Dmart Stock Analysis| Dmart vs Walmart (Radhakishan Damani's masterplan)
Hi investors. Welcome to SOIC. So, in today’s business analysis, first time on this SOIC channel, we are going to do Walmart v/s Dmart. So, basically in SOIC when we read any company or analyze any business then we consciously try to read that what happened internationally in that business or what happened in that sector. Why we are comparing Walmart with Dmart or why we are comparing Dmart with Walmart? The reason is that Walmart in last 50 to 60 years have been number 1 company across the world in offline retail. What was their strategy? What was their playbook? It is important to understand because when Radhakishan Damani created Dmart, he studied the retailers across the world.
He studied successful retail companies like Walmart, Costco, Tesco. If we can see his mindset and see which principles he read and if we can understand the competitive advantage in Dmart then I think we can get a very big advantage as an investor while doing the valuation of this business. Towards the end of the video, I have shared the detailed valuation of Dmart, right. So, before discussing about Dmart, let’s discuss once about retail industry in India.
So, today if we see the retail sector. It is organized and unorganized. Organized consist of modern trait and ecommerce. We can consider Dmart store in modern trait.
If we see reliance and spencer stores then it will also be included in modern trait. Big Bazar will also come in modern trait. Whereas if we discuss about unorganized store then basically it includes the Kirana shops near our home. So, currently organized retail growth is at 20 to 25 percent CAGR. Whereas unorganized retail growth is currently at 8 to 10 percent CAGR.
Organized retail is pulling the market share from unorganized retail. Here, there is one more very interesting thing which you should notice, many people don’t talk about it but we will discuss about it that in every sector there are different majoring rod. It means there are various different ways to measure every sector. So, in retail sector, there are 4 types of store. What is 1st type of store? 1st type of store is basically convenience store which is nearby your area. So, the sq. ft or size of this store is basically between 1000 to 2000 sq. ft and typically
groceries are sold here. So, groceries selling is more here. The primary location is residential and here the key players are the local players where we discussed about the Kirana people. Then 2nd is your supermarkets. Supermarkets are basically of 2000 to 10,000 sq ft and here the typical products sold are food and groceries. What are the primary locations? Residential areas and areas inside the mall.
So, the example here includes Food Bazar, Reliance fresh and More. So, these types of stores are called as supermarkets. What is 3rd type of store? Hypermarkets.
What are hypermarkets? Their size is between 75,000 to 1,50,000 lakh sq. ft and generally these hypermarkets are in malls. You get food, groceries, apparels, electronics, household item and furniture here. The examples are Big Bazar, Dmart, Spencer Hyper and Reliance Smart.
Last type of store is departmental store which are between 20,000 to 50,000 sq ft. So, here you get clothing, home décor, furniture, appliances, cosmetics. These are in malls generally and it includes brands like pantaloons, lifestyle, shoppers stop and central.
So, these are basically type of retail businesses. So, here Dmart actually come under the category of biggest store but Dmart have many characteristics of convenience store. Because what Dmart does today is Dmart sell only 3 types of products. It works only 3 categories. 1st segment in which Dmart works is basically groceries and food items. So, here comes your staples, process food, dairy comes which includes butter, ghee, frozen products and beverages are also included in this.
Here, typically the gross margin is between 12 to 25 percent but we will take it on lower side which is between 12 to 15 percent. Dmart revenue is close to 52%. 2nd category in which Dmart works is non-FMCG products, non-food product sorry.
So, what are non-food products? It includes home care items, personal care products, toiletries, creams, toothpaste. So, this is close to 20% in Dmart’s revenue today. Last segment in which Dmart works is general merchandise and apparels. General merchandise includes toys, games, crockeries, plastic goods, garments, footwear, utensil. Home appliances. What is the strategy of Dmart today? What Dmart does? Their 2 segments of non-food segment and food & grocery segment attracts many people because here the inventory turnover is very high.
As so many people visit the store, the margin of general merchandise is high. So, first 2 segments are to attract the people towards the store and 3rd segment is to earn the margin. So, Dmart segment is doing the same. But before we discuss further, today there is a very important thing which we should discuss is that why retail business is a difficult business. Because there are many similarities in retail business and banking business. What are the similarities? That all over the world, you won’t get so successful retail businesses.
You won’t get so many successful banking businesses too. In India also you can count only 4 to 5 banks which are successful, right. Because in these sectors, inherently there is a problem, right.
