DMart (BAAP Stock) – Excellent business with stratospheric valuation

Updated: Dec 2, 2021

Company Name – Avenue Supermarkets Limited (DMart)

Current Share Price – INR 5,079 (Nov 13, 2021)

Market Cap – INR 328,976 cr

1. What is interesting about the stock?

We have seen the popular series on Harshard Mehta – Scam 1992. Do you remember the character – Maheswari played by Paresh Gantara (see the above pic). It is supposedly based on veteran investor - Radhakishan Damani. He became India's retail king after the March 2017 IPO of his supermarket chain DMart. Let’s briefly understand the industry before we get into DMart.

India’s retail sector is experiencing exponential growth and is expected to reach USD1.5 trillion by 2030 from USD 0.8 trillion in 2020. India is largely an unorganized retail market. However, the organized retail market has increased by ~50% between 2012-2020 to its current value of nearly 12% of total retail. Modern retail is expected to grow at a 15% CAGR to reach 18% by 2025. DMart is a prominent player in organized grocery retail.

DMart was founded by Radhakrishna Damani in 2002 who has been a distinguished investor in the Indian equity markets since 1990s. DMart focuses on the value segment following Walmart’s philosophy of Every Day Low Cost which translates to Every Day Low Price (EDLP) business model for customers. Company has organically grown to around 250 stores with revenue and PAT increasing by CAGR of 30% and 40% over last 9 years ending March 31, 2021. Business is expected to grow 20-25% in next 4-5 years driven by higher share of organized sector and higher disposable income.

Key competitive advantages of the Company are:

  • Consistent focus on EDLP – drives customer loyalty

  • Cluster based growth; company is able to build scale in logistics and improve negotiating leverage with FMCG brands

  • Superior unit economics driven by high sales per sq ft (2-3x of competition), strong same-store sales growth and lowest opex as % of revenue. High sales per sq ft is owing to fast inventory turns or low inventory days

  • Experienced management team

On an overall basis, DMart has solid business which is expected to grow in next few years. So, far so good.

Then isn’t it a BAAP – Buy At Any Price story. Picture abhi baki hai mere dost – investors need to factor that the competitive dynamics is heating up in the industry and valuation is so stretched that they will have to ally with Space X or Blue Origin to open stores on Mars (you are getting the drift!) to justify it.

DMart is facing competition from four very well capitalized giants:

  1. Reliance Retail – market leader & well-funded player in the process of acquiring Future Retail which would leapfrog its grocery footprint in addition to improving its logistics capabilities

  2. Amazon (More) – Global e-commerce market leader with strong presence and increasingly moving towards omni-channel approach with the acquisition of Whole Foods in the US and More stores in India

  3. Walmart (Flipkart) – Largest offline retailer in the world which also owns Flipkart – an incumbent market leader in Indian e-commerce

  4. Tatas (Trent and BigBasket) – Tata’s have made their intentions clear with USD 1 billion acquisition of Big Basket (largest online grocery player)

India’s organized retail market may be able to sustain 2/3 national players, with others being regional players. Capital dumping is likely to take center-stage going forward with players aiming for market grab (similar to land grab). Global/domestic retailers Amazon, Walmart-backed Flipkart and Reliance Retail have significantly strengthened their war chests for investments in supply chain, fulfillment capabilities and pricing/selection. An inkling of this can already be seen in the reducing selection/pricing arbitrage of DMart over these biggies. Grocery is going to the focal point, with one of the highest velocities of daily transactions, for all players having Super App ambitions.

Industry is expected to see brutal competition.

2. Key Historical Financials

3. What is my view on company valuation?

DMart currently trades at EV/EBITDA (TTM) ratio of c. 140x and P/E (TTM) ratio of c. 240x. Now that’s super rich!

Some of the analysts/investors give the argument of DMart’s higher expected growth rate justifying the valuation. I would agree with them. Let’s use PEG ratio to arrive at the valuation as it will adjust for DMart’s higher growth rate.

Comparable PEG ratio for US giants like Amazon, Walmart and Costco vary between 3-4x (they are trading at their all-time high valuation ratios). Using PEG ratio of 3.5x, growth rate of 25% and margin of safety (20%), the PE ratio comes to c. 70x (3.5 X 25 X 80%) compared to the current valuation of 230x. So, the price using this ratio is less than 1/3rd of the current price or around INR 1,500 levels.

Factors not considered in this price is high competitive pressures expected in the industry.

Fair price will be lower as we should consider long term valuations of the US players and not the current all-time high valuation ratios.

It may not be the case that the share price comes down to the fair value. Stock could have a time correction (flat) over a long period time till the fundamentals catch up with the elevated share price.

4. What are the risks to the investment analysis?

Risks to the analysis are:

  1. High liquidity in the stock market and perception of being a BAAP stock – can push the price higher in short/medium term

  2. Acquisition by a large player like Walmart – to jumpstart their offline growth in India (low probability at this valuation)

  3. Roll-up strategy by DMart where they acquire unorganized players at an attractive valuation (very difficult to execute)

About the Author

I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.

I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).

I am an Insignificant Investor in the public market and co-founder of SocInvest.


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

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