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D-Mart Success: What makes it so valuable?

And yet, D-Mart, a chain of hypermarkets and supermarkets, which has 155 stores at present, has not had to shut down a single store in 15 years. It said as much at its initial public offering (IPO).

While the rest have struggled to stay afloat, D-Mart has only grown. Phenomenally. In the last six years, the company’s revenue has grown at a compounded annual growth rate (CAGR) of 38% and its profits have grown at a rate of 54%.

D-Mart has negligible debt on its books and is profitable in one of the world’s most cut-throat markets. Its domestic competitors, such as Reliance Retail and Future Retail, are larger in size. Plus, foreign e-commerce giants such as Amazon and Alibaba are also eyeing a slice of the offline retail pie. Let’s look at these competitors.

D-Mart has the least number of stores in the above sample set but clocks the maximum revenue per store at Rs 105.1 crore (~$14.5 million). Compared to this, Reliance Retail, the largest retailer in terms of number of stores and revenue, generates Rs 9.75 crore (~$1.4 million) on each store, almost 11 times lower than D-Mart.

D-Mart’s operator company, Avenue Supermarts, had a unique listing as well. The stock opened at Rs 604.40/share ($8.37/share), a gain of 102% over its offer price of Rs 299/share ($4.14/share). A record debut on the bourses for an offer of its size.

Dalal street also values the company uniquely. From its offer price, the stock has rallied over 400% and is trading at levels of Rs 1523/share ($21/share), with a market cap close to Rs 1,00,000 crore (~$13.9 billion). At current levels, the price to earnings ratio stands at 111, and for financial years 2019 and 2022, it is estimated at 90 and 63 times respectively, as per brokerage firm HSBC Global Research.

Looked at through the lens of earnings and cash flow, D-Mart’s valuation in the market makes it the most expensive retail company in India. But is there another perspective from which one could value it?

Also, to what extent do potential competition from e-commerce giants and the ground reality really affect D-Mart’s valuation?

But first, how did D-Mart get here at all?

Slow and steady to the top

There is nothing fancy about my neighborhood D-Mart store, never has been. Like most people in Mumbai, I usually visit it on weekends, and like most places in the city, the store is a sea of humans. There’s barely any room to move my trolley, let alone talk to a busy employee.

But today it’s different. I’m here on a weekday, a Tuesday evening. The store is not packed. The employees are friendlier, willing to talk. “There is no burden on us to achieve any target, we are not asked to try to sell more to a customer or convince them into buying something,” one employee says.

“Most of our time is spent on inventory management and making sure that every rack is adequately stocked with all the variety of brands we have in that category,” says another.

The store is cluttered. But this is efficient inventory and space management. D-Mart has the largest average store size, highest EBITDA per store and per square foot and the highest revenue per square foot in the industry.

The first D-Mart store was opened in Powai, a suburb in Mumbai, by veteran trader and value investor Radhakishan Damani, and Damodar Mall, the current CEO of Reliance Retail.

Damani entered the stock market as a bit of a rookie in his thirties. Inspired by the legendary value investor Chandrakant Sampat, he started investing in quality companies.

At the age of 45, he strode into the organised retail space. With a conservative policy on new store openings, prioritising sustainability and profitability over scale, 17 years later, Damani now sits at the helm of the Indian retail market.

What really worked in D-Mart’s favour is that, by and large, they own the property on which the stores are built. This is different from its competitors who follow a rental model.

“When Mr Damani built D-Mart, instead of renting property—and rental income tends to be a fairly large operations expense for a retailer—he actually went out buying land,” says an investment banker, who requested not to be named as he is not allowed to talk to the press.

Damani, he adds, was essentially positively financing his debt. He built an asset base, and at the same time, eliminated a lot of operating expenses.

Huge rental expenses take away a retailer’s ability to offer cheap products to the customer. With low operating expenses, D-Mart was able to sustain its pricing strategy of ‘everyday low prices’.

“They cracked the unit-economics by a combination of a) low-cost no-frills operations and b) maximising throughput by offering ‘everyday low prices’. They became the destination supermarket in every catchment they operated. Despite lower gross margins than peers, their higher inventory turnovers led to higher returns on capital,” says Savi Jain, co-founder of portfolio management service 2Point2 Capital.

Also, unlike the rest, who were in a hurry and taking on heavy debt on their books, Damani took one step at a time and ensured a strong balance sheet.

Damani and Mall would travel to various markets in Mumbai to interact with wholesalers and traders, and in 2002, they took the retail plunge and set up the first D-Mart store. Shortly after, Mall walked away. No one knows why.

