Despite the COVID-19 fears, the company is trading at a hefty P/E ratio of 96x. So why does the market place so much faith in the company?
Let’s take a look at D-Mart’s business.
Company Overview:
Avenue Supermarts is primarily engaged in the business of organised retail and operates supermarkets under the brand name of D-Mart. It seeks to be a one-stop shopping destination for the entire family, meeting all their daily household needs.
The company was founded by veteran stock market investor Mr. Radhakishan Damani, and has followed a business model similar to that of Walmart.
Industry:
According to the Indian Chamber of Commerce, the retail business in India is estimated at $1 trillion. Of this, the organised sector has only 9% of the market share and the rest is mostly held by the non-organised sector. That makes it a $90 billion opportunity for the organised sector, and of that D-Mart only did $3 billion in sales in FY19. This business is expected to grow to $1.1 trillion in 2021 and the share of the organised sector is expected to grow to 18%. So clearly, the market potential for organised grocery retailing in India is very large.
Company Performance:
D-Mart has displayed stellar financial performance, with its revenue and profit after tax growing at 33% and 40% CAGR respectively over the last 5 years.
It has been able to consistently outperform competitors due to its strong business model. D-Mart provides all its products at a very low cost. In fact, most of its products are available at lowest prices compared to all its competitors. D-Mart can operate in such a way as it negotiates huge discounts from vendors for buying in bulk quantities. It also gets discounts by making upfront payments to its suppliers.
The company has followed a cluster growth approach where it opens stores near its existing ones, where the brand has already been established. This is essentially a word of mouth marketing approach. Meanwhile, its competitors like Future retail and V-mart spend 10% of their expense on marketing. Unlike its competitors, D-Mart does not operate its stores on rental basis. Buying up properties requires more capex, but cuts upon rental expenses. Future Retail spends 8.2% of its expense on rental fees while that number is 5.2% for V-mart and 3.4% for Reliance Retail.
D-Mart currently operates around 196 stores in the country. It operates in only 11 states and derives more than 50% of its revenue from just 1 state (Maharashtra). It has a lot of room for footprint expansion. Its revenue/square foot has increased from Rs.26300/sq. ft. in FY15 to Rs.36800/sq. ft. in FY19. Same Store Sales Growth (SSSG) –which has been consistently high - was 17.8% in FY19.
D-mart has been pegged to be the next Walmart by many investors. D-Mart has posted ROE of 21.1% vs. 18.2% of Walmart. It also has an incredible inventory turnover of 14.8 vs. 10.8 for Walmart. In comparison, Future Retail has inventory turnover of just 3.98.
Risks:
The biggest risk D-Mart faces is competition from giants like Amazon, Reliance and Walmart. Amazon and Reliance have a reputation of being disruptive in any industry they enter. Amazon and Reliance both realise the potential of the Indian market and are aggressively growing.
Another risk is its growth running out of steam. In 9MFY20, rev/sq. ft. dropped by 2.6%. Bill cuts/store did not grow and remained at FY19 levels at Rs. 1 million/store. SSSG went from 17.8% in FY19 to low double digit in FY20. And capex/sq. ft. has doubled in 4 years to Rs.12000/sq. ft. in FY20. Also, the company has opted to switch to long-term lease models for stores instead of owning them.
Final Thoughts:
There is no doubt that the company has strong fundamentals and will continue to grow in the future. The size of the opportunity is huge. It has a strong founder leadership, and it is evident that its low-cost model is working.
But can the company continue its trail blazing performance over an extended period of time, that is currently discounted in its stock price? Only time can answer that question.
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