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Behind D-Mart’s bumper IPO lie fundamentals of business: Stick to basics

Experts say that the high-listing premium given by the markets to D-Mart should be seen as a mark of respect to a well-run company that follows the most basic fundamentals of doing a business.

Written by Sandeep Singh , Pranav Mukul | New Delhi | Published: March 23, 2017 1:48:25 am

D-mart, Dmart business, india ecommerce, ecommerce retailers india, dmart india, business news

At a time when the e-commerce players are struggling to stem their losses amid plunging valuations, the low-profile brick-and-mortar retailer Avenue Supermarts, which runs 112 D-Mart Stores in 41 cities mainly across Gujarat and Maharashtra, saw the market offering it a 100 per cent premium over and above the valuation it sought through its initial public offering on the first day of the listing. Experts say that D-Mart followed the basics of business fundamentals — keeping the costs under control, staying away from the high-cost mall format, managing an efficient supply chain and offering everyday low-price without any excessive discounts schemes — marking a sharp contrast to the trend among online players of burning investor money annually to retain customers. What has also worked for Avenue Supermarts, one of the largest and the most profitable F&G retailer in India, is that the company not only runs and manages its stores, but also operates distribution centres and packing centres — thereby shoring up the margins.

While all the talk over the last 2-3 years has been about how e-commerce companies were getting investments from large global investors and the rapid spread of their network and market share, experts say that the high-listing premium given by the markets to D-Mart should be seen as a mark of respect to a well-run company that follows the most basic fundamentals of doing a business. “The market has shown its respect for an efficiently-run company that followed the fundamentals of the industry. It also brings a message for all the investors who did not look too much into the brick-and-mortar players and were only investing in online players,” said Arvind Singhal, chairman and MD, Technopak. Abheek Singhi, senior partner and director at Boston Consulting Group said that the company got the trust of investors as it has not only demonstrated the success of its business model at a scale of over 100 stores but, “has also shown strong economics with a margin structure that is in line with global peers and has also shown constant growth over the years which is reassuring to its investors,” he said.

While Avenue Supermarts came with its IPO to raise Rs 1,870 crore that valued the company at less than Rs 20,000 crore ($3 billion), even after the first day of listing, its market capitalisation now stands at Rs 39,916 crore ($6.1 billion). By contrast, India’s largest online retailer Flipkart had a peak valuation of $15 billion in 2015. The firm, recently raised close to $1 billion at a valuation reportedly around $10-11 billion. However, several investors, including mutual funds like Morgan Stanley, Fidelity Rutland, Valic Co, T Rowe Price have marked down the company’s value in their books. Morgan Stanley reduced Flipkart’s share in its books by 64.5 per cent in December 2016 and valued it at $5.4 billion. Even a look at the performance of B&M players shows that Avenue Supermarts is a leader. While Avenue Supermarts clocked a net profit of Rs 320 crore on a revenue of Rs 8,600 crore in FY16, the Future Retail made a net profit of only Rs 14 crore on a revenue of Rs 6,845 crore in the same year.

So, even as ecommerce players were giving hefty salaries (ranging between Rs 1 crore to Rs 25 core) and bonuses to their senior employees, at D-Mart, only Ignatius Navil Noronha, the managing director of the retail firm, got an annual remuneration of more than Rs 10 crore in FY16 (Rs 17.9 crore to be precise). Ramakant Baheti, the CFO and executive director of the company received an annual remuneration of less than Rs 1 crore (Rs 75 lakh) that year. It is also important to note that the amount Avenue Supermarts raised from the market through its IPO would be used to repay its debt taken for building assets, whereas leading online players seem to be in need of $1 billion every year as additional funding.

“We operate predominantly on an ownership model rather than on a rental model. We open new stores using a cluster approach on the basis of adjacencies and focusing on an efficient supply chain, targeting densely-populated residential areas with a majority of lower-middle, middle and aspiring upper-middle class consumers…..The majority of products stocked by us are everyday products forming part of basic rather than discretionary spending,” said the company in its draft red herring prospectus. While D Mart has shown that a brick and mortar retail operator can succeed despite the discount competition from e-commerce players, Singhal says e-commerce will also do well in 10 years and their overall market share (of consumer spend) will grow from around 4-4.5 per cent to around 15 per cent. “B&M players will however still hold around 85 per cent of the share,” said Singhal while emphasising that, “D Mart reinforces the view that if you do the business on right fundamentals, you will succeed.”

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