Hi Alok,
I am also from Patna and we were in the same business line and I can give my perspective from a business aspect. I also think there is a lot of misunderstanding among the investor community about the core business model itself. I will share my own experience while running a small retailing operation in Patna.
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Orders for a season are placed during off-season by paying certain % as advances and later getting a discount. The later one buys during a season, higher the price they pay to the OEMs. Please note that I am giving a retailer perspective, Aditya Vision will also be dealing directly with the OEMs. For e.g. we used to stock Symphony and Kenstar air coolers when we bought at average prices of around 3500-4000 during off-season (say Nov-Dec) by paying 15-20% upfront (depending on relationship with a distributor). As season progressed, list prices increase and during peak season one will struggle to buy even at Rs. 5000. From sales perspective, we started at ~5000 during off season and during peak season, prices crossed 7000 (thereby approaching the MRP). On a blended basis, during a good season we could make average realizations of around 5500-6000 giving us 35%+ margins over a full season. In our case, margins were higher (vs Aditya vision) because we didn’t stock lower margin products like mobile phones. All this data is for 2014-17 period.
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Now that we understand the basic business model (which is working capital finance), lets see how small retailers benefit from big brands. There are always upcoming brands who want to dislodge incumbents by giving better trade conditions and discounts vs more established brands. For e.g. Kenstar was growing aggressively in Bihar at that time and gave us very good deals whereas Symphony didn’t provide large cash discounts. Our strategy was to stock both Kenstar and Symphony, but try to nudge customers to buy Kenstar. At the shop floor, a customer knows the product they want to buy (with a vague idea of the brand they will prefer), salesman then nudges him/her towards another brand which has the same look and feel, better guarantee terms and is cheaper (and also higher margins for retailer). Those customers who are very choosy about a particular brand generally prefer purchasing from an online channel, but a large proportion of customers have no clue at all. At the end, all these white goods are commodity products with a perception attached to it. Trivia: We also used to make our own air coolers which was available at our shop for a bigger discount, these used to be marketed to customers with a lower budget but made very high margins for us. That’s how all three product ranges work (established brands, competitors, white label). At the end of the day, retailer owns the customer (and not the OEMs).
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The per capita calculations about Bihar vs Maharashtra will not improve our understanding of a retailer like Aditya Vision. We need to focus on the value proposition of a retailer like Aditya Vision. In my understanding, there is a lot of latent demand in smaller places which get unlocked by availability when an organized retailer opens shop. Take for e.g. my wife’s family, they run a retailing operation in Biharsharif and were expanding their shop and needed to install few ACs. The brands they wanted were not available in the local shops, so they went to Aditya Vision who provided the brand they wanted, and installed the ACs on the same day. Now, this is what I call latent demand, which already exists but is only unlocked due of availability of brands in a shop.
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Finally on the growth runway, while doing some work on Aditya vision I got the opportunity to talk with the jewellery shop owners in Biharsharif to understand size of market. Now, Biharsharif is a very small place vs Patna or Ranchi. Each diwali, 800-1000 cr. of gold is sold in Biharsharif along with ~200 cr. of consumer durable items. In Patna, I think the consumer durable sales will easily cross 1’000 cr. in a year, as Aditya Vision itself might be doing 200 cr+ sales (combined with a similar no from Chandni Chowk shops). Simply extrapolating that, implies the overall consumer durable market is atleast 4000 cr.+ in Bihar, and probably 2000 cr.+ in Jharkhand. And this is a growing market, I dont think we need to worry too much about growth for a few years. I will rather focus on execution of the company and its focus.
All this being said, we should also keep in mind other relevant details (like cash taxes being lower than accrual taxes, political affiliations, etc.). The point of my post was to (hopefully) give some insights about consumer durable retailing business. Also, we shouldn’t just disregard an idea because they are from Bihar.
Disclosure: Not invested (no transactions in last-30 days)
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