How Radhakishan Damani continues to get it right with DMart 

Standing tall in India’s complex retail story is Radhakishan Damani, one of the most astute investors. Avenue Supermarts, which owns the DMart hypermarket chain of stores, a company he has promoted, rolled out its first outlet in Mumbai’s Powai area in 2002. Since then, its footprint has grown to 302 stores across 18 cities. Just by way of comparison, it had 131 stores at the end of FY17. With a model that is unique, effective and relentless on execution, the company is the toast of its investors, apart from posing a serious entry barrier to potential competition. Paradoxically, for the price-conscious Indian consumer, DMart is a high-quality value proposition. It is almost impossible to better them on that, or in simple terms, offer better discounts to customers.  

Abhijeet Kundu, Senior Vice President of Research at Antique Stock Broking, points out that DMart followed the Walmart model by owning real estate. There is a clear logic in this approach. The thumb rule is that rental costs should account for around three per cent of a retailer's turnover. And with most efficient retailers operating at an EBITDA (earnings before interest, taxes, depreciation and amortisation) margin of 3-4 per cent, the ability to control costs becomes extremely critical. By owning its real estate, DMart is able to deliver higher EBITDA margins since what is saved in rentals goes straight to the bottom line.  

The emergence of organised retail in India around two decades ago saw many new entrants, with Big Bazaar and Subhiksha being the prominent ones. Take the case of Kishore Biyani-led Big Bazaar, whose rental model involved a lower-capex (money was largely spent on furniture and fixtures) outlet, with all the focus on retailing. Working capital was deployed to maintain stock inventory and in every sense, it was an asset-light model.

By contrast, low-profile Damani followed a different approach. He understood real estate and acquired land in locations where it was affordable and at an early stage of urban development. At the core of his audience is the quintessential Indian middle class, a population that is large, aspiring and tremendously smart. “DMart is basically a large grocery retailer. Like a kirana outlet, it owns the land, works on high volumes and low margins," explains Kundu. The capex for land acquisition is amortised over time and the tack is to spend less on the store and more on providing value to the consumer. "For that to work, their costs have to be very low,” he adds.  

A report by Centrum Broking after the company’s second quarter result shows that 55 per cent of it comes from general merchandise and apparel; 20.5 per cent from non-foods fast moving consumer goods (FMCG) and the balance 24.5 per cent from foods FMCG. Interestingly, this segmental break-up has hardly changed since FY17. According to Akhil Parekh, analyst at Centrum Broking, DMart has the potential to have anywhere between 1,500 and 1,600 stores based on the current consumption pattern and growth of organised retail in India. 

“India’s retail industry was pegged at $800 billion in FY20 of which around 60 per cent is grocery. India’s organised grocery retail is at best 4-5 per cent of the total grocery market. DMart’s share here is around 15 per cent, while at an overall level is at just one per cent.)  

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While he highlights owning land as something unique for a retailer, Parekh also appreciates DMart’s cluster-based approach for store expansion to grab a disproportionate share of the consumer’s wallet. “In the process of opening new stores, the company takes into account key factors like population density, customer and vehicular traffic, customer accessibility, potential growth of local population and economy, and the potential to develop an area (into a market),” he explains. 

This critical approach also takes into account the population’s spending power, payback period or how the competition is faring. In the midst of all this, DMart’s stores (at least 35,000 square feet (sq. ft) and in some cases, going beyond 50,000 sq. ft) have a layout design that has ease of shopping and the feel of a large kirana store at its centre. “Maharashtra, Tamil Nadu, Karnataka and Gujarat are the top four states in terms of per capita retail spend. It is no wonder then that 65 per cent of DMart’s stores are in these four states,” says Parekh. In that sense, there is no compelling need for DMart to be a pan-India player the opportunity is greater in parts where the proportion of organised retail is not very high. 

Varun Singh, Lead Analyst of FMCG and Retail at IDBI Capital Markets emphasises DMart’s ability to offer high discounts. “They are very good at squeezing out the most from rentals and employee costs. Both together account for about half of a retailer’s gross profit. Besides, the cluster approach allows them to create warehousing capacity, which reduces the cost incurred to move the goods and also cuts back on time,” he adds. 

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This is where the competition finds it impossible to match them, says Singh, adding, “In smaller centres, they offer free parking to customers and that leads to very high levels of stickiness.”  

Speaking of competition, the one that immediately comes to mind is the unlisted Reliance Retail. Centrum’s Parekh points out that when Reliance Industries partially sold a stake in its retail business to private equity funds in late 2020, it was valued at nearly Rs 4.2 lakh crore or an approximate valuation multiple of 45 times (45x EV/EBITDA) on a one-year forward basis. Meanwhile the estimated valuation multiple for DMart on the basis of FY23 prices is at around 75 times (75x EV/EBITDA). “Strong execution capabilities, right allocation of capital, a long-term thinking while building the business and a huge opportunity in terms of size are probably some of the key reasons for DMart’s high multiples.”

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