We will do a case study to understand what is the problem in retail segment of a company named as Subhikhsha. So, Subhikhsha was a company who had same tag line like Dmart. So, Dmart and Walmart is basically into value cautious retail means they sell goods in less that the MRP price due to which the middle-class people enter a lot in the store. So, Subhikhsha was also started like this. But the mistake Subhikhsha did which Dmart is not doing is that Subhikhsha scaled up very early.
We can see here that in how much time their stores scaled up. So, the problem with Subhikhsha was that the margin was low, right. We will understand the concept of local economies of scale which they were unable to make and your cash flow was not positive. Capex requirement and expenditure on capacity expansion was more than cash flow from operation. In Hindi, we say that you were removing your leg out of the bedsheet.
Subhikhsha basically did this thing. When 2008, 2009 crisis came then that was the last shawl due to which Subhikhsha ended because you had debt and margin was low and you were doing expansion on uncontrolled pace. Due to this reason the CEO of Dmart says one thing again and again in his interview that when we entered the company, Damani said only one thing to us that you take time to scale the business. First understand the business economics, make the business right before we scale it because retail business is a difficult business.
Along with this let’s start the comparison of Walmart and Dmart because Walmart have been a very interesting company. Here, let’s see the similarities of Walmart and Dmart. 1st similarity is Dmart and Walmart both follow EDLP strategy.
So, Walmart actually in 1960s – 1970s till 1975 had a golden phase. So, at that time Walmart followed EDLP strategy a lot. Dmart also follow EDLP strategy. What is the meaning of EDLP? Everyday low prices. Dmart follow EDLC strategy that is everyday low cost. What does EDLP says? EDLP strategy is based on offering low prices on an everyday basis.
It means everyday you are offering low prices by achieving low procurement in operating cost. Cost of operating will be low and procurement cost will also be low. If you are taking it from vendor then you will take it in cheap rate, right. As compared to one more strategy means what can be difference in EDLP and another strategy is that some retailers offer discounts on some days.
But EDLP strategy says that everyday there is a discount and everyday you will get the cheapest price. What is the 2nd strategy here? EDLC strategy, that is everyday low cost. What does EDLC strategy says? This strategy requires that on everyday basis, minimize the cost, focus on procurement, focus on supply, focus on operating cost, try to minimize it as much as possible. Focus is to provide low prices across product categories and product sub categories within these categories every day, right. So, basically EDLP and EDLC strategy is mutually exclusive.
If your operating cost can be low only then you will be able to pass on the benefits to customers in terms of prices. So, these are EDLP and EDLC strategy. What is the 2nd key strategy here? In similarities, I think I will make you understand the Dmart fly wheel which is very important. I will also make you understand Costco fly wheel.
2nd key strategy here is that both the companies have done cluster-based expansion. Let’s understand easily that what is the meaning of cluster-based expansion? Let’s suppose that your 1 store is at central Delhi, right. The population is less in Central Delhi. So, you start opening other stores nearby central Delhi and slowly in all over Delhi, you have your stores.
So, what benefits do you get through this? 1st advantage is that the transportation cost reduces because number of trucks will also reduce. Secondly, your warehousing cost also reduces and thirdly what happens in cluster-based strategy is that in customer’s mind, the perception of your brand becomes really good. So, we call it as cluster-based expansion. You can see here that in 1975 annual report of Walmart, Walmart did cluster-based expansion strategy. It started spreading out slowly from one city, right.
Similarly, if we talk about Dmart then even Dmart slowly started spreading out from Maharashtra as we can see here in info graphic. Number of Dmart stores are increasing rapidly. So, this is an insight of cluster-based expansion strategy. Bruce Greenwald who is a professor of Columbia have a very nice book which every investor must read to understand industry structure and mental model. Name of the book is “Competition Demystified”. So, in Competition Demystified, Bruce Greenwald talks about a very interesting thing that is local economies of scale that when a firm makes its dominance in a region or make dominance in a locality then there, they achieve economies of scale on local basis.
As we discussed the transportation cost reduces, customer popularity increases and warehousing cost also reduces. So, the idea of this book is very interesting and it is required in businesses of Walmart and Dmart. As we can see in the con call of Dmart so the strategy of Dmart is that through 70% of money, 70% capex they will do in existing geographies means where they already have stores. Like they have stores in Maharashtra, they have stores in many other regions like Gujarat so as they have stores in these states so it makes sense for them to invest 70% money in the same region to do the capex.
