Do Margins Matter? The Curious Case of DMart

Sep 20, 2016

In this issue:
» Two-wheeler Sales at Record High
» NSE Plans Rs 450 Billion Listing
» ...and more!
Rohan Pinto, Research analyst

Pricing power - the ability of a business to dictate the prices of the products it sells - generally speaks volumes about its competitive strength. The common belief is the higher the prices you can charge, the better it is for you; the higher the margins, the higher the profits.

However, here's a counterintuitive concept to help you find great businesses.

A business that has an inherent ability to raise prices, yet finds every opportunity to reduce prices, creates more value for its customers. This then creates a virtuous cycle that feeds upon itself and helps the firm generate ever increasing profits.

Think about it...

You go to a supermarket year after year and find the prices of goods you buy are cheaper than at all the other supermarkets.

The store sells things cheap...more people go and buy from them...the store makes money on the higher sales volumes...this helps the store to squeeze the prices even lower...and even more customers line up at the doors.

Wouldn't you want to be a part of this wonderful business?

Hold on, you say, this is wrong...

Won't this adversely affect margins?

Well, yes. It definitely would mean lower margins.

However, it is the return on capital employed, not margins, that rightly measures a business's profitability.

A supermarket in India has implemented this with great rigour.

People swear by their low prices.

Their chief executive officer, who loves to have a handle on how things are going on the ground, had this to say about a visit to one of his stores:

  • On Sunday evenings, our stores are so crowded, it's worse than a local train during peak hours, and I don't know why people are shopping. It's so uncomfortable.

The company I refer to was founded by renowned investor-turned-entrepreneur Radhakishan Damani. DMart began operation in 2000 inspired by Walmart's model of keeping costs low and selling products cheaply.

Sell below MRP!

The company's unique selling proposition is its promise to sell their products below the maximum retail price (MRP).

Sometimes as low as 12%.

Achieving the lowest price...

Every new store is calibrated and well thought out.

More than 90% of their stores are owned and less than 10% leased. This is crucial as it helps the company save on rent.

The locations of these stores are close to residential areas and are not part of malls.

Vendor dues are paid in a short time frame and they provide further concessions to the company, which helps add a further 2-3% to the firm's gross margin.

DMart's payback period-breakeven point of within six months far surpasses the industry benchmark of 12-18 months.

The company recognises that supply chain is a big issue and hence follows a clustered growth strategy rather than a Pan-India expansion.

Bottom line: The company has been consistently profitable for the past fifteen years of its operation. Meanwhile, its competitors are still struggling to make money.

Dear readers, please be informed that since the company is privately held, we have relied on financial numbers published in the public domain by leading financial dailies.

DMart's sales have grown at a compounded rate of 47% since 2007. The company is expected to clock revenues of Rs 84 billion in 2016.

The company leads in its ability to squeeze in more sales per square foot.

  • 'There are two kinds of companies - those that work to raise prices and those that work to lower them.' - Jeff Bezos

The takeaway: A strategy of lower prices can build great businesses.

The StockSelect team is always on the lookout for such great businesses. In fact, having sifted through a lot of stocks, the team has identified four potential winners for the long term. Click here to know more.


Last week we promised you a special handbook on IPO investing. The wait is finally over. Without further ado, we would like to present Equitymaster's Handbook of IPO Investing (with special focus on never before Insurance IPOs). Click here to get your free copy right away...

03:10 Chart of the Day

India's Auto sector has begun firing on all cylinders again. The last few years haven't exactly been rosy for this industry. Two back-to-back failed monsoons and the absence of a broad based economic recovery have hampered volume growth. Sure, some companies have done better than others, but that would have been true in good times as well.

But now things are looking up for the sector. The good monsoon this year has certainly helped turn the tide. A flood of new launches has also helped. The first beneficiaries are companies that derive greater revenues from rural India. Thus, two-wheeler sales have hit a record high in August 2016.

Can the High Growth Be Sustained?

The upcoming festival season and the pay commission led demand boost can keep the party going in the short-term. However, what matters is the ability to sustain the momentum after FY17. Auto stocks may be ruling the roost right now but it won't be long before the wheat is separated from the chaff in our opinion.


After the BSE, it is the turn of the NSE. The National Stock Exchange will be listing soon as per an article in Livemint. Going by early indications, it seems the issue will be priced to perfection. In other words, there won't be much left on the table for IPO investors.

The NSE is likely to be valued at Rs 450 billion! This would imply a valuation of 30 times its projected FY18 earnings. It is interesting to note that as recently as July 2016, State Bank of India, had sold a 5% stake in NSE to Mauritius-based Veracity Investments for Rs 9.11 billion. This works out to a total valuation of Rs 180 billion.

Of course the final valuation is yet to be decided. But it just goes to show that when it comes to IPOs, the rule for retail investors should be 'Buyer Beware'. Last week, we wrote about the only two ways investors should think about IPOs. We strongly recommend you read it.


After opening the day on a negative note, the Indian stock markets witnessed more selling pressure and were trading below the dotted line. At the time of writing the BSE-Sensex was trading down by about 100 points while the NSE Nifty was trading down by 30 points. Sectoral indices were trading on a mixed note with stocks from the Oil & gas sector in the green and auto stocks trading in the red.

04:50 Today's Investing Mantra

"There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating." - Peter Lynch

This edition of The 5 Minute WrapUp is authored by Rohan Pinto (Research Analyst).

Today's Premium Edition.

What to Look for in an Auto Ancillary Stock

Consider these three factors when analysing stocks from the auto ancillary sector.
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