Stock Picks

DMart IPO: Buy or Ignore?

Company Overview:



DMart is a retail chain owned by Avenue SuperMarts Ltd. which is promoted by Radha Kishan Damani. RK Damani is one of Dalal Streets legendary value investors. The company had 112 stores in 41 cities as of 15th September, 2016. The state wise revenue breakup is given in the next page. The company’s style is of operating discount stores in sub urban areas. The company takes into consideration many metrics before opening a new store. The company prefers to own the retail space rather than lease or rent them.


Industry Overview:

Retail stores in India have struggled to remain profitable. DMart is one of the few successful names in the sector where the likes of Kishore Biyani and Mukesh Ambani have struggled to remain profitable successfully.
India’s retail spend is said to be $616 Billion. DMart operates in nine states and it plans to stick to these states for expansion. These nine states account for 65% of India’s retail spend. 

Financial Overview:
(In Crores)

Particulars
FY12
FY13
FY14
FY15
FY16
CAGR (5Y)
CAGR (3Y)
Sales
2203
3335
4681
6434
8580
38.40%
37%
YoY Growth

51.38%
40.36%
37.45%
33.35%


PAT
58.9
92.2
159
210
318
47.50%
49.60%
YoY Growth

56.54%
72.45%
32.08%
51.43%


NPM
2.67%
2.76%
3.40%
3.26%
3.71%


NOCF
61.7
128
206
207
439


NOCF %
104.75%
138.83%
129.56%
98.57%
138.05%


 ** NOCF – Net operating cash flow

The company is growing at a CAGR of 35%+ with it's margins expanding and profits growing faster than sales. The company enjoys significant pricing power and is able to convert it's profits into cash.

Usually companies compromise on profits, margins and cash flows when growing at such a fast rate every year. DMart owns most of the real estate and plans to continue this model of operations which will keep costs low in the long run and increase the book value when real estate prices go up.

But the IPO comes at a P/E level of 46 which is very expensive for a company whose net profit margin is just 3.7%. This leaves no margin for safety. However, no IPO in this market will come at a PE of 15 or 20.

State wise revenue breakup:
State
% share of revenue
Maharashtra
62.57%
Gujarat
18.83%
Telangana
10.15%
Karnataka
6.14%
Andhra Pradesh
1.03%
Madhya Pradesh
0.85%
Chhattisgarh
0.43%

Per store metrics:
Particulars
FY14
FY15
FY16
Number of Stores
75
89
110
Rev/St (In Crores)
        62.41
        72.29
        78.00
PAT/St (In Crores)
          2.12
          2.36
          2.89

IPO Proceeds:
-          The company plans to repay debt which already is at a tolerable level
-          The company plans to open more stores in the existing nine states

IPO Details:
Issue Open
March 8, 2017 to March 10, 2017
Issue Size
Rs 1,865.57 Crores
Issue Price
Rs 295 to Rs 299
Market Lot
50
Minimum Order Quantity
50
Listing at
BSE, NSE

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The above article is an extract from our report sent to our clients.
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