DMart Share Price Analysis 2023 – Why is DMart’s Stock Falling?

DMart Share Price Analysis 2023 – Why is DMart’s Stock Falling?

Introduction DMart Share Price

Radhakishan Damani ji’s Avenue Supermarts, which operates arguably our go-to monthly grocery store Dmart, DMart Share Price has skyrocketed in the past and has given its investors nearly 500% returns since its listing in March 2017. We all probably buy our household ration from Dmart because of the huge discounts, isn’t it?

The family goes to Dmart one day in the month and buys the whole month’s ration, snacks, cosmetics, and whatnot. They go to take 10 things and come back with 20. It must have happened to you too, right? Who doesn’t love a last-minute discount? But such a company which gives a lot of discounts to the customers of its company, today it is trading at a discount in the stock market.

Surprisingly, after the listing, its investors have not received negative returns in any year till now, but in 2022, this streak of Dmart was broken. Yes, DMart Share Price had fallen over 12.90% in 2022. So is this a buying opportunity? Are there any fundamental challenges in Dmart’s business due to which market participants are shying away to pay premiums to Dmart Share Price? Let us know in today’s article.

How DMart Operates Its Business

If we have to identify the challenge in Dmart’s business, then first of all we have to understand their business model very well. Whenever we go shopping in Dmart, all the products there can be mainly divided into 3 categories.

Food Products such as groceries, frozen products, processed foods, beverages, cooking oils, dairy products, snacks, fruits, vegetables, etc. Next is Non-Food FMCG Products such as all small things related to personal care, toiletries, home care, etc. And General Merchandise and Apparel or GM&A includes Bed and Bath, Toys and Games, Crockery, Footwear, Home Appliances, etc.

Also Read, Patanjali Foods Share Price Analysis

In short, from household pins to cargo pants, from food to cleaning, you will find it all at Dmart. Out of the 3 major segments, the Foods category alone contributes about 55% of DMart’s total revenue to DMart’s total revenue. The contribution of non-food items is 20.50%, and the share of GM&A is 24.75%.

Now ask your question, after all, why do we wait to go to Dmart on the weekend after the items are stocked? ‘Discount‘. Isn’t it? We get even the smallest items at a discount in Dmart, which considerably reduces our total bill.

So, if the discount is the whole game, why don’t normal retailers give discounts? Here comes the matter of ‘volume’. There will be a massive difference in the volume of purchase by a retailer when the goods are standing and of the same product by Dmart.

Let’s understand by Example: A retail store buys 100 units of an item of Rs.100, assuming its MRP is Rs. 115, i.e. the retailer got a 15% margin. So for selling 100 units, the retail store gets Rs. 1,500 profit, right? But when Dmart buys the same item, it places an order for 1,000 units instead of 100. Now in front of such a big order, Dmart has a secret weapon called ‘Negotiation Power‘. When you buy the same on this scale, you get even more discount.

After all, the next supplier, who gets more profit at the same time, also agrees to give a discount. So let’s say that DMart sells the same product for Rs. 90. So even if Dmart has priced that product at Rs. 115 then their margin will be around 27%. But then what will be the difference between Dmart and retailers?

DMart believes that they may keep the margin low, but their sales volume should be very high. That is, DMart focuses on the volume game. And Dmart does this by offering products to consumers at a lower price than the market.

So the item which is available in the market is for Rs. 115, Dmart may attract customers like us by selling at Rs.100 and also earns profit itself. The profit margins of Dmart are very low but because of this, they make it very difficult for normal retailers to compete.

DMart’s operating profit margins have been around 8% for the past few financial years. This is called the ‘Deep Discount Strategy‘. You will find the same strategy in US retail giant, Walmart as well.

So, DMart can sell its regular orders easily, and with this, DMart always has fresh products on its shelves, which are liked by new customers. Because of this, DMart has to face a lot of issues like wastage or decay. Apart from this, if you visit your nearest DMart, you will notice that the infrastructure and setup of DMart stores are very simple.

From above, DMart’s maximum operates on an ownership model. This means that most of the stores they own are self-contained, which makes their rental rates comparable to those of their competitors! Their stores are also not in fancy locations as their real estate expenses are relatively low. The impact of all these factors can be seen in the profitability of the company. In fact, due to this strategy, DMart has become the retail king of India today.

The company has compounded its sales at a rate of 30% in the last 10 years, while at the same time, its profits have compounded at 38%. Now you must be thinking that the business model of Dmart is solid, then what problems can arise in it? See, every business has its challenges, and DMart has them too. Let’s understand.

