What is the Future of DMart?

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This post has been written by Abhirup Roy for The Financial Pandora.

What is the future of DMart?

With CSK defeating MI in the opening match of IPL 2020, let us delve into its shareholder, Radhakishan Damani’s other well known venture, D-Mart. What is the future of DMart?

At first glance, D-Mart is an outlier among India’s organised retailers.

It has single digit operating EBITDA margins (8.6% in FY20), yet it is a Dalal Street darling stock, trading at 118x of its PE multiple. While the rest of the pack, More, Future Group, Godrej and Vishal MegaMart have struggled to stay afloat, D-Mart has only grown from 2 stores to 214 stores in a span of 20 years.

In the year 2017, the company IPO’d at Rs.1,870 Cr., listing at Rs 604.40/share, a gain of 102% over its offer price of Rs 299/share and its CMP stands at Rs. 2149 (in a pandemic) in 3 years. So what gives?

Unlike popular opinion, DMart does not just sell low margin essentials. It derived its revenue of Rs 24,675 crores in FY20 from the following categories:

i. Food, consisting of staples, groceries and dairy, contribute 52.40% (increased from 51.255 IN FY19) with a gross margin between 12-25%
ii. FMCG accounts for 20.29% with a gross margin between 12-25%
iii. General Merchandise and Apparel bringing up the rest, with 27.31% with a gross margin between 25 – 55%.

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The following factors have been essential for driving its performance:

Expansion Strategy

DMart added 38 stores in FY20, up from 21 in FY19. However, this has always been driven by a cluster based expansion strategy, starting with 2 stores in Mumbai in 2002-03, increasing to 75 stores across 4 states in 2013-14.

Watch: DMart Case Study

While it has now expanded to almost all of southern, western and northern states, DMart is extremely cautious in opening new stores, with 53% of its stores are still in Maharashtra and Gujarat. This helps in managing supply chains, optimising warehouse costs and reducing market demand risk.

Efficient Inventory Management

D-Mart has the largest average store size (~33,500 sq ft) and the highest revenue per square foot in the industry at Rs 32,879 per sq.ft, higher than its nearest competitor, Reliance Retail at Rs 26,000 approx and miles ahead of Future and Aditya Birla Retail.

One of the key factors driving this is its excellent inventory turnover ratio at 14.2 in FY20, which is nearly 2-3x what other retailers clock.

Limited SKUs, Lowest Prices

DMart is known for prioritising the best-selling brands and their variants within a product category and may have more than 25% SKUs when compared to its competitors.

It has even steered clear of the fruit and vegetables segment due to its notoriously perishable nature which leads to 5-10% wastage everyday. This allows it to maintain a lean supply chain and maintain industry leading discounts to the tune of 23-30% on MRP throughout the year, instead of festivals or seasons related period discounts.

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Negligible Rental Expense And Minimal Debt

Unlike competitors which follow a rental model and often set up in malls, DMart owns 90% of the properties on which its stores are built, thus creating an asset base and eliminating approx 5-7% of operating expenses which in turn is ploughed into the business as cheaper products.

And this has not weighed down the balance sheet as debt with expansion being financed through internal accruals. Due to this, DMart had zero long term debt and a debt/ equity ratio of 0.03 in FY20, down from 0.78 in FY16.

Loyal Vendor Base

Unlike other retailers, where vendors may have to wait for almost 1.5 months to have their invoice cleared, D-Mart pays its vendors within 7-10 days. This practice has created an extremely loyal vendor base, and gives preferential access to vendor inventory in case of supply chain disruptions.

So, All Is Well? Not Quite.

i. According to CEO Neville Noronha, the current level EBITDA margin of ~8.6% is high and there is no scope for further improvement if DMart plans to maintain its price leadership while competing with online and offline retailers.

ii. Same-store sales growth (SSSG) has consistently declined from 26% in FY14 to 10.9% in FY20, even after extending operating hours of stores by 2-3 hours – mainly driven by lower incremental revenue growth from stores older than five years.

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iii. While demand in older geographies have almost reached a saturation point, DMart has been unable to find attractive catchment areas in new geographies ahead of its competitors. Couples with escalating real estate costs, this has led to increased operating cost.

iv. As DMart has expanded to poorer states in terms of per capita GDP, it has failed to replicate historical throughput rates – one of the primary reasons it still has zero stores in eastern India

v. While DMart had created DMart Ready in 2016 to provide an omnichannel experience, a narrow focus on profitability, operations restricted to only Mumbai, relatively high delivery charges and absence of same day deliveries have prevented it from taking off. DMart Ready had sales of only Rs 354 crore with a net loss of 57% in FY20.

And then there’s the fact that Reliance has decided to focus on DMart’s turf.

With deep pockets, a much larger footprint throughout India with 797 stores, fast growth in grocery segment and a strong omni channel presence through JioMart, Reliance Retail has already captured 29.4% of India’s organised grocery market, ahead of DMart’s 23.1%.

COVID notwithstanding, will DMart’s conservative approach be able to persist against Reliance’s sky high ambitions? Only time will tell.

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