Remaining 30% money, they will invest in new cities. So, this means that they are performing cluster-based expansion strategy so that local economies of scale keep on increasing slowly. So, what was the difference between them and Subhikhsha that Subhikhsha expanded a lot very quickly and in Dmart, they are going slowly step by step. They are properly harnessing power of compounding because to win in retailing there is only one way that you have to be the lowest cost producer and Dmart is a lowest cost producer, let’s see how.
So, this is the data of Walmart from 1985 to 1987. Here, you can see that Walmart gross margin as compared to Kmart is less but Walmart’s operational expense is more than Kmart, we can see this here. Due to which Walmart operating margins or operating income is 7.4% whereas Kmart income is 4.8%.
If we see industry average at that time, that is close to 1984 then Walmart gross margin in industry average was 26% and industry was 28%. But again, there is a difference in payroll expenses means how much is the expense on employees. Walmart had 10% and industry had 11.2%. Advertising expense of Walmart was 1.1% and industry was 2.3% Rental expense of Walmart was 1.9% and industry was 2.2%
Miscellaneous expense of Walmart was 5.3% and industry was 7.6% Total SGNA which is selling general and administrative cost of Walmart was 18.4% and industry was 23.3% Due to which Walmart operating margin was 8.7% whereas industry operating margin was 5.9%. So, biggest similarity between Walmart and Dmart is that both of them operationally run a tight ship. To win in retail business if you can control cost at backend then prices on frontend gets controlled automatically.
We call this as virtual cycle which we will see in Dmart’s case. You pass on the cost control to your consumers, right due to which more consumers will come, due to which you will get more leverage on the suppliers, due to which you can buy goods at cheaper rate. Again, through which you can lower the price, through which again more customers will come, right. So, here if we see Dmart operational expenses as compared to their competitors.
So again, Dmart advertising expense is 0 at this time as compared to Spencer and Big Bazar. So, Spencer has 1.8% whereas Big Bazar has 2.2%. If we see employee cost of Dmart again then from Dmart annual report, we took contract labor here because Dmart use contract labor. So, Dmart is 3.9%, Spencer – 7% whereas Big Bazar – 5%. One of the reasons is that actually Dmart don’t hire tier 1, tier 2 universities of IIM graduates due to which their employee cost is controlled and they are using contract labor too.
If we see other expenses as a percentage of income means miscellaneous expense or complete total expenses so Dmart is 4.9%. Spencer – 9.8% and Big Bazar – 5.4%. Whereas gross margins of Dmart is the lowest, right. So, even after the gross margin of Dmart is lowest, its operating margin and ROCE is almost higher than these businesses.
So, this is the part of a conscious strategy. Before we proceed ahead, if anyone wants to know how to take deep insights from annual reports, how to take deep insights from conference calls, which tools to be used for research, things to be seen in forensic accounting, checklist of SOIC and portfolio creation criteria of SOIC, all of these things are covered in SOIC intensive course. Along with this, we regularly update SOIC intensive course with SOIC continuous learnings because we will that stock market is a thing which is continuous in nature. So, we update you with new case studies and annual report season is also coming so when new annual reports will arrive, we will add the analysis of it too in SOIC continuous learnings. So, link to the course is mentioned in the description below.
Now, coming back to Dmart so both Dmart and Walmart promoters basically are a type of intelligent fanatics. So, when we discuss about Sam Walton, we read his book “Made in America” so I recommend this book to all the investors. If you want to understand retail investment then you can read this book too. So, there was a very interesting incident in his book that I think in Brazil he was jailed, right. He was put in jail in Brazil because there was a retailer in Brazil where he was looking the difference between the racks by bending down so the retailer called police against him and this was a very odd incident. Because he had so much passion in him for the business that he was ready to do such things too.
Whereas at the same time if we discuss about Damaniji then even Damaniji used to do same thing that he used to stand outside different retail stores and see that when the customer is buying the goods, which type of goods he is buying the most. There is a very interesting insight of this which I will tell you in Dmart fly wheel that why he used to do it. If we talk about Damaniji then there is a very interesting thing that Damaniji is also actually a value investor and let’s see the traits once which he used of value investing. So, 1st trait which he used is belief in the power of compounding.
So, when we discuss about Dmart so Dmart actually started in 2000. But from 2000 to 2010, Dmart has very less stores but after 2010 many stores have been opened. So, from 2000 to 2010 less stores were open because they were busy in perfecting the business model. As soon as the business model was perfect, he started scaling it up.
