How high can Dmart go????? Can it touch Rs 1000?????

Hello friends. IPOs have once again gained charm and are attracting investors like a magnet. A recent history was made in the IPO world. The IPO of DMart hit the markets on 8^th March 2017 and was listed on 21^st March 2017. With a issue size of Approx Rs 1870 Crores the Issue was oversubscribed for more than a 100 times. Over Rs 2 Lakh Crores was pumped into this most expected offer. What’s more interesting is that it made history on the day of listing by doubling its investor’s wealth by more than a 100% from 299 Rs per share to around 630 levels. This is a feat no other IPO has ever achieved in the history of Indian Stock Markets.

Is this sustainable?

Rather lets as the million dollar question. Can it touch 1000 level?

To answer this lets look into certain facts.

The company operates more than 110 stores in 41 cities, which is increasing with every passing year. The biggest competitor for the company is Future retail which operates under the brand Big Bazaar. Now Big Bazaar operates more than 500 stores in India. Yet why does DMart command a higher valuation over not only Big Bazaar but in the entire retail industry in the world. One fact of the matter is that the company owns its stores as compared to other players.  Which means it saves a lot of expense in the name of Rent. It also means that the company is not only in the business of retail but also in the business of real estate. Another fact is that DMart actually has a higher inventory turnover ratio. DMart’s inventory gets replenished every 26 days whereas Big Bazaars inventory takes 6 months. This obviously shows the level of footfall both the group has.

The company in its DRHP has said that the object of the issue is repayment of loans and construction or purchase of new stores. The amount that they have set aside for repaying loan is Rs 1080 Crores and Rs 366.6 Crores for new stores over the next 3 years. This means that the company is trying to be completely independent in terms of funding which will help the company to avoid financial cost thereby boosting profits. Currently the finance cost of the company is approx 90.82 Crores. Avoiding this cost will give a big boost in the profits which shall improve the EPS and thereby valuations over the next 3 years. Further the amount set aside for purchase or construction of new stores will ensure the expansion of thereby bringing in additional income.

Now the writing on the wall is very clear that the company is going to enter in the E-Commerce space. So companies like Big Basket and Grofers are in for a ride. The company’s subsidiary ‘Avenue E-Commerce Limited’ has not yet commenced operations and we are not sure about the business model it’s going to adopt. However we feel that traditional delivery systems may not be the way this company would operate. This company has already shown us that their business model is different as compared to traditional business methods.

We would like to speculate that the company may enters into E-Commerce segment where customers may be placing the orders online and collecting the delivery from the nearby DMart store. This may not be the traditional approach but it surely appears to be more of a profitable model than providing door to door delivery. We will have to wait to see what the company plans out. Rest assured if the company becomes profitable in the E-Commerce segment, it shall blow its competitors out of the business at ease.

Now coming back to the million dollar question, can DMart cross 1000 Rs. Looking at the financials we believe that over the next 3 years the revenue shall grow from 8588 Crores in 2015-16 to 12000 Crores in 2019-20 and Profit should raise from 321 Crores to Rs 500 Crores. With the current price being around Rs 650, achieving 1000 Rs doesn’t look difficult on the long run. However assuming the success of E-Commerce business, we feel the company would easily touch 1500 levels in a stable market scenario.

Thanks for joining us. Have a nice day. 

- RicherInvestor

Written by Roger Vins (CA, MCom)

Disclosure:
Financial interest in the company is not greater than 0.1%.
The author is not a research analyst.