From the first store’s internal accruals, they bought land and opened another store. And so on. “This is why D-Mart had less than 100 stores before it went public despite being in the business for over 10 years. But they were and still are the most efficient and profitable retailer in India,” Jain says. With this approach, D-Mart was able to become debt free just after its IPO. The company used the bulk of the proceeds to pay off debt and the rest was used to expand beyond Maharashtra and Gujarat.

But D-Mart’s ownership model isn’t for everyone, “as [the others] already have huge debt on their books and taking on debt is now becoming more expensive along with real estate,” says Tushar Jain of brokerage firm IIFL.

D-Mart’s expansion has been very calculated. It will open 70% of the new stores in existing geographies and is very cautious about entering new markets. In line with its focus on value retailing, the company has a cluster-based scaling strategy. This allows them to have synergy within their supply-chain. “With this approach, D-Mart can order and warehouse in bulk. The bulk purchasing also gives them better bargaining power and steeper discounts with wholesalers,” Jain from IIFL adds.

"Retail is not a margin game, it's a volume game,"


D-Mart’s choice of location for its stores is also peculiar. It is present mostly in suburbs and does not have outlets in towns. It targets residential areas with a majority of lower-middle and middle-class consumers and offers them the best deals in the market, developing strong brand loyalty.

Another strong differentiator is D-Mart’s relationship with its vendors and distributors. “Unlike other retailers, D-Mart pays its vendors on time. So, with most of the other guys, the invoice is raised and cleared after three months but because D-Mart pays on time, vendors are super loyal,” says Mukesh Singh, co-founder of online grocery and consumer product goods retailer ZopNow.

This gives D-Mart access to goods that have a limited inventory. “Let’s say only 1000 packets of Aashirvaad Atta is remaining in the city and every retailer wants to refill their inventory with it. In such a scenario, nobody but D-Mart will have access to it. Because the vendors know that this guy pays on time,” Singh adds.

As Brokerage firm Systematix Institutional equities, in a March 2017 report, notes, “[D-Mart] has been able to get decent discounts from a wide range of suppliers, given a policy of prompt payments within seven to eight days, unlike competition that follows 30-45 days of credit period.”

Of course, this means revenue growth and profitability. And it further gives D-Mart the best retail sale per square feet, EBITDA margin, and lowest rent as percentage of total sales across the industry.

What makes it so valuable?

In the last quarter of calendar year 2016, Warren Buffett’s Berkshire Hathaway sold 90% of its Walmart stock. While many tabloids in the west ran with headlines saying that Buffett just confirmed the death of retail after this sell-off, Damani, his Indian counterpart, was in the process of getting his retail company listed on the bourses. The kind of response the public offer got—oversubscribed 104 times on the last day of the bidding—showed that India’s retail story had only just begun.

However, the company is still very early in its growth cycle and so it is assessed in market cap terms relative to the potential size of the organised retail opportunity in India, and not just on traditional financial figures.

$13 billion

D-Mart's market cap stands at Rs 94,445 crore (~$13 billion) as per Wednesday's closing price

“Companies like Reliance Retail and Future Retail have way more stores each because they followed the asset-light model and also had access to capital from their promoters. However, they were nowhere as profitable as D-Mart,” Jain says.

“The market view is that D-Mart has a long runway for a multi-year growth as it scales beyond its home state of Maharashtra, one of the reasons why the market values the stock so exorbitantly. It believes that D-Mart can replicate its profitable unit economics across hundreds of more stores across India,” he adds.

India’s retail sector is valued at $672 billion. In terms of market size, India ranks fifth globally and is growing at an annual rate of 12%. Out of this, the organised retail market is currently valued at $60 billion, merely 9% of the sector. This is significantly lower than developed nations like the US, where it stands at 85%.

“When a company is in its growth phase, especially in India, which is still very early in its consumption life cycle compared to other emerging markets, traditional multiples don’t necessarily work,” the investment banker says.

In India, the household debt to GDP is just 16% whereas the emerging market average is about 40%. “Indian households still have the attitude of save first and spend later, and at present, it is on the cusp of a change in consumption pattern,” the banker says.

As the per capita income of the country grows, consumption will start to increase as well, and “if I have a high-quality company like D-Mart, where the per capita income of 1.3 billion people is going up, the tailwind is amazing,” he adds.

Still pinches?

While the street might have incorporated all the possible tailwinds, has it fairly priced the headwinds while valuing D-Mart? In bull markets, while the going is good, the market will not ask that difficult question.

