Avenue Supermarts Limited (DMart): Sample Research Report

Started in 2002 with a single mission to be the lowest priced retailer in its area of operation, Avenue Supermarts Limited is a Mumbai-based company, which owns and operates DMart stores. DMart is India’s largest supermarket chain that offers customers a range of household and personal products under one roof. The Company offers a wide range of products with a focus on Foods, FMCG and General Merchandise & Apparel product categories. 

DMart was conceived by Value Investor Mr Radhakishan Damani by operating a single store in Maharashtra, and it took eight years to start its first ten stores. DMart has grown steadily over the years and operates 216 stores in 11 states and 1 Union Territory of India as of July 2020. Avenue supermart was ranked 33 in 2019 among all listed companies in the Bombay Stock Exchange. 

Business Model of DMart

The Company comprises everyday use products for its customers, which are categorized as Foods, Non-foods and General Merchandise & Apparel. The chain operates on a B2C (Business to Consumer) model, where goods are directly sold from the manufacturers or big traders to the end-user.

DMart follows another successful retailer, Walmart’s business model of “Everyday low cost - Everyday low price (EDLC-EDLP)”, and is focused on high inventory turnover. DMart sells most of its products that are needed on a day-to-day basis. Throughout the year, demand and readily available products at low-cost margins allow it to reduce the risk of demand fluctuation and therefore provide consistency to the business.

Unlike any other Retail business, DMart follows a cluster-based expansion approach. The Company’s focus is on deepening their penetration in the areas where they are already present before expanding to newer regions. Due to its business model, all its franchises are profitable. This is very rare to see in retail stores where even Reliance Fresh was forced to shut some of its stores due to declining profits.

DMart makes timely payment to their suppliers, so they are able to get an extra discount for sourcing the products in bulk. Amidst this lockdown, it has also started home deliveries through DMart Ready App, which would provide home delivery. This could be a direct competition to Amazon Pantry and other online startups.

The majority of its revenue is from the foods segment, which accounts for more than half of its total revenue, while General merchandise and apparel cover up its remaining part.

What is the moat?

DMart is a brilliant business whose moat lies in its supply-chain management - the way they maintain their inventory, pay their suppliers on time, get the best prices from the suppliers, ensure the quality of the products, pass on the gains to the customer wherever they can and so on. They have great consistency in debtor days, inventory turnover and other return ratios, which are enviable in the retail business.

What is good?

1. Organic Growth: Though the Company’s store expansion process is slow compared to others, the strategy has helped it to remain self-sustained and avoid debt in its balance sheet.
    
2. Better at cost-cutting: They own property rather than renting it. They don’t open stores in shopping malls and have acquired a ‘store ownership model’, owning most of their stores or have taken these on a 30-year lease term. So, they have managed to avoid rental costs, unlike other retail chains. You will notice that most of the stores are not in prime areas; this helps them keep initial investments low. Furthermore, there’s no spike in rent in future as property is owned by them. This is one of their success mantras. They have also managed to cut down their costs as they don’t spend much on marketing, advertising and interiors.
    
3. Discount policy: A good discount policy separates DMart from its competitors. The retailer sells essential goods at a deep discounted price which most competitors cannot match, and this helped them strengthen their roots in the market.
    
4. Low Price Products: The non-branded products like bedsheets, towels, and Garments are sold at very low prices to attract target customers, which generates a huge volume for these products.
    
5. Prompt payment to suppliers: They negotiate very aggressively with vendors by making payments within 7-10 days, whereas its competitors make payments in 20 to 30 days. This makes vendors offer a good discount to DMart on its products.  

What is bad?

1. Focus on specific places: DMart is more focused on the Western and Northern Geography of the nation, unlike its competitors. This has disabled DMart from leaving an impact in the other regions of the nation, which slows down its growth.
    
2. Online retailers: With the technological shifts, people are more adamant about shopping online rather than going to the stores. This has created a strong economic moat for companies like Flipkart or Amazon, which deal in online retailing. Though DMart is also hoovering with its “DMart Ready app”, capturing this space from existing players might be a big challenge for the Company to tackle.
    

Financials

The Company has delivered an extraordinary sales growth of 31% CAGR over the period of the last 5 years; meanwhile, the Company has exhibited even better profit growth of 43.78% CAGR in the same time frame (in its consolidated business). This is on account of the low-interest costs. 

The Company has further maintained an operating profit margin of ~8% consistently throughout the years. This tells a lot about the stability of the Company. Due to the growing net profits and not much of the equity dilution, the earnings per share of the Company is also growing consistently. 

The balance sheet of the Company also looks rock solid with not much of the equity dilution seen in the past and also with the aggressively growing reserves of the Company. The Company has further reduced its borrowings and current liabilities, thereby taking it to the path of being a virtually debt-free company.

With an increase in its number of stores from last year, the Company has also witnessed a spike in its fixed assets, thereby appreciating the value of total assets. The Company holds cash of Rs 107 Crores which can be further utilized in its expansion.

The leverage multiplier has declined as the Company removed long-term debt from its capital structure, which also improved its interest burden ratio. This is the reason for such a decline in return of equity over the years. The asset turnover has also seen a sharp improvement over the years, indicating that it has been increasing its efficiency in using assets to generate revenues.

The Bottom Line

The Indian retail market is poised to grow at a CAGR of about 13% to reach a massive $ 1.75 Trn by 2026! And organized retail players like DMart could get a bigger pie of the market. With its organic growth strategy, affordable products, deep discount policy, efficient supply chain management, consistent growth in both its topline and bottom-line, a low-debt capital structure and a strong balance sheet.

Altogether, DMart could be the retail hero of tomorrow. It remains to be seen how it leverages the power of tech to capture the increasingly online-inclined Indian market. Competition is rife, but growth potential is immense!