Before I proceed further a quick disclaimer, I am not a SEBI registered analyst or an investment advisor. My views are just that. My views. A detailed disclaimer is given at the end of the blog, please go through it first in your interest.
When my sons wanted me to suggest stocks for investment, I was in a quandary. They are in their 20s earning a decent salary and have a whole life ahead of them. The investment philosophy that I follow (someone who is pushing his 50s) is hardly applicable to millennials.
The world I grew up in and the world today are largely different. I was like my sons when Kapil’s Devils won the cricket world cup for India. It was a very different world compared to what it is today, and today’s millennials will hardly understand the environment we grew up in. The world 40 years hence may still be a world that has no resemblance to today’s world. It is quite possible with global warming, with fossil fuel and plastic becoming bad words, with EV and cryptocurrency making very big strides. So, suggesting a couple of stocks to my sons has become much more complicated.
So, the company that I choose for my sons to invest in SIP mode has to have some basic ingredients. They have to have long-term visibility and a strong moat (ability to maintain a competitive advantage to protect profits and market share for a long time). Secondly, the company should conform to a new-age thought process.
With a bit of research, I zeroed in on three companies.
The first company has a PAT of about 5%, return on equity of about 17%, operating margin of about 9%, and a price-earnings multiple of 175 (Nifty company average is 22 times PE), price to book of 20 times (I prefer a price to book ratio of less than four times) and discount cash flow valuation for a five-year horizon is hardly 20% of the price at which the company is traded in NSE. In short, a company I am unlikely to touch even with a 9 feet barge pole. The irony is that I am strongly recommending this stock to my sons.
Welcome to the world of Avenue Supermarts. I did a quick scuttlebutt. I asked a few millennials whether they know Avenue Supermarts. Nobody knew. Once I said it is D-Mart everybody knew about it.
Despite the fact, the share prices are trading at an astronomical PE of 175+ and a book value multiple of over 20 times. I am inclined to recommend this share to my sons for a holding period of over the next 20 years. My advice would be to keep about 8% of their saving potential in this share over the next 20 years and buy one or two shares every other month in SIP mode. Here are the reasons why one should consider Avenue Supermarts.
For starters, the promoter group still holds close to 75% shares. The only reason they sold shares is to bring their holdings to 75% (A SEBI mandate).
They are in an evergreen industry. They generate 52% of their revenue from food, 20% from non-food FMCG and the balance 28% from general merchandise and apparel. It is an evergreen business.
The company’s past efficiencies are very good. Here are the bird’s eye view. The performance of the company over the past five years prior to COVID as phenomenal. For this analysis, I am relying more on FY 20 Annual Report since the data of FY 21 and current year gets vitiated due to the pandemic. A lot of reliance is placed on Annual Report 2019–20.
As on date, they have 234 stores operating in eleven states and a union territory with approximately 12 million sq. ft. of retail business area. The store’s expansion strategy is in in clusters. It is fascinating and visually pleasing. They are slowly expanding into the whole of India and their strategy involves penetrating tier II and tier III cities where there is a dearth of stores from organized players.
The company’s financials are enviable in the industry. The consistency and growth over the last decade have been quite good. Their sales grew from Rs.2,209 crores in 2012 to Rs.24,870 crores in 2020. Around the same period, retained earnings went up from Rs.150 crores to Rs.10,400 crores. Very efficient inventory management turnings around roughly 12 times in a year. The business is not working capital intensive as they predominantly buy on credit and sell on cash. Those who are interested in numbers can download the summary sheet here.
Combating e-commerce threat
With the advent of the pandemic, we all know e-commerce has made giant strides. Not to be outdone, the company is in the process of creating good e-commerce presence. Here again, their strategy is to have clustered expansion approach to e-commerce. They started online grocery retail under the brand name D-Mart Ready in certain selected areas in Mumbai. They have crossed Rs.350 crores in GMV right in the second year in Mumbai city alone. However, competition from e-retail from the likes of Amazon Fresh and Jio Mart cannot be wished away. D-Mart is here to stay. However, the strategy with which they are going to combat e-retail is a thing to be watched in the future. This de-risking is essential to creating good shareholders’ wealth. Those who buy Avenue Supermarts should always keep an eye on this aspect as time progresses.
The single most important reason why one should consider D-Mart
D-Mart can be a likely winner producing exceptional returns for the investors just by their business model. Unlike their peers, Avenue Supermarts believe in buying the assets they operate in. Their gross block of land and buildings is about Rs.8,400 crores for the total area in operation of about 1.2 crores sq. ft, translated over Rs.7,500 per sq. ft is spent in fixed assets. What they do is they buy the properties from where they operate, unlike their peers. They will continue to do so. This is the brutal advantage of D-Mart. They have a market capitalization of over Rs.2,60,000 crores. 1% dilution of equity through QIP can fetch them Rs.2600 crores to buy properties and expand the business.
Their locations are in cities, new expanding areas of cities, and highways near cities. 10 or 15 years down the line these areas are likely to be congested and the rents will be quite high. So, as time passes by, when their peers pay astronomical rents that results in reduced margins, D-Mart will pay no rent and they will increase their margins . Needless to say, the real estate value of the properties owned by the company will also simultaneously increase. All in all, an exceptional business model that is largely aided by very large market capitalization. A CAGR of 20% to 25% can be a very reasonable expectation. To reap the fruits one needs to give themselves a lot of time. Someone willing to hold for 10 to 15 years is likely to benefit a lot.
About the other company, I will write a separate blog.
DISCLAIMER This Blog, its owner & contributors are neither a Research Analyst nor an Investment Advisor and expressing the views only as a valuation enthusiast and an Investor in Indian equities. He/She is not responsible for any loss arising out of any information, post or opinion appearing on this blog. Investors are expressly advised to treat the blog entries as one more opinion on the subject company and are expressly advised to do own due diligence and/or consult financial consultant before any investment decision. Author of this blog not providing any paid service and not sending bulk mails/SMS to anyone or asking for email ids or contact details. These are just ballpark enterprise valuations. We do not claim the value provided by us to be correct. These are based on the past ten years financials which has no relevance to the future whatsoever. We are not providing any recommendation on the stocks concerned. In fact, the market price is of no relevance to us and we just provide the enterprise value debt component and shareholders value. And its future business prospects. Additional