Avenue Supermart: a compounding machine?

My views on DMart:

1. Avenue Supermarts (DMart) came out with an IPO in 2017 with a price band of 299 and got listed around 616, giving IPO investors more than 100% returns. Since then the stock rallied to an all time high of 5485 and currently trading at 3986 with a 27% discount from its recent high.

2. DMart operates in a high growth retail sector and hence commands a high PE close to 100. The stock had a median PE of 125 since its listing and the lowest PE was around 90.

3. Currently it is trading at a PE of 96, indicating a limited downside and a huge margin of safety. This is a consistent compounding high quality stock, which provides a strong value buying opportunity during significant corrections.

4. The promoters hold 75% of the shares, while FIIs own 10% and DIIs own 7%, CEO owns 2% and the rest 6% is owned by retail investors. There is low free float available in the market hence the stock price is not prone to much volatility unless there are big transactions from FIIs or DIIs.

5. The promoters have not diluted the stock since IPO, not taking any Dividends and investing the entire profits for growth and expansion which shows their strong conviction and commitment to the company.

6. The company has consistently been adding new stores in the last 10 years and been growing revenues at a rate of more than 25% CAGR since inception.

7. DMart currently operates around 377 stores across India and is aiming to add 40-50 stores per year. With strong presence in Maharashtra (112), Gujarat (61), Telangana (42), AP (37), Karnataka (34), TN (23), MP (22), RJ (17) Punjab (13), NCR (9) & others.

8. Remember that Walmart operates 10,500 stores across the world while it operates 4,600 stores in the US with a population of 330 Million, imagine the growth potential DMart has by operating on the similar business model.

9. The company’s unique selling point (USP) is its huge land bank in major metros and tier 2 cities, it owns and operates the stores which saves a lot of lease rental expenses. Also focusing on improving its e-commerce app DMart Ready.

10. It follows a cluster-based expansion approach for penetrating areas where they are already present, before expanding to newer regions, this provides a huge competitive edge. (EMI – Bajaj Electronics allows follows the same approach)

11. The stock has recently corrected by 27% within a month, since the growth has slowed down in the recent quarter and the company acknowledged that its large stores in the tier-1 cities are facing competition from the quick commerce companies.

12. Quick commerce companies are currently trying to match the prices comparable to the retail stores along with free deliveries in 10-15 minutes. For this they need to burn huge VC money for rapid top line growth and exploit manpower.

13. I believe this is an unsustainable business model, once the VC money inflow stops they have to hike prices to become profitable to survive. Once the prices are no longer matching the retail stores their business declines and may get acquired or go bankrupt.

14. Groceries are essential commodities which have very thin profit margins, unlike food delivery business where the margins are high. Zomato and Swiggy have already burnt their hands in the food delivery business and learnt that’s not sustainable and hence pivoted to quick commerce.

15. With rising food inflation the majority of the population looks to buy groceries on a monthly basis where the provided discounts are high. Only the affluent population looks for convenience over the price which is around 1-2% of the overall population.

16. While quick commerce businesses may continue to exist parallelly but beyond a certain point, their growth would be limited. While the retail stores expansion continues beyond tier-1 to tier 2 & 3 cities.

17. The stock has been consolidating in the price range of 3300-4500 since the last 3 years. Once these fears are taken off it may break this price range and start a new rally, I don’t know when that will happen but when it happens it may provide a 2-3X return from the current levels with low risk/reward ratio.

18. Remember Warren Buffett’s saying – to be greedy when others are fearful. That truly applies to D-Mart at current competition fears and hype created by the Zomato stock rally and Swiggy upcoming IPO.

Happy investing in Dmart

Disclosure: accumulating DMart in small quantities with a long term view.