Dmart – finally, I am turning cautious !

Since its IPO in March 2017, Dmart share price has increased to more than 400% currently. Company continues to remain fundamentally strong on most parameters. However, there is something else that is changing.....

At the outset let me accept, I have been a huge fan of Dmart business model from early days and have huge respect for its promoter, the stock market veteran Radhakishan Damani.

For last 2 years, I have had number of discussions with many of my professional colleagues where the main point of contention has always been the expensive valuations of Dmart stock (the stock has consistently traded at more than 80x trailing PE since its IPO). Whereas most of my colleagues have been negative on Dmart due to expensive valuations, I have always been positive due to the following reasons:

Valuations are surely important but Dmart is enjoying Scarcity Premium
Everyone in India big or small (Tata, Bharti, Reliance, AB Group, Godrej, RPG, Rahejas, Future Group) tried grocery retailing and has either failed or is still struggling. Dmart is the only one with commendable success.

So if investors wants to bet on Indian grocery retail, do they have any other choice? And my bet is that any serious investor would not like to ignore this segment given India’s macro dynamics.

The topmost factor - Customer Segmentation, Expansion and Loyalty
  • Noticing Dmart evolution over years, one would have surely witnessed the increasing income profile of Dmart customers. To put it simply “in initial days of Dmart, I used to call it poor man’s Big Bazaar” and now the life seems to have come full circle for Dmart.
  • Dmart is also the only grocery retailer that I believe is equally visited by small retailers as well as end consumers.
  • Most important is customer feedback – try to talk about Dmart with any of its customers and they will tell you how much they love shopping there (cheapest no-nonsense experience).
Dmart's track record of laser focused expansion and execution, which is a rarity otherwise, in today's valuation driven expansions
Some examples –

  • After opening 1st store in 2002, Dmart first focused on learning the retail model and then expanding and even now it never gives mindless growth numbers to analysts.  Try talking with any real estate broker and he will tell you what kind of research Dmart does before finalizing a new location.
  • Speak with any of the brands, established or new, and they will tell you how hard negotiator Dmart is ensuring best prices for its customers.
  • Try visiting Dmart stores and you will witness a lesson in retailing, right from store layout, rack placement, kind of products that it private labels, value added segments it outsources etc etc etc.
  • It never tom-toms about new segments it is testing, e.g., Dmart Ready
  • The last but not the least, so far I have not seen Dmart focusing on any unrelated or over ambitious businesses. Compare it with other grocery retailers and you will notice a huge difference.
Dmart has huge potential to grow
With population of more than 130 crore people, even currently Dmart operates only 177 stores with more than half located in Maharashtra and Gujarat.
More scale means more profits in an otherwise thin margin business
Dmart’s EBITDA margins have consistently improved from 7.1% in FY 15 to 8.9% in FY18 before correcting to 8.2% in FY 19 (due to competitive pressures). The fact remains that the bigger you are, the better negotiating power you have with the brands.

At this stage, I am sure you must be rechecking the title of the article and wondering if everything is good then why am I turning cautious !

I am turning cautious mainly because of the near to medium term very strong headwinds that I expect the industry to face from deep pocketed competition.

In the scenario, sentiments are going to turn cautious/ negative for Dmart irrespective of how strong the Company is.   

These deep pocketed players are:

  • AmazonI am most scared from and hence dedicating a separate small section underneath for interested readers.
  • Reliance through JioMukesh Ambani has time and again shown how he can disrupt a well established industry with his sheer vision, speed of execution and ability to spend. After disrupting the telecom industry wherein Jio subscribers have already crossed 300 mn, everyone knows that Reliance group has been for sometime now, talking about disrupting food and grocery retailing business. Reliance retail already has a touchpoint of more than 10,000 stores across formats in 6600+ cities. Integrating that with Jio’s subscribers is something that can potentially create tremendous business proposition. The exact rollout model to achieve that and the customer acceptance and feedback to the offering is something that all of us are waiting and watching closely. 
  • Walmart – Flipkart – Here, I believe Walmart may not go all out immediately and would first focus on setting the basics of Flipkart, Phonepe and Myntra. And who knows, maybe down the road there can be a synergy between them and Dmart !
Amazon

Jeff Bezos is a remarkable man and no one can deny what he has achieved with Amazon. He is a different breed and thinks long term and is disruptive. Anyone interested in his thought process should definitely look at his acquisition history. Looking at it one would notice how many of his disruptive product offerings have been planned years’ in advance.

Majority have doubted Amazon’s survival and success almost since inception and they have been proven wrong consistently.

For me, Amazon is focused on only one objective – 

Create such a comprehensive ecosystem around the end consumer that he just cannot forget or ignore Amazon. Transaction and profits will follow…

Laser focus on customer service, Prime membership ecosystem with fast deliveries, offers, exclusive launches, movies, music, fire stick, echo, alexa, kindle etc etc etc. Suddenly amazon is all around us creating a higher brand recall vis-à-vis any other player and without even realizing we are becoming more and more dependent on Amazon.

A typical customer’s number of transactions with Amazon vs any other online player would sufficiently prove this.

Jeff Bezos knows it for long that food and grocery is an important piece to get into the regular mindset of any end consumer The first investment he made in this space was wayback in 1999 in homegrocer.com

Amazon’s huge acquisition of Whole Foods for $13.7 bn in 2017, partnership with French Casino recent investment into India’s More are all steps that prompt me to believe that it is becoming aggressive in this segment.

My main concerns in relation to Dmart
  • There have been rumours of Amazon investing into Future Retail for last 1 year or so. For last 3-4 months there has been complete silence on the same. Normally these silence periods precede actual announcements.
  • Future retail has significant presence of more than 1500 stores of varied formats across 428 Indian cities.
  • Future retail had a customer footfall of >350 mn in FY 19.
  • Amazon claims to have a registered customer base of 150 mn in India i.e., about 12% of total population. An estimated 8-10% of this customer base is on Amazon Prime membership. Further both numbers are estimated to have been growing significantly.
Have a look at this section sourced from amazon.com website related to partnership between Amazon and Whole Foods
Spot more savings in-store

From weekly deals to an extra 10% off items with yellow Sale signs, Prime members save more on grocery favorites and everyday essentials.

5% Back at Whole Foods Market

Earn 5% Back every time you shop at Whole Foods Market with the Prime Rewards Visa Card and an eligible Prime membership.

If above is an indication of what might happen between Amazon and Future Retail, it can be disruptive given that Indian consumer is highly value conscious and Amazon has tons of money to burn.

Further, I am here not even getting into the subject of data analytics on consumer buying behaviour that Amazon (who knows it better than most) will exploit.

I therefore decide to turn cautious on Dmart more out of risk aversion and my own prediction related to increased competitive headwinds sooner than later.

Whether in that case it would make sense to turn positive on Future Retail – that’s the subject of maybe another post 🙂

Disclaimer: These are my personal views and not any recommendation to the reader. The reader should do his own independent research before taking any investment related decision. I was an investor into Dmart’s stock since IPO and has recently liquidated all my holdings.

 

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About the author

Nitin Jain

A finance professional with around 20 years of investing experience in Indian markets both on buy and sell side, equity and debt, private and public with some of the best organizations globally including Goldman Sachs, ICICI Group, ICRA and others. He is a All India Silver Medalist CA by qualification.

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