by Welcome to Traders Ideology, where you learn how to invest in the stock market and create wealth. In this article, we will discuss the Fundamental Analysis of DMART. We will discuss its business model, company financials also we will study its valuations, and at the end, we will check if stock is available at a good level to buy.
Disclaimer: This article is only for educational purposes. I do not recommend buy or sell so please consult your advisor and do your own research before investing.
Contents
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Introduction
- Radhakishan Damani is such a trader who, at the time of Harshad Mehta, when the equity market started to go down. Became a trader and earned a lot of money by short selling in the market.
- After this, he shifted his strategy from a trader to a value investor because as I always say, making money by investing is very easy, and in the long run, a lot of money can be made.
- So, Radhakishan Damani, at that time became a value investor become a trader, not only did he becomes a value investor, he became a very successful one and he choose such companies where he got more than 100% return.
- After becoming a value investor, He thought, why not become an entrepreneur? Why doesn’t he start a company where That doesn’t only create value for itself But to create value for the people who invest in the company as well.
- So, he started a company called Avenue Supermarts. Which, in short-form is also known as D-Mart
- D-mart is a Value retailer. “Value Retailer” means they sell their products at very cheap prices.
- You also might have observed that dmart have a buy one get one free offer and we get their products for lesser than MRP.
- We will discuss dmart business model in some time but before that, we will discuss their promoters.
- Mr. Radhakrina Damani started D-mart in 2000. He is a good investor and that’s why he is able to develop a good business.
- As Warren Buffet said, “I am a better investor because I am a businessman, and a better businessman because I am an investor”.
- Radhakrishna Damani was a good investment that why he was able to develop a good business.
- Mr.Ramesh Damani is one of the promoters of Dmart and he is also a very good investor.
- When the promoter is an investor then they know how to allocate capital, how to diversify, and how to reduce expenses.
Also Read: Praj Industries Stock Fundamental Analysis & Fundamental Analysis of Deepak Nitrite
Fundamental Analysis of DMART
Fundamental Analysis of DMART are as follows:
Business Model
- Now we will discuss the d-mart business model. As I mentioned d-mart is a value retailer and they sell their product at very cheap prices.
- Everyday low price, Everyday low cost is their business model, which means you will get products for cheaper cost on daily basis.
- As you know in some shopping malls keep off on a particular day of the week but d-mart didn’t follow this strategy.
- Everyday low cost, Everyday low price strategy was first time implemented by Sam Walton at Walmart, and Walmart is a successful business. so d-mart also used the same strategy and they are also growing now.
- D-mart is always focused on sales and not on margins. Because if they will do more sales they will get more profits.
Why D-mart can keep their prices very low?
- Whichever products D-mart sells from their stores they buy that in bulk from suppliers.
- Suppose you buy a single watch at 1000 rs but if you buy them in bulk then you will get it for 600 or 700 rs.
- D-Mart does the same thing. D-mart buys products for cheaper prices from suppliers and also sells them cheaply to customers compared to competitors due to this Dmart can increase their sales and they are using different strategy than their competitors.
- Most of the products of D-mart are used in day to day life and they didn’t focused on premium segment products.
- They focused on middle class and lower middle class because in India most of the population is with within this category.
Revenue Breakup
- Now, will check from which all business segment D-mart earns their business revenues.
- Avenue Supermart Revenue comes from 3 segments which are food,non-food and general merchandise.
- Most of their revenues comes from food segment which is contributing 51%. Beverages,snacks and dairy are products in this segment.
- The second segment is non food which contributes around 20% of revenue. Home care and personal care are products of these segments
- Third segment is general merchandise. Cloths, foot wares, toys, utensils are the products of this segment and in contributes 28% revenue.
How DMART Expand their Business?
- Now we will see one interesting thing. When D-mart started in 2000. They only had 10 stores in first 8 years, its not because they didn’t have investment but they wanted to check if their business model can work, can they get profitable and can we scale it, and how much profits can be earned.
