Avenue Supermarkets which run the retail chain D-mart had a spectacular debut on the stock

exchanges with its market value doubling in a single trade session. Some may say it is a result of
the hype created around the listing of the shares while some may give credit to the reputation of its
Promoter Mr. Radhakishan Damani. However, if one tries to decipher the strong business
underlying, it is not difficult to say that D-Mart has not only outpaced its competitors during the last
decade but it has also shown how a retail chain is operated successfully in a consumer driven
market like India.

D-Mart has created an image in the mind of consumers as a place where one can find products at
much cheaper rates than anywhere else. Carrying this image and still being able to generate an
average net profit margin of around 3.5% during the past 5 years (2012-2016) is really noteworthy.
Not to forget that during the same period, the retail sector (think Future Group) was getting
assaulted by the booming (discounted) e-commerce market.

The first thing that it did differently from its peers (offline Retailers) was attracting customers by
offering goods at cheaper prices. This suggests that the company has a larger focus on the volume
game rather than margin. This fact is proven by the inventory turnover ratio of the company which
on an average has been around 11.6 times for the past 5 years (2012-2016). Higher inventory
turnover ratio means inventory sell faster and thus rises volumes. This in turn is helps the company
negotiate better prices with the vendors. In comparison to this, companies like Shoppers stop and
Trent (owner of Super Bazaar Chain) have much lower Inventory turnover ratio of around 2.5 times
for the same period. Lower prices are also evident from the gross margin ratios i.e. between
2012-2016, D-Mart’s gross margin was just 14.8% whereas gross margin of Shoppers Stop and
Trent was 32.74% and 48.8% respectively.

Another differentiating factor is in the way it operates its chain of stores. Unlike the predominant
model of being asset light and leasing stores, D-mart has gone the other way and most of their
stores are either owned or leased for a long period. This has helped them to save rental costs and
effectively manage the working capital. Rental and maintenance costs in case of its peers forms a
major chunk i.e. 15-20% of their total expenses.While agreed, they have saved rental costs, this
practise has forced them to invest in acquisition and building of stores by taking debt. During
2012-2016, the debt-equity ratio of the company increased from 0.39 to 0.60 and the number of
stores increased from 65 in 2012 to 118 in 2016.

Since the company is already selling products at thin line of margin, to be able to be net profitable,
it has no option but to control its costs. This is clearly evident from the total of operating expenses
as a percentage of sales over the past 5 years. While for D-mart, it is around 10%, for Shoppers
Stop and Trent it averages between 30-50%. This is also due to the fact that D-Mart doesn't spend
much on advertisements and promotions unlike its peers.

For a Supermarket like D-Mart, the mix of its products is quite important. As per the information
given in DRHP of Avenue Supermarkets, 52% of the total products in D-Mart shelves belong to
Food & Grocery Category. Another point to note is that Gross margins for this category are the
second lowest ranging between 12-25%. This suggests that products from this category are used
to attract customers towards the store with attractive prices thereby increasing footfalls. The others
categories comprise of footwear and general merchandise which is 27% of the total products
offered by D-Mart while the same is in single digits for its peers like Reliance and Spencer. The
margins for this second category are the highest ranging between 23-27%. This indicates that once
the customer is pulled to the store through discounted products, efforts are made to sell other
category products which yield higher margins.

When we look at the cash flow of D-Mart, operating activities are generating good amount of cash
and by combing with long term debts, the cash is being used in investing activities, specifically for
buying intangible assets/real estate for building stores.This gives a perception of the company still
being in investment mode, the benefit of which it will reap going forward-A big positive sign for a
long term investor.
Thus we can say that a mix of controlled costs and effective and well maintained product portfolio
has played a vital role in D-Mart being the fastest growing and among the most profitable. No
doubt with the current pace it can very well turn out to be the next Walmart from India.