Disposable income visibility, job visibility also drive consumption and they are getting more marginal. The stock is expensive, the valuation in the stock market is not in sync with their maturing margins, the investment banker says.

In its maiden investor meet earlier this year in March, D-Mart’s CEO Neville Noronha, said that the current level of margins—gross margin of 16% and EBITDA margin of 9% in FY18—are high and there is no scope for further improvement.

Same-store sales growth (SSSG) has been on a constant decline; it has dropped from 26% in FY14 to 14% in FY18. This fall will be steep going ahead if the old stores continue to dominate the overall store count. D-Mart needs to expand in other states to have controlled SSSG. But this may not be feasible as the new stores being added are larger, and with rising land costs, the pace of store expansion could suffer.

As per the management, D-Mart prefers the store-ownership model for expansion, but it would also consider renting if shops are available at attractive prices.

Though the company may prefer the ownership model, Jain from 2Point2 Capital is of the opinion that D-Mart will have to rent properties as well, which it already has started doing. He explains that it won’t be possible for D-Mart to scale the business by just buying more properties as capital is limited and prime properties may not be easy to come by.

Also, there is a mad rush by others to capture the market. Apart from behemoths like Future Retail and Reliance retail, private equity funds, too, want a piece of the offline retail pie. Samara Capital recently acquired Aditya Birla’s More in partnership with Amazon to play this space.

An even bigger threat is from online players such as Amazon and Flipkart who have just started delivering groceries. They are willing to let go of profitability for long periods of time in order to acquire customers. “These competitive threats from both offline and online players can negatively affect D-Mart’s growth and profitability, and is not priced into D-Mart’s valuation,” Jain adds.

D-Mart’s success is directly linked with the price they have offered their consumer so far. “With a rental model, will they be able to give the ‘everyday low price’ deal?” the banker asks.

While D-Mart is expanding to newer clusters, most of its growth has been from tier-1 cities. “Penetrating into tier-2 and tier-3 cities would be a challenge for [D-Mart] because people tend to get loyal with an existing brand or chain of stores and capturing customers from them won’t be easy,” Tushar Jain says.

The threat of e-commerce. Or not?

What made Buffett lose faith in Walmart, a company he had invested in 2005, was the rise of e-commerce and the disruption it brings.

Traditional retail was an endangered lot last year, but the predicted death of brick-and-mortar stores never happened. Some international retailers did file for bankruptcy and some have even closed, but in India, traditional retail has continued to grow, and on the contrary, e-tail firms have had to fight for survival. Today’s consumer is extremely demanding. They want touch-and-feel, comfort, cheap price. Everything.

Both offline and online players seem to have realised that a marriage is the best way forward.

A merger of these two worlds, omnichannel commerce. “Consumers are moving between online and offline channels and hence omnichannel commerce is the preferred route to targeting varied consumers across geographies” Aashish Kasad, Partner Tax and Regulatory services, EY India says.

D-mart is betting on omnichannel with its D-Mart Ready stores. Started in December 2016 with a separate arm called Avenue E-commerce Limited, a total of 58 300-400 square foot ‘hole-in-the-wall’ stores are being used as delivery centres in various Mumbai suburbs. Customers can place their orders online and can collect it from these pick-up points, or with some extra money, get it home-delivered.

But it’s in test phase.

D-Mart’s philosophy is to keep the omnichannel profitable. “In order to keep the channel profitable, D-mart charges for online deliveries, a service that it provides from limited locations near its existing stores. It may not be able to compete effectively with online players with such a strategy,” Jain says.

Large retailers who have established their presence in India, will gain more synergies with their suppliers and supply-chain by expanding into tier-3 cities and promoting omnichannel retailing


“At the end of the day, what Mr Damani will ensure that even if e-tailing fails, he would have pioneered the traditional retail model, and if e-tailing succeeds, then he can adapt to it in a profitable way,” the investment banker says.

So, is D-Mart ironclad? No.

There are two Ds to D-Mart. Damani and ‘D’amodar Mall, who is now heading Reliance Retail. He has both D-Mart’s secret sauce recipe and Reliance’s capital. And Jio. An e-commerce alliance leveraging Jio’s mobile network and customer base to the retail arm can give Reliance a unique position like no one has in the market.

Also, Future Retail’s EasyDay store expansion is being seen as the perfect Kirana replacement. D-Mart has enough competition eyeing its spot.

You see, bulls can’t run wild forever, and at some stage, there is going to be a repricing of risk in the market. Though D-Mart might not see the same extent of correction as its rivals, better valuations can be expected as growth in the company matures.

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