- Once they understood it is good business model then they expanded it and in 2018 they have 155 stores.
- They are present in many states of India but they have less stores in north east because, V-mart have good hold there.
- There is almost 50% of population of India lives in those states which D-mart covered.
- Initially D-mart operated from a smaller place which was part of their one of stores because Mr. Radhakrishana Damani knows how to reduce business expenses.
- D-mart owns their stores instead of leasing it. Because there is an increment lease each year.
- If you compare this with reliance mart as they lease their stores, In 2016 the cost of leasing was 630 cr compared to Avenue Supermart spent only 30 cr.
- Most retailers follow a strategy of leasing because if there are no sales from particular store then closing that store is easy.
- But D-mart didn’t use this strategy and till today they did not close a single store due to a lack of sales.
- McDonald also used same strategy of owning stores and they have total assets of $30 billions and McDonald is also one of biggest real estate company.
- As you know, nowadays there is the craze of online shopping, you can get a lot of products from online like electronics, clothes, footwear.
- I think due to this online shopping, D-mart may face some problems in future. In India till now it didn’t caused any disruption but in US it already caused disruption.
Company Financials
Company Financials of Dmart are as follows:
- So, the first financial parameter which we should see in the FMCG or Retail sector.
Operating margin
- If I explain operating margin in very simple terms.
- If a company sold ₹100 worth products, andnd their expense was ₹80, then their operating margin is ₹20 which in percentage is 20%.
- So, in this case we will know about how Dmart’s operating profit margin is and if we compare this to its competitors, then how does it perform?
- As you can see on the screen that in the case of operating profit margin.
- Avenue supermart has always out-performed its competitors.
- If I talk about 2019, then D-mart’s operating profit margin was 8% which in 2018 was 9% and in 2017 was 8%.
- Whereas, Future Retail’s operating profit margin in 2019 was only 5.24%.
- And it wasn’t only in 2019 that D-mart out-performed Future retail but they also out-performed them in both 2018 and 2017.
- Now, if we look at Spencer’s operating profit margin.
- It is only 1.90% and 0.89%.
- From this we can say that, in the case of operating profit margin, D-mart has very nicely out-performed all its competitors in that industry.
Inventory Turnover
- This ratio is very important when you talk about any FMCG or any company in the retail sector.
- If I explain the meaning of Inventory Turnover ratio in very simple terms, so inventory turnover ratio tells us how fast the company sells its inventory.
- For example, is any company’s inventory turnover ratio is 10. It means that the company rotates its inventory ten times in one year. So, it sells all its inventory and refills it, Ten times in one year.
What D-marts inventory turnover ratio is? And when we compare it to its competitors, how does it perform?
- Dmart’s inventory turnover ratio has always been around 14.5. If I talk about 2019, then their inventory turnover ratio was 14.6. In 2018, it was 14.4, and in 2017, it was 14.9.
- In the same case, if I talk about its competitor Future retail, then that comes out to be 3.98. In 2018, it was 4.18, and in 2017, it was 4.57.
- You can see how big the difference between the company and its competitor’s inventory turnover ratio is.
- From this, we can understand that D-mart sells its inventory very quickly because of which they don’t have to keep the inventory with them for long. In one year, it rotates its inventory 14 times.
- In the same case, their competitors like Future retail are only able to rotate their inventory four times in one year.
- From this ratio, we can also find out in how many days a company sells all its inventory.
- Here if I talk about Avenue Supermart, then they sell all their inventory in 25 days and this number is very good in this industry.
- When we compare the number to the company’s competitors A lot of people also say that Avenue Supermart is going to be India’s Walmart and in the coming days, as Walmart expanded itself in the US, Avenue Supermart will expand itself in India.
Now we also want to know that if you compare Dmart’s financial ratio or financial analysis to Walmart, So where does Dmart stand?