Also Read, Accelya Solutions Share Price Analysis

Why is Stock Underperforming

Market Sentiments

DMart Share Price is down 34.56% from October 2021 peak. In the last 1 year also the DMart Share Price has gone down by about 12.39%. The bearish trend in the overall markets and macroeconomic factors are behind the underperformance in the stock market, but there are some factors related to Dmart’s business that have not played out positively for them.

High-growth stocks which trade at a premium valuation in the market against their competition also have high market expectations. Only one negative news or bad quarter can eat away at the company’s premium valuation. Any factor that can affect the growth of these companies or if the revenue and profit growth numbers of such companies fall below the estimates of market experts and analysts, then their stock prices can correct very quickly.

And this is what happened with Dmart. This stock, which was trading at a PE of 313.9 times in October 2021, is today trading at around a PE of 100. Let’s talk about the company’s results for the quarter that ended December 22.

There was growth in the company’s sales and operating profit, but they could not meet the estimates of the market. Due to this, there were a lot of corrections in the Dmart Share Price. Even the company’s gross margin has declined by 60 basis points year-on-year, and by 20 basis points quarter-on-quarter.

The Decline in GM&A Segment Sales

Now, one of the reasons behind these declining margins is the decline in General Merchandise and Apparel i.e. GM&A segment. See, most of Dmart’s revenue comes from the food and FMCG segments, but the company’s margins in these are very low. Thus, the GM&A segment is the only category that supports its margins.

And in the December’22 quarter, the company’s food and FMCG sales growth was faster than that of the GM&A segment. Therefore, the overall profit margin was impacted due to the lower contribution of GM&A to their total sales. Think for yourself, you have 2 products. Both cost Rs. 100. But you can sell one at Rs. 110 and the other for Rs. 150.

So which product would you like to sell more? The same product with higher margins, right? Similar is the case in Dmart. DMart wants customers to buy clothes, crockeries, toys, and home appliances along with food and FMCG items to boost their margins.

And generally, the company’s margins are historically strong in the December quarter due to the festive season. And good sales are also seen in the GM&A segment. But this year, the company’s December quarter margin hit a multi-year low. Experts and brokerage houses say that inflation is the reason for the decline in sales growth of the GM&A segment.

Due to inflation, the discretionary spending of the people has come down. Discretionary Expenses mean such expenses which are not necessary for a common man in his day-to-day life. Apart from this, another big reason is the bad competition in this sector. That too from big players like Reliance Retail and Tata Group-backed Big Basket.

The company is also facing competition from quick commerce players like Zepto, Blinkit, and Swiggy Instamart. However, to compete with these online players, Dmart has also started its online service Dmart Ready. You might have also seen these new Dmart Ready stores near your home.

Customers can order online through the Dmart Ready app, and then they can pick up their order from the nearest Dmart Ready store. And if you want the order delivered to your home, then Dmart will deliver it to your home by charging you the delivery fee.

Revenue Per SQ.FT

Now let’s move on to another important metric – ‘Revenue from sales per square foot of retail business area’. Then, in short, revenue per square foot. To calculate this, we divide a company’s total sales by the total area of all its stores.

So this metric shows how much sales Dmart is able to generate from 1 square foot of area, which essentially shows how efficiently they are using their storage area. As you can see from the numbers on the screen, there is no growth here but a big decline is being seen.

That is, the company’s operating efficiency has reduced, and it is now earning less revenue per square foot of land than before. Two things emerge from this. The revenue numbers of the new stores the company is opening are below expectations. Then the size of the company’s stores is more as compared to earlier, the total area of which has been increased.

When we studied, it was found that the new stores which Dmart is opening for the last 3-4 years are relatively bigger in size, more than 50,000 square feet in area, i.e., the company is now opening much bigger stores than before. Opening of larger stores and declining sales in the GM&A segment, both these regions have not only resulted in higher revenue per sq. ft., but smaller new store additions are also taking a hit.

DMart added 4 new stores in Q3FY23, which is September quarter base and well below market estimates. For example, Motilal Oswal Securities was expected to add 12 new stores.

For example, when there are conditions like inflation and rising interest rates in the market, then in a way, opening fewer stores to the management can also be a safe step. But what the management thinks and what the market expects, the timing may not match. And the conservative thinking of the FIR management may also indicate that it may take a little more time to pick up demand and growth.

Conclusion

So this was a detailed analysis of the recent performance of DMart Share Price. It remains to be seen whether DMart will be able to convert India’s growth story into its own growth story. After all, whenever we talk about India’s growth, the growth of the middle-class population cannot be ignored in any way. Similarly, Dmart, which is targeting the growth of the middle-class population, would also like to take advantage of this opportunity. Do let us know about your stand on the falling DMart Share Price.