DMart borrows many Walmart principles-operational discipline (a science) and product mix (an art)-and customizes them for India. Real estate ownership must not be confused with inherent operational strength which delivers returns (15 %) that are 2x rental yield on property. Cost discipline is evident from low fixed/central costs (2% of revenues) and culture of inclusiveness (stock options). Capabilities of assortment management are evident in range and mix of inventory catering to a large customer base. Accelerating store addition on own store model is challenging, plus stores in smaller towns may have lower throughput and, hence, lower margins. Our DCF value (16% below CMP) of Rs 930 factors 30bps margin expansion over FY17-22E, 786 stores by FY30 and doubling of payable days to 15 with a WACC of 11.5%. Operational strengths of assortment, pricing and cost discipline should not be confused with rental savings from real estate ownership. In fact, attributing a notional rent at market prices, DMart would actually elevate RoCE. Its EBITDA is 3x that of notional rental yield (15%) on capital employed, demonstrating the value addition of operations. Ability to accelerate store count on own store model is key to sustaining growth rate above 30 %.
‘Everyday low prices’ provide higher volumes by catering to all classes of society. Average bill value of a DMart store is 10-20 % cheaper than mom & pop and other modern trade stores. We estimate, on average, a DMart store caters to 0.3 million families in its catchment per month, driving 12x inventory turns. However, the throughput and margins of stores tends to fall in smaller cities – revenues per sq ft CAGR 2% against SSG of 24% over FY12-17. The science and rigor of processes to maintain low cost help DMart offer low prices. DMart’s key margin driver – general merchandise and apparel – has low ticket size, triggers impulse purchases, is utilitarian and competes with the offerings of unorganised players. However, its e-commerce business would be margin dilutive as it is skewed to FMCG/food, which offers 3% gross margin vs store-level gross margin of 15%.