Madhuchanda DeyMoneycontrol Research
D-Mart’s dream listing on Tuesday has prompted many enthusiasts to take its name in the same breath as Walmart.
Walmart is largest organised retailer globally with sales exceeding USD 485bn and 11,528 stores. Walmart, founded by Sam Walton, has set the benchmarks to run a successful retail model. Our home grown D-Mart has imbibed quite a few qualities of its global peer in its business model.
Like Walmart, its Indian follower has an overwhelming value-for-money proposition. D-Mart has figured out early in life that creating its own niche is important. Hence, it has ventured into select geographies with its value retailing model. A majority of its stores are owned properties thereby limiting lease rental – a model which has a striking similarity with Walmart. D-Mart has a diversified sales mix – 53 percent food, 20 percent FMCG and 27 percent apparel. The sales mix of Walmart is extremely diversified, with only a handful of categories namely electronics, personal care and apparel touching double-digit share.
But where Walmart has been dwarfed by the aspiring Indian competitor is in the valuation stakes. At 77X price/earning, 40x EV/EBIDTA and 3.4X Market cap/Sales, D-Mart it is manifold times costlier than its global peers including the company that might well be its idol, Walmart. But that’s not without a reason.
As the exhibit suggests, while much smaller than its competitors, D-Mart is way ahead in profitability. While a diversified (predominantly non-food) basket ensures relatively decent operating profit margin for Walmart, Walgreens Boots and Carrefour SA, D-Mart, with food accounting for a lion’s share of sales, has much higher profitability.
That’s not all. The global giants are like lumbering elephants – in the past three years the compound annual growth in sales of the top three global retailers, Walmart, Costco and Kroger were 0.7 percent, 4.1 percent and 4.4 percent respectively. In contrast, D-Mart grew at CAGR of 35.6 percent.
The moot question is: How long will this fancy valuation sustain?
Simply put, as long as the company grows at this scorching pace without compromising on profitability. Investors should thus focus on two parameters – topline growth and EBIDTA margin.
It is important to remember that returns in equities are a function of earnings as well as multiple re-rating. For Avenue Supermarts, the post-listing price factors in healthy earnings and the multiple has already re-rated. Going forward, even if earnings grow at the previous trajectory, further multiple re-rating is unlikely and returns on the stock will solely be a function of earnings growth. On the flip side, if earnings fail to grow at the anticipated pace, multiples might de-rate. Hence, investors should keep a hawk eye on earnings before catching the highs on this stock.
