HISTORY
A well known investor of India MR. RADHAKISHAN DAMANI who have invested in many successful businesses, once dreamed to create a successful business itself, he kept the vision of providing best quality products at lowest possible price. And then to pursue his dream, he went to United States of America, there he studied and observed the business models of various departmental stores like WALMART and some other companies. Then he came back to india, modified the business model in Indian context and in the year 2002 he and his team opened the very first DMART store in Maharashtra.
“By running a business, you will know what makes a good investment and by being a good investor you can also be a good businessman.”
MR. RADHAKISHAN DAMANI, is a perfect example of above quote. Starting from 1st store in 2002 in Maharashtra, today DMART has 196 stores in 72 various states comprising of 11 states and 1 union territory. And DMART is expected to open 20-25 new stores every year. It has majority of its stores in western and southern part of India and it is planning to expand its business in northern and central India.
INDUSTRY OVERVIEW
Departmental stores(retail sector) is one of the top growing sector of India. As per the estimation of commerce ministry of India, retail sector in India would be around 1.1 trillion dollar by 2020. Let’s have a look at market share in retail sector by traditional market, organized market and e-commerce.
TRADITIONAL MARKET
(It includes, various individual kirana, apparel, and other household shops)
ORGANIZED MARKET
(it includes stores and malls of various retail products having chain of stores or malls like Reliance Retail, DMART, Future retail, VMART, Spencer etc etc)
E-COMMERCE
(it includes various online portals who sells various retail products online. For example Amazon, Flipkart, Big Basket etc etc)
As per the estimation of commerce ministry of India, gradually market share of retail business will shift from traditional market to organized market; let’s have a look at estimations.
So here we can see how much growth potential this sector has. We can say that we have a huge opportunity in organized retail sector. Let’s have a look at one more interesting data about E-commerce.
Here we can see that electronics and apparels are sold in good volumes on e-commerce platforms, but food and grocery products are yet not successful on e-commerce its just less than 1% being sold on ecommerce, we Indians mostly like to buy grocery in physical presence. So overall we can see that there lies a huge opportunity, this provides a good earning visibility of at least 20-25 years in departmental store segment.
CURRENTLY DMART GETS 50% OF ITS REVENUE FROM FMCG AND DAIRY PRODUCTS , 21% FORM NON FMCG GOODS AND NEAR 29% FROM APPAREL AND GENERAL MERCHANDISE.
BUSINESS MODEL OF DMART(AVENUE SUPERMARTS LIMITED)
DMART HAS DEVELOPED A VERY UNIQUE BUSINESS MODEL, WHICH MAKES DMART A UNIQUE AND A SPECIAL COMPANY COMPARE TO ITS COMPETITORS. LET’S HAVE A LOOK ON THESE SPECIAL FEATURES.
1. SLOTTING FEES
Its like an entry fee for the products to be sold in DMART, here vendors who wants to sell their products on DMART, pays slotting fees to DMART for providing a slot to their products. DMART withholds some portion of slotting fees, and remaining portion of slotting fees is straight away subtracted from price of a particular product. In this way it gives benefit of slotting fees to customers and it is also able to sell goods at discount. One thing must be noted that not everyone will get a slotting fees, reason being DMART provides huge turnover to its vendors and because of that vendors are paying slotting fees comfortably.
2. CASH DISCOUNT
DMART is one of the very few companies who gets highest cash discount from its vendors, reason being DMART generates cash in big volume and it pays to its vendors in just around a week, while its competitor like big bazaar of future retail pays to its vendors around 30-50 days. And then again some portion of cash discount is used for the benefit of its customers in form of providing discount on those products.
3. TRADE DISCOUNT
Like cash discount It also gets a trade discount from its vendors for the tons of goods purchased and then again I don’t need to mention, some portion of trade discount is used for the benefit of its customers in form of providing discount on those products.
4. POSITIONING FEES
ONE STUDY SHOW THAT ANY PRODUCT WHICH IS AT EYE LEVEL IS SOLD MORE THAN THE PRODUCT WHICH IS AT FOOT LEVEL.
DMART offers prime positions, where some vendors pay a positioning fee for their products to be kept at prime locations so that their products are sold more. Then again I don’t need to mention, some portion of positioning fee is used for the benefit of its customers in form of providing discount on those products.
5. OWNERSHIP MODEL
More than 80% of its stores are owned and nearly 20% only are rented premises. So it has very less rental expense, so DMART owns a lot of properties. This process is like first they buy a land in a suitable area, then construct a store or directly buy a ready space available, but as they are into ownership model, no. of stores growth happens to be little slow compare to its competitors, reason being the moment they generate cash and make profit, they invest that profit in investment of new property and this process goes on, and due to this reason they are not giving any dividend. But it’s a good thing reason being near to 80% of its shares are held by promoters itself so if they give dividend, 80% of total dividend will go back to promoters, still they are not giving dividend, it shows high commitment of promoters towards growth of the company. But in long run, in ownership model, no. of stores will grow very fast. Let’s understand with an example. Suppose there is one DMART store which earns a profit of Rs.1000 per year, and cost of opening a new DMART store is rs.3000, so this one store of DMART will take 3 years to earn a profit of Rs. 3000 and open a new store. Now dmart has two stores, and now each DMART store will earn Rs.1500 in 1.5 years. So in total two stores collectively will earn Rs.3000 in 1.5 years. So it can open its third store in 1.5 years. Now after having 3 stores, it will earn Rs.3000 in one year collectively, so a 4th store can be opened in one year now. In this way this process continues and time gap between opening a new store keeps decreasing.