But this was possible because of the belief in the power of compounding. The CEO says in the interview that retail is a very boring business. So, you have to make small things correct on daily basis so that in long term, your business can become big. Power of compounding is a thing which makes simple thing very big if you do that one particular thing for a long time. 2nd trait of value investing which worked in the business was majorly that they reduced averaging in this business. So, many value investors when make portfolio, most of the times the best strategy to invest in a portfolio is to average up in same stocks.
Similarly, by focusing in the business, they started more stores. They did more investment in business and through internal accrual means by taking less debt, from one store’s internal accrual they opened other stores. Along with this, there was power of cash flow. In Dmart a very interesting thing is that if we see growth of cash flow from operations then in last 10 years, cash flow from operations have been growing by a lot. What is the importance of it? If your CFO is good, if I am getting great cash that is cash flow from operation the basically, I can do more investment in internal accrual.
Basically, I will not have to take debt to open more stores. So, this is the power of cash flow from operations (CFO). So, value investors look for the companies where cash flow from operations is positive. Then getting the thesis right, first they continued the business correctly and then started to scale up. We make thesis in investing and see that our thesis is going right or wrong.
It is important to do so. Better businessman is equal to better investor and better investor is equal to better businessman. So, he implemented same strategy in business, controlled the cost. What is the principle of value investing? Even when we invest in a company, we find Key variables, right.
If I talk about Devi’s laboratories then which key variables will I see there? What is the gross margin of the company? How much DMF filling is there? Which molecule has leadership, right. As compared to industry, why their gross margin is high? So, every business has different key variables. Pharma key variables will be different, IT key variables will be different, Tobacco business key variables will be different and FMCG key variables will be different. So, here their key variables were same store sales growth, number of stores and basically operating expenditure as compared to your peers, they perfect their key variables. So, this is also a very big trait of value investing that if you are right then you can tell why you were right. If you were wrong, you can say why you were wrong.
So, this is the meaning of making thesis. If we look at their value investing traits then they had long term attention span. Value investors are generally long term focused like we are also long term focused.
So, here even they had long term attention span. Business was done by the perspective of 20 – 25 years. Then ability to say no.
In Subhikhsha’s case we saw that how quickly it scaled and how quickly it got bankrupt. So, here they had ability to say no. In value investing, there is a key principle that say no to the opportunities where you feel that your capital can be destroyed. Warren Buffet has 2 rules of investing, 1st rule is do not lose money, 2nd rule is do not forget rule no 1. They implemented same rules in the business and slowly grew through internal accruals.
They didn’t scale up quickly like Subhikhsha and didn’t take too much debt so again ability to say no. The other principles of value investing which they applied were that their return on capital employed was always more and again they maximized the variables. So, again when a value investor does the business properly and when businessman look at the world through the eyes of value investor, again this is the end result that we get. Before discussing about key success of Dmart, what is Dmart fly wheel, what was the positive virtual cycle here, I will let you know about the Costco first. Costco is international retailer which is in US.
What is the business strategy of Costco? Costco does many private labels and sell many bulk commodity goods. Basically, if you are going to buy 100 grams mayonnaise then you will get Costco of 1.5kgs. But one thing is guaranteed that the price which you will get in Costco, you will not get it anywhere else. Because when Costco send goods in the store then basically, they sell in no profit no loss in a way, keeps very less mark up. Why so? Costco don’t want to earn money on their goods. Where does Costco earn money? On their memberships.
So, if we see the business model of Costco then it is something like this. Costco prices are lowest due to lowest prices, most memberships are sold. Membership is 60 dollar per year. 27% of USA have their membership. As a lot of memberships is sold so sales are high.
As sales are high so the suppliers get a lot of leverage due to which they can lower the prices because they are buying the goods in bulk. As they are taking in bulk, prices are reduced. Price don’t retain the benefit; they give price benefit to the customer. Key strategy of Costco is SKU means the number of stocks keeping unit, we talk about the barcode, how many numbers of products they keep, right.
So, if we compare Costco with Walmart or Amazon then we get to know that Costco have only 4000 SKUs whereas Amazon have more SKUs, whereas Walmart have 20,000 SKUs. Costco renewal rate of membership is close to 87%. Costco pure profit comes from membership and they have kept less SKUs, here again a mental model comes by the name of paradox of choice.
