The current market capitalization of Avenue Supermarts is INR 71,000 Crores with 136 stores spread across India (some prime real estate but most mediocre). That means, on average, each outlet is worth INR 522 Crores.
For what ? For it to be a proxy-real estate holding company ? Because no matter how well-managed the Business is, ultimately it’s a retail store. Where’s the edge ? It’s a glorified cluster of kirana stores at best.
I like the business and the management, but I’m not paying that much money to buy an easily replicable business model.
There are tons of listed companies which are priced at a fraction of Avenue Supermarts but have incredible products (yes, something of their own, not mere retailers) , patented technology, time tested moats etc.
To me, I think the frenzy will eventually subside and you’ll see the true value of the business. To make a bold statement, I think it shouldn’t be valued anymore than 200 crores per store i.e. less than half it’s current price.
Now for some stats.
In 2017, it’s consolidated net profit was shy of 500 crores. At this valuation, all their 136 stores put together couldn’t make enough money to buy an additional store at the 522 crores valuation i.e. Dmart itself couldn’t buy Dmart. Thats actually quite some thing.
Most real-estate players have a much larger land bank than Avenue Supermarts but trade at a fraction of it’s value. As on date, the Company has 4.2 million sqaure feet of space, and assuming the entire space is owned by the Company, at the current market cap, each square feet of land and the business it brings is valued at INR 167,000, which is absolutely ridiculous. And to remind you, DMart has a big portion of it’s stores in Tier-2 cities.
It’s OPM shouldn’t ideally exceed 12%(FYI Giants like HUL, Dabur, Gorej Consumer have OPM of less than 20% when they’re the actual producers of the goods that DMart sells) since it’s a mere retailer. Even if Avenue Supermart sells the entire turnover worth of products of HUL, with a turnover of 33000 Crores and OPM of 12% it’ll still only make a profit of 4000 Crores trading at a PE of 18. It’s 2017 turnover was 12000 crores and OPM at 8%, so I’m being really lenient lending those sort of numbers here. And we are talking about OPM here, you reduce other expenses and PAT for Dmart last year has only been 4%. Some food for thought ? Rather generic FMCG for thought.
Walmart is only 26 times more expensive than Dmart and yet has 240x the revenue , 186x the profit, 85x number of stores, 275x square footage, operations in over 20 countries including 20 stores in India. Ridiculous ? Of course.
Last year, Dmart made a profit of some 480 crores from 136 stores, which means around 3.5 Crores from each store which is now valued at 522 Crores. What return does that give me ? 0.67% only. Need I explain more ?
I can probably come up with a 100 more reasons, but the fact remains. It’s a grossly overvalued business. And to me, I don’t see much value in an essentially retail business model.
Again and to reiterate, my problem is not with the business, it’s with the crazy valuation.
I see the topline grow by CAGR 15–17% (unless new stores are bought aggressively which will add to the debt) and OPM to stabilise at around 9.5% unless they work on their product-mix and offer high-margin goods. PE for a retail business shouldn’t be more than 25. In 5 years’ time, it should be valued at around INR 65,000 Crores, still INR 7,000 Crores cheaper than it is being priced today. But, at this juncture I’d also like to stress that the land value of the Company would also be somewhere close to INR 15,000 Crores (assuming growth in square footage by 10% CAGR and 22,000/sqaure feet which is the average going rate of commerical property) so roughly, bringing the value close to INR 80,000 Crores an upside of another 11% in 5 years. (Whicis quite poor even after using an optimistic set of numbers). For the land bit, I might have to do a little more assessment, but the value I’ve stated above is largely optimistic, again. Despite having such a positive disposition, I still can’t seem to accept the absurd current valuation.
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