This is going to be very interesting, I will tell you this in detail. As you can see on the screen that I have compared Avenue supermart to Walmart in four parameters.
Let us see where D-mart stands
ROE
- The first parameter is ROE which is called Return On Equity that is an equity investment, how much return does a company give.
- If I talk about Dmart then its ROE percentage is 16% And Walmart’s ROE is 18.2%.
- In this parameter, Dmart very nicely outperforms Walmart.
Asset Turnover Ratio
- Let’s about the Asset turnover ratio, This tells us how well a company utilizes its assets.
- If I discuss about Dmart’s asset turnover ratio, it is 3.9% and there Walmart’s is 2.4%.
- In this parameter as well, D-mart outperforms Walmart.
Inventory Turnover
- If I discuss inventory turnover, which we just discussed in a lot of detail,
- So in this parameter as well, Dmart is further along than Walmart.
Debt equity ratio
- In the end, let us talk about the Debt equity ratio.
- To see how much debt a company has.
- So when we talk about Debt equity ratio, Walmart and Dmart are almost equal.
- So, this was Dmart fundamental analysis.
Future Growth Prospects
- Now let us discuss this company’s future prospects, and we’ll will discuss about some interesting facts about this company.
- Before I discuss D-mart’s future prospects, I will tell you a very interesting fact, that 63% of Dmarts total revenue comes just from Maharashtra.
- So this tells us how concentrated the company is in one area when it comes to its operations. In the near future, if they expand to the other states in India, because, right now, it is active only in 12 states.
- Even now there are a lot of states left in which they can expand themselves and if they expand themselves well, and utilize their operations well. In the coming time, their revenue and net profit can improve well.
- If we discuss promoter holding in Dmart Which is of Radhakishan Damani, it is about 75%.
- So in India, this much of a promoter holding is a lot as compared to other companies.
- This is one of the highest promoter holdings in a company and apart from this, recently Radhakishan Damani sold a little more than 1% stake and at that time the stock went very down.
- In the coming time, there is pressure on Radhakishan Damani that according to SEBI regulations, he has to reduce his promoter holdings.
- In the near future, we should see how Radhakishan Damani reduces his promoter holdings and if he reduces his holdings, how will investors react to that decision?
- The third interesting fact is that this company’s PE ratio is around 200 Which makes this one of India’s most expensive companies Just by seeing the PE, we should not decide that the company is too expensive.
- Only after doing your research and your analysis, should you decide how valued the company is?
- So, friends, what do you think, that with a PE ratio of 200, is this company expensive or is it still undervalued And will it perform well in the near future?
- Please comment down below and tell me what you think.
Dmart Valuations
- Now we will discuss Dmart valuations. As I mention every time to value a business we should predict about its future free cash flows.
- Dmart is a growing company so we can non value it with free cash flows because they to buy new stores they have to invest their profits,
- That’s why their free cash flows are negative. So we will check PE multiple. Dmart is available at 200 PE and its price to book value is around 30 times
- So this is a very expensive stock. Warren buffet want to buy Walmart in 1988 which was available at 30 PE and warren buffet was ready to pay 20-21 PE for that but wall mart didn’t come at 20 PE and he skipped it. After that stock became 35 times in 30 years.
- So this doesn’t mean that you should buy Dmart at 101 PE because it is very expensive now.
- We don’t have to buy each stock from the market, we should buy what we understand and we should buy when good stocks fall at good levels.
- If you buy the good stock at very high valuations then also it won’t give you a big profit.
- But never buy a bad stock that is making losses, which don’t have good revenues at cheap levels. Because they will give loss in long term.
Conclusion
Overall if we conclude Dmart has an excellent business and its management, strong competitive advantage, and good financial and bright growth prospect which makes it a fundamentally good company.
It is currently available at a fair valuation due to correction in the market. What is your take on the fundamental analysis of Dmart have you invested in it do let me know in the comment box. I hope you find this analysis useful, and if yes please share it with your friends and family.
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