Why D-Mart may actually deserve its rich valuations…

When D-Mart first announced the IPO, it was always looked upon as a very focused and profitable player in the retail space. In fact, D-Mart was everything that a typical retail player in India was not. D-Mart was not flashy, it did not exist in the most upmarket addresses and it did very little by way of advertisement and promotion. Its malls were stacked high, teeming with people, goods flew off the shelves and they were located more in residential areas. That became the biggest advantage for D-Mart when it came out with its maiden public issue.

If the oversubscription (105 times) was any indication, then the listing was going to be at a substantial premium to the issue price. When the stock listed on 21st March, it listed at around Rs.600 compared to its issue price of just Rs.299. More importantly, the stock hardly saw any concerted selling by HNIs and in fact closed the day at a premium of 116%. The question, therefore, is whether the valuation of D-Mart is justified at these prices and do the fundamentals justify further upsides on the stock from these levels. Here are 4 key factors that make D-Mart an interesting story…

D-Mart has stuck to its core focus rather than diversifying…

One factor that has probably worked in favour of D-Mart is that it has focused on its core business competency of food and groceries. Unlike other retail brands like Reliance, Trent and Future which have forayed into a wide range of products, D-Mart has stuck to its core knitting only. It has fine tuned its business model and has set up most of its stores in residential localities very close to where people live. This proximity makes it very convenient for women to shop at these stores. Focus on food and groceries also ensures that its products never go through cyclicality and hence the business model is largely de-risked and is not vulnerable to shifts in trends, fashions, tastes etc. But above all, D-Mart has the perfect combination of quality, availability and price, which is what any women shopping for groceries is looking for. It is this sharp product focus that substantially reduces the risk in the business model of D-Mart.

Keeping their key stakeholders very happy…

One of the reasons for the success of D-Mart has been that it has managed to keep its core constituency of vendors and customers very happy. Consumers are happy because of the great bargains that they get at D-Mart. In fact, D-Mart assures 6% lower prices compared to competition but in reality the actual discounts are much larger. Indian households are extremely sensitive about their monthly household budgets and this cost-conscious approach makes a lot of difference. Also the extremely crowded environment reminds more of the erstwhile bazaars making people a lot more comfortable. But how do they offer such steep discounts. Actually, they do so by squeezing their vendors. The reason is D-Mart is one of the promptest paymasters. While the retail industry insists on 30-45 days credit, D-Mart pays vendors within 11 days flat. This allows vendors to extend special terms to D-Mart which gets passed on to the end customer. In the process, both the key stakeholders viz. customers and vendors are kept extremely happy.

Getting more square feet per square feet…

When you enter any D-Mart store, what strikes you immediately is the huge size of these stores and the way every inch of space has been utilized to the hilt. It almost resembles an erstwhile bazaar with inventory in perpetual motion, high ceilings with shelves stacked as high as possible. But the crux of the matter is that D-Mart is getting more value per square feet than any of its competitors. Consider these statistics. D-Mart earns Rs.75 crore per store as compared to just Rs.16 crore that Future Retail earns per store. Even the profit per store in case of D-Mart is almost 10-times what Future Retail earns. All these mean that their operating margins are substantially higher than competition. But, the biggest differentiation that D-Mart has created is in the matter of inventory turnover. It measures the speed at which goods fly off the shelves and are a key metrics for measuring efficiency. D-Mart has an inventory turnover of 14.67 compared to just about 4-5 times in case of competition. Effectively, each square foot of space is made to work that much harder.

They own their stores and now even the debt will be repaid…

As a retailer, D-Mart had to make a crucial choice. Should they own stores or lease stores? The norm in the industry is to lease stores and pay the rent as it does not tie them down to the property. D-Mart opted to own stores. That meant higher debt and larger asset base. But that also gave heft to their balance sheet and saved the rental costs that account for 5-10% in case of other retail players. Now with the IPO, a large chunk of the money raised will be used to defray the debt and that will substantially reduce the interest burden and further improve their profitability. This will be a major value accretion for the company.

To cut a long story short, D-Mart has been a classic case of adopting an unattractive business model to add value to customers. To a large extent, it has replicated the Wal-Mart model. The next big agenda for D-Mart could be its big national foray and that will surely put pressure on the company to deliver consistent performance. For now, the company surely looks like a value proposition!

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