The number of choices you will give to customers that much the customers will be confused. What Costco did? All the people who are watching this video, at many houses only 3 types of ketchup brands must be used. 1st is Heinz or Kissan or Maggi which is of Nestle, right. So, what Costco will do is that they will deal with only these 3 brands just to give you an example.
They will not bring 5th, 6th, 7th brand, right. He will sell these 3 products only in bulk. So, again key element is right assortment. Assortment is the goods kept. Now, let’s come to the Dmart model because Dmart have learnt to right the assortment from Costco. Now, we can finally see the fly wheel of Dmart.
So, 1st is that Dmart have low prices, right. What happened with low prices? Low prices are passed on to the customer. We saw that Dmart gross margin is only 15% due to which more customers come to Dmart. More customers come because their assortment is perfect.
Assortment is an art and assortment is not science. They have kept goods which will definitely be sold but among them also they have kept only those varieties which are need, extra varieties are not stored. Due to which their inventory turnover in the industry is one of the best.
It is 14.3, 14.4 times. In 1 year, how many times can they turn the inventory. On an average in 25 to 26 days they finish their inventory due to which more leverage comes on the supplier, right. The key insight is that they don’t keep debt days for long with supplier. Their trait payables are very less.
They provide money to supplier on time because with supplier also they maintain win-win relation. Due to this what happens is that if there is any shortage of any product then Dmart is the first preference of supplier because they know that Dmart will pay first compared to others. Again, as Dmart is producing goods in bulk so Dmart gets discount, Dmart can buy with discounts and those discount Dmart don’t add in margin and keep it with them, Dmart provide that discount to their customers.
Again, this is the virtual cycle of Dmart. Dmart business is built on this cycle. Let’s discuss about Dmart valuation. First time on SOIC, we will do scenario analysis. So, in FY20 their profit was of 1300 crores. We are not considering FY21 because under FY21 numbers are not comparable because of pandemic.
If we assume 1300 crores net profit then in next 10 years, we can assume that the 1300 crores profit will grow almost by 15%. We will be conservative in this. So, we will take conservative estimate also and will also get aggressive once.
So, in next 10 years, their profit will be of almost 5 to 5.9 crores. So, in 1st year 15% growth and in next 10 years if we assume 10% growth will come then around 13,641 crores will be their profit after tax after 20 years. Here, let’s do simple multiple and give PE multiple of 40 times. So, at that time, how much will be their market cap? 5,45,000 crores. Today their market cap is somewhere close to 2,00,000 crores. So, according to this scenario by this point of view if we see risk reward type then risk reward is not favorable because valuations is very high.
Let’s do second scenario analysis. Here, let’s be more bullish, right. So, let’s assume that 1300 crores are the profit after tax. So, again let’s assume that in next 10 years, growth will come by 20% per year.
After 10 years, their profit after tax will be 8,000 crores and in next 10 years, they can grow their profit after tax by 12%. Let’s assume 12% here. So, in 20th year, 25,000 crores will be profit after tax. Again, if I give 50 times multiple to this 2500 crores that at 50 PE it will trade then their market cap is 12,50,000 crores.
Again, their market cap is 2,00,000 crores so in 20 years it will be only 6x. We can see here how much will be the CAGR. So, again if I see in risk reward then here one risk is that if we discuss about Reliance retail then reliance retail gross margin is close to 19% and when we talk about reliance grocery stores then the opex is less. They have done a lot of fund raising. In retail different types of players are also entering. Many players are entering into e commerce.
Many players are entering into grocery business. If we talk about Reliance industries, we will do detailed analysis of Reliance industries soon where we will discuss about Jio, Reliance and complete conglomerate. In today’s basis, I personally don’t feel that If we talk about Dmart, there the risk reward currently is favorable. Because my opportunity cost is very simple if I take Sensex then in Sensex also there 10 to 12 percent CAGR is possible.
So, Sensex CAGR seems that it may beat Dmart CAGR. Unless and until in Dmart 25 to 30 percent growth will not come in next 20 years. So, margin of safety is less here. Your margin of safety actually depends on promoter’s execution and again this is not the fault of the management of the company, this is the fault of the valuation at which it is trading right now. So, this is what I think about Dmart. Thank you for joining us.
Hope to see you in the next video. Do let me know the topic for next video that we should do it on Asher polytechnic or on Asian paints. Thank you for joining us. Hope to see you in the next business analysis of SOIC.
2021-04-12 07:09