6. LOW COST MODEL
DMART believes in everyday low cost model, and it uses many measures to achieve the same. Like it uses means of slotting fees, positioning fees, cash discount, trade discount etc from its vendors to give extreme discount to its customers. And this low cost structure is very difficult to copy for any organization reason being
IF SOME OTHER COMPANY CAN’T SELL IN BIG VOLUME LIKE DMART THEN IT WILL NOT GET TRADE DISCOUNT AND IT MAY ALSO NOT GET CASH DISCOUNT.
AND IF OTHER COMPANY DON’T GET TRADE AND CASH DISOUNT THEN IT WILL NOT BE ABLE TO SELL AS CHEAP AS DMART.
AND IF THE OTHER COMPANY CAN’T SELL AS CHEAP AS DMART THEN CUSTOMERS WILL NOT COME.
SO OVER ALL ITS VERY DIFFICULT FOR OTHER COMPANIES TO BREAK THIS CYCLE.
LET’S HAVE SOME OTHER, VERY IMPORTANT POINTS FOR LOW COST MODEL.
-Goal is to keep expenses as low as possible
-you will not find DMART stores as beautiful and sophisticated as other company stores, and because of that DMART saves a lot money.
-you will not find much helpers/staff around you while adding products to your cart, here also DMART saves much amount.
-you will also not find extreme or very bright lighting conditions in DMART compare to other stores. Here also DMART saves a lot of electricity bill compare to its competitors.
-you will also notice that products are always kept very near to each other, there is very less extra space, in this way DMART uses the maximum space available.
-all these above savings are used to give even more discounts to its customers.
-If a company who is providing goods at cheapest prices against its competitors and still its earning highest profit against its competitors, then we can say that business model of DMART is extremely strong.
-Suppliers are very happy with DMART, BECAUSE NO COMPANY PAYS SO EARLY, LIKE DMART PAYS NEAR 7 DAYS.
7. REGIONAL GOODS
DMART also keeps famous regional goods of the particular state and city as well. For example, a DMART store which is located in Mumbai keeps famous products of that particular area and state. And this strategy is followed in every city and state. In this way DMART keeps national and regional both products at its stores. While its competitors mostly keep only national products. It gives DMART an edge over its competitors.
8. EXCELLENT HUMAN RESOURCE MANAGEMENT
Its always said that employees are the biggest asset of an organization, and DMART also believe in that. HAPPY EMPLOYEES, IS ONE OF THE MOST IMPORTANT FACTOR FOR AN ORGANISATION TO SUCCEED FOR LONGER RUN.
HR policies of DMART are very much employee centric, for example DMART HAS A HR POLICY THAT IF ANY OF ITS EMPLOYEE DIES AT WORKPLACE THEN DMART CONVERTS SALARY OF THAT EMPOYEE TO PENSION AND FAMILY OF THAT EMPLOYEE GETS THAT PENSION FOR LIFE.
And because of such policies employees love its company and work very passionately, which in turn help the organization to grow faster with sustainability.
9. OWN BRANDED PRODUCTS
DMART also sells some products under its own brand, like DMART PREMIA, DMART MINIMAX, DMART HOMES DUTCH HARBOR etc etc. own brands provides price flexibility to DMART and prices are under control of DMART, own brands are selling well and gaining popularity among customers.
FUTURE OUTLOOK & PRESENT FINANCIAL PERFORMANCE
Future outlook of departmental stores in India looks extremely positive as there will be a big shift from traditional business market to organized market. This provides an excellent earning visibility for the whole sector for at least 20-25 year. And we at Madhwani & Associates believe that DMART stores will be one of the biggest beneficiaries of this opportunity.
LETS LOOK AT BUSINESS GROWTH OF DMART……
In the year 2009 DMART was having sales of rs.1035 cr and net profit of rs.21cr while today on 12 months trailing basis DMART is having sales of rs. 23676cr and net profit of rs.1221 cr. In past decade sales and profit have grown at CAGR of 36.75% and 50.12% respectively, which is excellent, and in coming years as well, we believe DMART will grow in the range of 20-25% every year, which provides excellent investment opportunity.
RECENTLY COMPANY DECLARED ITS Q3 AND NINE MONTHS RESULTS.
Total Revenue for the quarter ended December 31, 2019 stood at Rs. 6,809 crore, as compared to Rs. 5,474 crore in the same period last year.
Net Profit of Rs. 384 crore for Q3 FY20, as compared to Rs. 247 crore in the corresponding quarter of last year.
PAT margin improved from 4.5% in Q3 FY19 to 5.6%in Q3 FY20.
