (IRCTC being another example). But just comparing with Walmart is only focusing on long runway and ignoring everything else.

Disc - not invested. Hence can be biased against the valuation.

[Surender]

Like you, I keep contemplating but unable to reconcile with valuation. May be this is for keepers, one can delay taxes and brokerage till the wealth is handed over to the next gen.

NPM shall remain in this range with a tendency to trend down as CEO claims that as one of the tools to remain competitive and maintain the MOAT.

As shown below, I tried to understand the expectations in basic math’s for a period of 20 yrs and they look aggressive for both sales & NI CAGR.

Disclosure: Not invested.

[vh1]

As there is a heated debate regarding valuation, I think we should carefully read this article as an example and ponder over it.

What are you thinking now?

'What Were You Thinking?'

[rpattabi]

My DMart Ready experience so far (Hyderabad). Hope this is of some value. Note: The word store here implies DMart Ready pickup centres in this post.

• The website is excellent in my opinion (https://www.dmart.in/), especially when it comes to usability. There is attention paid to subtle but important details, which we observe as we use it more. I used big basket website, but I feel DMart Ready website is easier to locate items of my interest and look at alternative brand or alternative quantities. Of course, a lot more can be (and will be) improved further. There is also an app, which is okay, nothing to complain about.
• I also notice that the DMart Ready stores are increasing around. It used to be a 4-5 km travel for me to pickup, and after few months an additional store came up within 2-3 km. I could not say they’re increasing these stores rapidly, though. As of now there are 14 such stores in Hyderabad. One can get the list here. Though there is a regular dmart store on the other side for about the same distance, I prefer dmart ready as I could avoid the crowds. I haven’t figured out dmart’s basis of selecting an area for dmart ready store in relation with the location of regular store.
• Regarding the assortment of the items, dmart ready has most items, but I think the regular dmart store has much more items in some categories like toys and games, plastics, etc. It is interesting to think about why not all the items are made available through dmart ready. It is possible, we purchase some of these items only after physically seeing them. That’s only my guess. There may be other reasons.
• It looks like, dmart is very selective about offering home delivery. It’s been more than 6 months, yet dmart has not made home delivery available to my pincode even though they can charge for home delivery. Only self pick up from the store.
• The store is usually on the side of the main road, clear DMart Ready branding makes it easier to locate. There is no dedicated parking, as the customer is not expected to spend more than 10-15min. The stores are spacious enough to keep several oft-forgotten items that we usually forget to add to the grocery list like light bulbs, cleaning towels, etc. Since there is no rush, we tend to browse the store for some time and pick an item or two which can be paid separately. As with dmart, the prices are cheaper for these items, but I think these are of higher margin items compared to staples for sure.
• The store is air-conditioned and there are about three staff members at the store. Two of them take care of moving the delivery boxes, and one at the computer to recheck the items during the pickup and billing. From my observation, one person seems to be experienced and like a mentor for the other two.
• Interestingly, there are no temptation items at the store like chocolates, mints, etc. It seems dmart is trying to help the customers get those occasionally required items, not to trick them to spend more that may make one regret later.
• It’s nice that there is refrigerator for freezer items till we come and pick up. The glass bottles (pickles, etc) are packed with extra care.

I don’t know if the prices at dmart ready are any different from the regular dmart store. I expect them to be mostly the same (Please let me know if you find out otherwise).

---

Going through this thread, I sense there is (or was?) one concern for dmart sceptics, that of the impact of ecommerce competition in dmart’s revenue and future. There are also interesting discussions on the valuation of dmart. DMart Ready is probably at the intersection of these concerns.

In DMart Ready, they’re definitely building a solidly grounded ecommerce wing. If profitable, this can give the ecommerce players very tough competition. What is the value of dmart when it is profitable and successful in both B&M stores and in ecommerce? I have no idea. However, I think this interesting combination should now be kept in mind for valuing DMart as it plays out.

Having said that, as far as management is concerned, DMart is simply a low-cost retailer. B&M store and DMart Ready are just two avenues to that end (pun unintended!).

Disclosure: Invested

[ChaitanyaC]

Online Grocery Shopping: Who’s the cheapest of them all?

[Aniesh7]

What does DMart’s current market cap tell you of its value in 2050?

[sincyvarghese]

I don’t know what the author tries to imply through this article. A market cap of 70-90L crore is not at all in the realm of impossibility for DMart in the next 30 years. It is an above ordinary return of 12% CAGR. Then the article mentions a market share of 8%. Again, very much possible for DMart in the next 30 years. Similarly India’s GDP can grow 6% for next 30 years in the digital era. What I feel is a lot of locked in capital in traditional industries will be freed up and invested at higher returns in new-age digital investments. For example, in the US, the capital that were being allocated to GE and GM and Ford and other industrials now are being allocated to Google and Apple and MS. Even at elevated valuations these companies are generating higher returns. These kind of returns can really help grow the per capita income of India from the current $1900 to 11000 - about 6 times in 30 years.

Now I am not a cheerleader for DMart. I sold out of DMart at far lower levels. Do I regret it? Probably not. Luckily invested the profits buying some other companies on margin. But numbers that may seem audacious may not seem much 30 years hence. For example in 1999 at the peak of IT boom/share prices, when NRN spoke to our new batch at Infosys about how they created a company valued at 26,000 crores (There was a slip of tongue and he missed out the crores in the speech ) no one would have thought that Infosys will become an 7.5L crore company in 20 years. Add to that thousands of crores in dividends and buybacks.

