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"The Jambhavan Diaries"

Buy from DMart, but not the stock

Warren Buffet said, "Price is what you pay, the value is what you get."

Today, I am going to share an exciting view about one of my favourite shopping hotspot. It is none other than DMart. 

A Brief History of DMart

DMart is a one-stop supermarket chain that aims to offer customers a wide range of primary home and personal products under one roof. Each DMart store stocks home utility products - including food, toiletries, beauty products, garments, kitchenware, bed and bath linen, home appliances and more - available at competitive prices that our customers appreciate. Our core objective is to offer customers excellent products at great value.

DMart was started by Mr Radhakishan Damani and his family to address the growing needs of the Indian family. From the launch of its first store in Powai in 2002, DMart today has a well-established presence in 155 locations across Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh, Karnataka, Telangana, Chhattisgarh, NCR, Tamil Nadu, Punjab and Rajasthan. With our mission to be the lowest priced retailer in the regions we operate, our business continues to grow with new locations planned in more cities.

The supermarket chain of DMart stores is owned and operated by Avenue Supermarts Ltd. (ASL). The company has its headquarters in Mumbai.

* The brands D Mart, D Mart Minimax, D Mart Premia, D Homes, Dutch Harbour, etc. are brands owned by ASL

Management Background:

DMart was founded by a famous value investor known as Radhakishan Damani. 

My Analysis

 

A quick look at the spreadsheet reveals some key findings:

  1. Sales have grown at a rate of 42% over the past seven years.
  2. PAT has grown at a rate of 56% over the past ten years.
  3. The company's operating margin is in the range of 6% -14% and is fluctuating.
  4. SSGR seems to be in the range of 1% - 13% implying that company will have to rely more on external borrowings for its expansion.
  5. The debt keeps on increasing over the past many years which could be attributed to the fact that the company plans to expand its presence across cities. However, the debt to equity is below 1.
  6. Promoter holds around 82.2%- which seems to be a huge positive.
  7. DMART has created Rs 65.73 as market value for every rupee reinvested in the business. A look at this number shows that DMart has given mouth-watering returns for its investors. Also, the stock price has gone over four times from its IPO price.
  8. Interest Coverage Ratio seems to be at 21.1. The company appears to be well-financed and will be able to manage its interest costs efficiently.
  9. FCF < 0, which is a huge negative for DMart.

Credit Rating Agencies View

 

Based on the credit rating report, we understand that DMart has positioned itself to gain a considerable market share in the organised retail segment. However, the reported highlighted some critical insights like limited diversification of its stores across the country. Additionally, DMart might be susceptible to competitive pressures from players like the Future group, Grofers, etc. 

The stock is currently trading at a price to earnings multiple of 116.5 which is a massive premium that an investor will have to pay. If the earnings do not grow at an astronomical rate to sustain the PE, the stock price will tumble leading to value erosion for its investors.

Last but not least, DMart seems to be a good company with high-quality management. Regardless of the fact, the company seems to be trading at a huge premium which does not offer any margin of safety to new investors. Often, we realise that stock price will tend to go ahead of its earnings during bull markets. In the long term, the stock prices will tend to reflect the underlying earnings growth. Currently, DMart is factoring in all the positive news, and the market is paying a big promoter premium which is unjustified according to me. If there are any adverse surprises down the line, the stock price will be impacted severely. 

I would advise investors to exercise caution while paying a huge premium for such stocks. For details, investors can read about what happened to people who had invested in Infosys at the peak of 2000. DMart is no different. 

Disc: No holdings in DMart

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