Basic Earnings per share (EPS) for Q3 FY20 stood at Rs. 6.14, as compared with Rs. 3.96 for Q3 FY19.
Total Revenue for 9M FY20 stood at Rs. 18,614 crore, as compared to Rs. 14,943 crore in the same period last year.
Net Profit of Rs. 1,030 crore for 9M FY20, as compared to Rs. 711 crore in 9M FY19.
PAT margin improved from 4.7% in 9M FY19 to 5.5% in 9M FY20. Basic Earnings per share (EPS) for 9M FY20 stood at Rs. 16.49, as compared with Rs. 11.39 for 9M FY19.
Commenting on the financial performance of the company Mr. Neville Noronha, CEO & Managing Director, Avenue Supermarts Limited, said, “Our topline growth was in line with our estimates. PAT Margin improvement partly reflects the benefit due to revision in corporate tax rates. We have opened 20 stores during the first 9 months of this fiscal”.
Currently DMART enjoys a healthy NET PROFIT MARGIN near 5.5% which is excellent as per the industry standards, it is a very low debt company, so it has debt paying capacity of 27.9 times, which is very good, while its competitor future retail has debt paying capacity of only 0.7 because it has huge debt.
Currently DMART has 196 stores with space of 6.97 mn square feet. For a departmental store one of the most important parameter is revenue per square feet, this parameter shows how effectively company is able to utilize its space with regard to sales. REVENUE PER SQUARE FEET FOR DMART IS RS.35647, WHICH IS VERY STRONG COMPARE TO OTHER COMPANIES. FOR EXAMPLE ITS COMPETITOR FUTURE RETAIL HAS 1511 STORES WITH SPACE OF 16 MN SQUARE FEET, BUT STILL ITS REVENUE PER SQUARE FEET IS ONLY RS. 19000.
NOW LETS COME TO ONE VERY INTERESTING THING, WALMART IN AMERICA HAS DELIVERED 100X RETURN IN LAST 40 YEARS, TODAY THEY HAVE 12000 STORES, WITH ANNUAL SALES OF RS.36LAKH CRORES AND NET PROFIT OF RS.46700CR, WALMART DID THIS GROWTH WITH 50CR POPULATION IN AMERICA, NOW JUST IMAGINE WHAT DMART CAN DO WITH 130CR+ POPULATION IN INDIA! AND CURRENTLY SALES AND NET PROFIT OF DMART IS JUST 23676CR AND 1221CR RESPECTIVELY, SO JUST IMAGINE HOW MUCH HUGE GROWTH IS STIL PENDING.
We see two companies getting maximum benefit of this huge opportunity one is RELIANCE RETAIL AND second is DMART.
DMART HAS ALSO VENTURED INTO SELLING GOODS ON E-COMMERCE PLATFORM THROUGH MOBILE APP. CURRENTLYY THIS VENTURE IS IN PILOT RUN STAGE AND DMART HAS STARTED THIS VENTURE ONLY IN ONE CITY(MUMBAI) AND GRADUALLY WILLL EXPAND TO OTHERE CITIES AND STATES.
DMART IS ALSO PLANINNG TO COME UP WITH MINI DMART STORES AS WELL WHICH WILL BE IN PRIME LOCATIONS BUT SMALLER IN SIZES, IN THAT WAY IT WILL FURTHER EXAPAND ITS REACH.
VALUATIONS
CURRENTLY DMART IS HAVING VERY PREMIUM VALUATIONS IF WE SEE THE P.E. RATIO WHICH IS NEAR 1250 YES ITS VERY EXPENSIVE IF WE ONLY LOOK AT PE RATIO. BUT MARKET IS GIVING SUCH HIGH PE RATIO TO DMART BECAUSE OF SOME REASONS LIKE, THERE IS HUGE GROWTH EXPECTED, COMPANY IS EXPECTED TO GROW 20-25% EVERY YEAR.
THERE IS EXCELLENT EARNING VISIBILITY FOR NEXT 20-25 YEARS COMFORTABLEY. SO IN CASE OF DMART WE HAVE TO CONSIDER OTHER FACTORS ALONG AS WELL. HERE WE NEED TO SEE THE FUTURE PROSEPECTS.
YEAR AFTER YEAR SALES AND PROFIT OF DMART WILL KEEP GROWING IN LEAPS AND BOUNDS AND GRADUALLY P.E. OF DMART WILL KEEP REDUCING AND WILL REACH TO REASONABLE PE AUTOMATICALLY. STILL PRICE NEAR 2000 WILL BE GOOD TO ENTER.
AND IF SOME ONE WANTS DO SIP EVERY MONTH THEN CAN DO SIP AT ANY PRICE.
ALWAYS REMEMBER THAT THERE IS HUGE DIFFRENCE BETWEEN PREMIUM VALUATION AND OVER VALUATION.
GOOD BUSINESSES ARE ALWAYS AVAILABLE AT PREMIUM VALUAITONS. GOOD COMPANIES CAN BE BOUGHT AT PREMIUM VALUATIONS IN SIP MODE FOR LONG TERM.
Overall DMART has all the ingredients to make multibagger story, it has been a multibagger since ipo and it will continue to become a multibagger in future.
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