Updated: Apr 14, 2022
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Remember the popular TV series “Scam 1992”? Well who would’ve thought that Maheswari from this series was 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 USD 1.5 trillion by 2030. Organized Retail only forms 12% of that, but it has expanded by approximately 50% in the last decade.
DMart is a prominent player in organized grocery retail market. DMart focuses on the value segment following Walmart’s philosophy of Every Day Low Price for customers. Business is expected to grow 20-25% in next 4-5 years driven by higher share of organized sector and higher disposable income.
DMart has competitive advantages like their experienced management team, better procurement prices, cluster based approach and superior unit economics. DMart has a solid business going with industry-high profit margins and ROE north of 15%. But, what about competition?
DMart is facing severe competition from well capitalized giants like Flipkart, Amazon, Reliance Retail and Tata. They have significantly strengthened their investments in supply chain, fulfillment capabilities and pricing/selection. Well, India’s organized retail market may be able to sustain 2 or 3 national players, with others being regional players. The competition is expected to be brutal.
What are our views on company valuations?
DMart currently trades at an EV to EBITDA ratio of approximately 130 times and PE ratio of approximately 230 times. Now that’s super rich!
Comparable PEG ratio for US giants like Amazon, Walmart and Costco vary between 3 to 4 times. Using similar PEG ratio, the PE for DMart comes to approximately 70 times, compared to the current valuation of 230 times. So, the fair value using this ratio is less than 1/3rd of the current price.
Factor not considered in this price is high competitive pressures expected in the industry. It may not be the case that the share price comes down up to the fair value due to a concentrated shareholding pattern. But the stock could have a time correction over a long period till the fundamentals catch up with the elevated share price. What are the risks to the investment analysis?
Risks to the analysis are:
High liquidity in the stock market can push the price higher in short term
Acquisition by a large player like Walmart – to jumpstart their offline growth in India. However, the probability of this happening is quiet low.
Would you invest in DMart?
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