How high can Dmart go????? Can it touch Rs 1000?????
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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 8th March 2017 and was listed on 21st 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.
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.
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.
It already touched 1500 , what next ? still we can buy this stock ?
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