On 6th January 2021, DMART Share prices hit a new lifetime high of Rs. 3061 raising the company’s market cap to over 2 lakh crore rupees for the first time. From Rs. 558 levels in March 2017, DMART share prices have increased almost six times, generating handsome returns to investors in a short span of fewer than four years.
Is this rally in DMART share prices here to stay?
In this article, let's take a detailed look at the stock of DMART from a fundamental perspective.
Background and business
Avenue Supermarts Limited (DMART) is one of India's largest Food & Grocery retailer and operates 189 stores in 11 states and 1 Union Territory of India as of 30th September 2019. It was conceived by Mr Radhakishan Damani in the year 2000 operating as a single store in Maharashtra.
Revenue Streams – The key product categories of DMART can be classified into i) Foods ii) Non-Foods (FMCG) and General Merchandise & Apparel. Food segment consists of Dairy, staples, groceries, snacks, frozen products, processed foods, beverages & confectionery and fruits & vegetables. Non-Foods (FMCG) segment consists of home care products, personal care products, toiletries and over the counter products. General Merchandise & Apparel segment consist of bed & bath, toys & games, crockery, plastic goods, garments, footwear, utensils and home appliances. As per FY19 Annual Report, Foods, Non-Foods (FMCG) and General Merchandise and Apparel segment contributed 51.25%, 20.46% and 28.29% respectively to total revenues.
Management Effectiveness- DMART was started by Mr. Radhakishan Damani, who was already established as one of the successful and well-known value investors in Indian Equity markets. DMART was conceived by him in the year 2000. DMART is now run by professional management consisting of Mr. Ramesh Damani as its Chairman, Mr. Ignatius Navil Noronha as its MD and CEO, Mr. Niladri Deb as CFO.
Key strengths and opportunities for DMART
India's retail sector is one of the largest and fastest-growing retail industries anywhere in the world. It is backed by a combination of rising income levels, growing propensity to spend, a rising proportion of nuclear families, demographic dividend and growing aspirations, among other factors.
The faster growth will be led by the entry of newer players with deep pockets in the organized segment, growing e-commerce, changing buying patterns, and a level playing field created post-GST implementation.
Of the total retail market size of $792bn in CY2018, 88% is unorganized, 9% is organized while 3% comprises of E-tailing. Within the organized retail segment, food and grocery are the largest sub-segment, comprising 65% of the total. Unorganized retail dominates the scene in India ….within organized, food and grocery are largest at 65%.
Growth drivers for the organized retail industry in India
- The demographic dividend of India
- Increase in the proportion of the working-age population (age 15 - 64 years) is as high as 67% in India (2018)
- Rapid urbanization - Higher population in urban areas implies greater ticket-size of spending, propensity to spend on higher-value and growing wants as compared to growing needs.
- Growing income levels and per capita expenditure - India's consumption boom has been led by a 10% CAGR growth in per capita GDP over FY15 - FY19 (from Rs. 98,405 to Rs. 1,42,719)
- The growing use of cards and easy credit availability - Over FY15-FY19, credit and debit card transactions have grown at 30% and 16% CAGR respectively, resulting in ease of spending. Retailers, credit card companies and digital wallet companies have been offering various discounts, schemes, cash backs and other plans to lure customers towards themselves and urge them to spend more.
- The emergence of nuclear families – The average no of persons per household has declined from 5.6 in FY81 to 4.9 in FY11. This has led to a greater propensity towards buying luxury items and necessities.
- A growing proportion of working women - Proportion of working women has grown from 26% in FY81 to 31% in FY11, resulting in a greater number of "double-income" earning households. Also, lack of time for working women necessitates the availability of all items of purchase, especially food and grocery "under-one-roof".
Source: Equentis Research, data inputs are taken from CARE Ratings report on retail sector dated August 2019
According to a report by Deloitte and Retail Association of India, the share of organized retail is expected to grow from 9% in CY2017 to 18% in CY2021. Organized retail will grow at five times the rate of unorganized (traditional) retail owing to the factors mentioned above. E-commerce will grow even faster, owing to a low base.
Has India found its very own Walmart in DMART?
DMART’s hugely successful business model which combines strong growth, high profitability and strong balance sheet has led many to compare its business model with the global retail giant ‘Walmart’. Walmart was among the first to initiate the daily discounting model (called "Everyday Low Cost, Everyday Low Price" in DMART parlance).
Its founder Mr. Sam Walton founded the company in 1962, and currently, Walmart operates more than 11,300 stores in 27 countries. It had mammoth revenues of $514bn in FY19 (Walmart reports 1st February – 31st January as its financial year). According to the Fortune Global 500 list (2019), Walmart is the largest company in the world by revenues.