So if this article is positive about the prospects of DMart as a company, then I agree. Investment-wise not so much but still better than most. If this article is trying to showcase the limitations of how much the company can grow, then I won’t agree. Nobody knows exactly what will be the case in 2050 but there are sufficient reasons for DMart to grow and thrive.

All this is assuming there are not many capital destroying events in the world in the next 30 years. A major war, regular pandemics, significant famines and the like can destroy capital. In which case valuations will nosedive.

[sincyvarghese]

This only talks about what is available. I stay in a building where we have a large sized Reliance Smart store on the ground floor. I send my children there for milk and we go for fruits. For others my wife is filling out the DMart cart.

One day while shopping the check out clerk asked for my mobile number. I said I generally shop from DMart. So forget it. He said yes Dmart is the cheapest. His family also shops from there. It is one thing to compare the cost of products which are available, but totally another to find things you need. And for those things you need for a regular household, DMart gives the best prices. I go to RelianceSmart regularly for vegetables and fruits. There is lot of wastage in these categories. Also the roadside vendor gives me a better deal for fruits. For example NZQueen apples are sold as exotic in Reliance costing 399 a kg. I get it for 250 from my local fruit vendor. The sizes are slightly different, but my palate is not so refined as to detect any taste difference. I can’t even dream of going to DMart regularly, I’ll go once in 1.5-2 months (or order from DMart ready) because it is almost always crowded. Reliance being the larger retailer needs to open more stores to show YoY growth. DMart is not under that pressure now. Reliance will open up the market for DMart to bring about a better model and succeed better. Reliance is good, DMart I think is superior as of now.

I had invested in DMart, but exited some time back.

[ankit_vira]

Agree that Valuation seems too high… in my personal view, India’s grocery market is huge and players like Dmart even today has very low market share.
DMART adds slow carefully & slowly. they can easily double / triple their store count without being much disrupted by E-Commerce.

[Divyanshu_Bagga]

Why is DMart opening bigger and bigger stores?

The article suggests two possible reasons for large stores:

1. Add more high margin products like apparels.
2. Use the store as fulfilment centre for its e-commerce venture.

[rpattabi]

It is interesting to see e-retailers investing in offline retailing. It is too early, but I wonder what this means for DMart in the near and long run.

Bigbasket forays into offline retail; unveils Fresho store in Bengaluru

[Ravi89]

This is significant development as Bigbasket is owned by Tata and they are planning aggressive expansion. From the article:

The launch is part of the company’s vision to open 200 physical outlets pan India by 2023 and 800 by 2026, a statement said. The stores will offer high quality products at extremely competitive prices, it added.

Some pictures of the store from Twitter

[rpattabi]

Is DMart’s IT an internal department, or they outsource (though unlikely)? How much do they spend on IT alone? I couldn’t locate this info anywhere. Where to find such info?

[GreenGlobe]

43634ed8-9cf6-4521-b3d5-c037567a8b9f.pdf

[kitesh]

Q3 Results:

Stock Market Updates India

Another solid quarter. Brief snapshot

[Nickunj_Nayak]

While comparing Reliance Retail Q3 Results with Dmart Q3, below are my observations, any opinions.
Reliance Retail Sales per sqft per qtr 750 vs 9900 dmart
Net Margin 4.5 vs 6 Dmart
14500 stores having 40 million sq ft vs 263 stores having 10 million
Reliance Retail grey mkt mkt cap 19 to 20 lakhs crore whereas the holding company i.e. Reliance Industries mkt cap is much less
After seeing above numbers, feel like dmart is better place to be in.

[sincyvarghese]

Thanks for those numbers. It Reliance has 14500 stores and DMart has 263 and assuming one DMart store is equivalent to 4 Reliance stores, we are looking at 3500 DMart stores which will compete with Reliance. Will Reliance keep quiet while DMart walks away with customers from Reliance? Definitely no. But DMart can still target the most inefficient Reliance stores amongst these 14000 odd. It will not be an exact competition, but sooner or later Reliance will be a victim of its own size. My observation has been that in location that I know people shop for groceries and clothes and plastics from DMart and vegetables and probably fruits from Reliance. Reliance is mostly like a convenience store for us, whereas DMart is the monthly go-to grocer.

I dont know how applicable these things are for other localities. I’ve observed that over time the quality of clothes in DMart has significantly improved. So Dmart as I know is comparable to Walmart and Reliance like Cubfoods or Wholefoods or the like.

I sold out out of DMart some time back but still feel they have a better business model.

[ChaitanyaC]

In my view, the competition is not between Dmart and Reliance but rather between these giants becoming even bigger, at the expense of small shops. At the end of the day, a regular working/salaried person needs discounts if he can spend time. The more the number of such people, the more will be the sales, profits, margins and expansion, as the addressable market is huge. For others whose time is precious, Dmart obviously is not the answer, it never was.

A predictable business, with strong management, good business model, a large country with increasing population favor. And of course, as Dmart despite its strengths trades and astronomical valuations, it too reacts to the swings of the market and falls in the short term, but rises as retail share holding is very less.

Until the sales remain stagnant, and margins shrink and Dmart covers entire India, the valuations will correct but I guess will remain strong. Of course, not everyone will agree on the valuations front. The competitive advantage period when looked through a lens of 20-25 years is huge. A lot of changes will happen in these many years both at society level and personal level, and if Dmart taps into those changes too, expanding its merchandise, it will remain a good business and a good stock.

Just my thoughts and yes, invested.