To be fair, it was never in doubt that D-Mart will get a bumper listing on the bourses. But the stock actually went on to break all expectations. Against the issue price of Rs.299, D-Mart listed at nearly Rs.600 and despite minor hiccups, closed the day near its highest point. By close, it had yielded 116% returns on the day of listing and the company was valued at nearly Rs.40,000 crore. That is roughly 5 times the valuation of Trent and more than 3 times the valuation of Future Retail. So the question that arises is whether the stock can maintain such valuations and do the fundamentals justify such a premium valuation over its peers…
D-Mart is a pure food and groceries play…
At a time when the theme of retail in India has been to spread as thin and as wide possible, D-Mart stuck to its core knitting of food and groceries only. Broadly, D-Mart was structured on the lines of Wal-Mart, the US convenience store chain. Like Wal-Mart, the locations of D-Mart stores were typically in semi-urban and rural locations. Instead of splurging on rent, which accounts for 5-10% of the cost structure of a typical retail superstore, D-Mart has preferred to own most of its stores. This also reduces their cash outflows and gives heft to their balance sheet. A visit to a quintessential D-Mart store gives the typical impression of a store that is stacked to the hilt, is teeming with customers and not too tastefully done up. That is exactly the focus of D-Mart. They have tried to appeal to the middle-class Indian housewife who would feel more comfortable shopping in a store that offers salivating bargains.
Managing the consumer / vendor partnership…
This delicate relationship is again something that D-Mart has managed quite effectively. In fact, in the retail business, this is the most critical aspect. Certain basic issues like improving customer experience, giving value for money, increasing store turnover, handling vendors, managing payment cycles are all a major part of the retail business experience. So, how exactly has D-Mart managed these relationships. For customers, the focus of D-Mart has been purely on offering value for money and more. A typical D-Mart store offers a minimum 6% discount over the other stores. For most products, the discounts are much higher. Typically, they squeeze the vendors to offer them the best deal and then pass on these benefits to the end consumer. The entire game is of volume and not of value. But, why do vendors offer such terms to D-Mart. The answer is that D-Mart has squeezed payment cycles. In the retail industry, most retailers demand credit of 30-45 days from the wholesale suppliers. D-Mart has made it a point to pay by the 11th day. This has come as a boon for the vendors who are typically squeezed for liquidity and hence are willing to offer better terms of D-Mart in exchange for timely payment of bills.
Getting more value per square feet…
If you walk into any D-Mart store, you may be intimidated by the chaos and product stacks. But in the midst of this chaos there is a very smart financial method at play. What D-Mart has managed through its pointed focus on customers and vendors is to get more value for the company per square feet that it deploys in the business. Let us compare D-Mart and Future Retail on some of these parameters. While D-Mart has just 117 superstores, Future Retail has a total of 794 stores. Future retail has revenue per store of Rs.16 crore while D-Mart, on an average, earns Rs.75 crore per store. While Future Retail earns Rs.3 million as profit per store, D-Mart’s corresponding number is nearly 10 times of that. This means that D-Mart’s operating margins are at 9% compared to just 3.2% for Future Retail. But, how did D-Mart achieve this outperformance?
Since most of the D-Mart stores are owned, they save on rental outflows although it does entail capital investment. Of course, a large part of the loans taken for these acquisitions will be repaid when the company gets the proceeds of this IPO. As a result, D-Mart has an asset-heavy balance sheet and hence has an asset turnover ratio of just 3.5 compared to 31.2 for Future Retail. But what really matters in this industry is inventory turnover; the number of times you churn your inventory. D-Mart has an inventory turnover ratio of 14.6 compared to just 4.9 for Future Retail. This ensures more profit per square feet for D-Mart. Because of this high inventory churn ratio, D-Mart has a profit per square feet of Rs.25,844 compared to just Rs.13,900 for Reliance Retail and Rs.12,900 for Future Retail.
Getting growth through low debt and high ROE…
D-Mart has been growing its revenues and profits at over 40%, which makes a strong case for its premium valuations in the market. At a debt/equity ratio of 0.7, it is almost at par with Future retail, but D-Mart will repay part of the debt with the IPO proceeds and also has heft in its balance sheet. Despite the balance sheet heft, D-Mart has sustained ROE of 21% principally due to the growth in profits. Even if you compare globally, the ROE of D-Mart is comparable with similar global players like Wal-Mart and Costco. So the broad strategy for D-Mart has been predicated on 4 factors viz. Squeezing rental costs, passing on vendor benefits to customers, earning more money per square feet and staying close to the customer. Which is why, like a typical convenience store you find more D-Mart stores in residential areas than other store formats.
Are there are any risks to the D-Mart model?
Well, there is rarely a business model without the concomitant risks and D-Mart will not be an exception. We see 3 possible risks to this business model. Firstly, the model can be replicated. While the business execution model is quite easy to replicate for someone with deep pockets, the finer aspects like vendor relationships and customer loyalty will not be all that simple. Secondly, D-Mart does face a threat from online selling. While that model is yet to be perfected, it is surely one way that the industry can be disrupted in a big way. Lastly, there is always the risk that large investors may try to coax the management of D-Mart towards decisions towards higher profits. D-Mart needs to ensure that none of these decisions impacts its core constituency of vendors and loyal customers.
In a nutshell, the bumper listing of D-Mart is part of a much bigger retail story that was floated by Radhakishan Damani back in 2000. Like Wal-Mart, the D-Mart model has surely managed to squeeze more profit per square feet. This advantage needs to endure!
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