Similarities between the models of Walmart and DMART:
- a) Lowest price every day, not just limited to festivals or discount season.
- b) Efficient supplier management and inventory cost control.
- c) Suppliers are paid within the shortest period (compared to peers), hence it is able to extract discounts from
suppliers in lieu of the short cycle. This helps to keep procurement cost low and offer discounts on end-products.
- d) Owns real estate for most of its stores, thereby saving on lease cost. Both Walmart and DMART own nearly 85% of
their total stores (US stores in case of Walmart).
- e) Both companies prefer to stock goods at their stores which belong to the “daily necessities” category. While food occupies 51% of DMART’s total revenues, grocery contributes 56% to Walmart’s revenues. This helps to keep footfalls high and sales of the remaining items (non-food FMCG and general merchandise and apparel in case of
DMART and General Merchandise, Health and wellness in case of Walmart) can piggyback on those of essential items.
DMART has kept its focus strictly on product mix – food drives footfalls and revenues:
Over the 8-9 years, DMART has seen a strong growth in bills cut in its stores, a metric it uses instead of footfalls. This strength in footfalls is due to the assortment at its stores. DMART has always kept its focus on food as its largest revenue contributor. This drives footfalls for the company since food is a “necessity” rather than a discretionary item.
Sales of other items piggyback on food items, driving overall sales for the company. This strategy has yielded excellent results for DMART with sales growing consistently over the last 9 years. DMART has stayed away from keeping fresh food (fruits and vegetables) since it consumes a lot of shelf space but has a low shelf life and is employee intensive. It also does not sell large appliances since these require a lot of sales effort, consume a lot of shelf space and stretch the working capital cycle.
Cluster-based store addition with ownership model helps manage inventory and save rental cost DMART follows a unique model of owning almost all its stores against leasing, which is followed by competitors. Nearly 85% of all DMART stores are owned by the company while the rest operate on very long-term lease contracts (>10 years).
The ownership model results in a very asset-heavy balance sheet; however, it helps the company save on lease cost, which ranges from 5% - 14% of sales for peers. Secondly, it saves the company from frequent store churning due to lease expiry and the hassle of lease renegotiation with owners. The cluster-based approach implies that DMART expands in geographies that are (relatively) closer to existing stores. DMART started its operations at Thane, near Mumbai in Maharashtra. Currently, almost 60% of all its stores are located in Maharashtra and Gujarat. After establishing a presence in Western India, DMART has also started ramping up presence in South India.
It plans to enter North India, where presence is currently limited, in its next phase of growth. The cluster-based expansion helps DMART to gain dominance in a given region and understand customer preferences and tastes. This helps it to augment supply chain, thereby reducing the cycle and resulting in faster store profitability.
EDLC / EDLP model at the core of DMART’s profitability:
DMART's highly-acclaimed and time-tested practice of Everyday low Cost (EDLC) / Everyday Low Price (EDLP) have differentiated its business model from that of competitors, thereby creating a moat for the company.
DMART procures at the lowest possible price from its vendors (suppliers) by paying off its creditors in a short time (8-10 days) and squeezing discounts from them for the early payment. In addition, DMART stocks only the fastest-selling SKUs of a given product to ensure that inventory churn is fast and the company is not saddled with a stock of slow-moving SKUs.
Key risks for DMART
- A prolonged slowdown in consumer buying in India
- A decline in the rate of store expansion
- Price under-cutting by emerging (Reliance Retail) or existing (Future Group, Tata Group) players in India, leading to depressed margins.
- Revenue concentration from key states of Maharashtra and Gujarat.
- Intense competition from e-commerce players like Amazon Pantry, Big Basket & Grofers etc.
Bottom line: With DMART Share prices currently trading at lifetime highs does it make sense to invest in the stock of DMART now?
DMART has one of the most differentiated models among retail players in India. Owing to its unique ‘Everyday Low Cost, Everyday Low Price’ model, it has managed to keep procurement costs low and selling price among the lowest in the industry. This has resulted in huge growth for the company’s top-line while maintaining a healthy bottom-line in a highly competitive industry. Also, the fact that it owns nearly all of its real estate (stores) shields it from rent expenses, rent escalation and store churn due to rent renegotiation. DMART is also a well-managed company with low debt.
When you look at all the factors mentioned above, the stock of DMART definitely looks like a winner.
However, no matter how good a stock, maybe investors never hold a concentrated portfolio of few stocks. The ideal way for wealth creation is to invest in a well-diversified portfolio of 20-25 stocks after detailed research.