Is DMart Really a BAAP Stock and a future 100-Bagger?

Mar 22, 2021

Rahul Shah, Editor, Profit Hunter

The Equitymaster research team has a Whatsapp group where both knowledge and humour are shared in equal measure.

On most occasions, we have no issues differentiating one from the other.

But every now and then there's a post that ends up confusing us.

We don't really understand what to make of it. Should we treat it as something that's knowledge enhancing or should we have a good laugh about it and move on?

A colleague put up one such post recently. It was about DMart, one of India's most respected companies.

In it, an analyst has argued that as per his conservative estimate, DMart is a 100-bagger stock from the current price.

Yes, you read that right.

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The report, which the analyst claims is an original work, has done a 25-year projection of the company.

It claims DMart has potential of compounding its earnings per share (EPS) at 28% CAGR over FY21-46.

Sadly, any further details are available only in the report, which we did not have the chance to read yet.

However, we are wondering whether we really need to see the report. After all, how hard it is to conclude that the claims are more sensational than realistic and more sophisticated than useful?

To be honest, we have no doubts in our minds that DMart is a great business. It's one of the best retail franchises around. It has a very bright future if it keeps executing the way it has in the past.

However, what we are worried about is the sky high valuations the stock is trading at.

Avenue Supermarts, the company that owns the DMart chain of stores, is not cheap by any stretch of imagination.

Based on its all-time high EPS of Rs 20 that it earned in FY20, the stock is trading at a price to earnings multiple of a whopping 150x.

That's huge.

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There aren't many investors who've earned 100x their investments by paying a starting multiple of 150x. This is irrespective of how great or how fast growing the company.

Besides, there's always the chance the high growth rate of 28% the analyst seems to be projecting, comes unstuck.

After all, competition not just within its own space, but even of the digital kind, seems to be breathing down its neck.

Thus, there could well be a double whammy in the form of the bottomline growing at a lower than projected rate.

If that happens, a significant contraction in the valuation multiple could follow.

Back in December 2000, Infosys, one of the largest wealth creators, was trading at a princely price to earnings multiple of around 130x. This is pretty similar to what Avenue Supermarts is currently trading at today.

It was a high growth company. It grew its earnings by a whopping 36x between FY01 and FY20.

However, despite the high growth, Infosys wasn't able to outperform the benchmark index by a big margin.

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Its share price has gone up by 14x over the last 20 years. This is only slightly better than the Sensex, which has given a 12x return.

This is one of the biggest lessons in investing.

Your future returns are to a large extent, dependent on the valuations you are paying for a stock.

If you pay too high a valuation multiple, even a high growth company may not end up giving returns better than the benchmark index.

Analysts love to use the term BAAP for some very good quality stocks that are growing at a fast rate.

BAAP stands for Buy At Any Price.

However, as the Infosys example shows, even a good quality stock may end up giving just par to below par returns if you try to buy it at an exorbitant valuation.

Thus, be it DMart or any other stock, GARP (Growth at Reasonable Price) should be your mantra and not BAAP.

Always be mindful of the valuation you are paying for a stock and stay away from overpaying as much as you can.

Good Investing,

Rahul Shah
Rahul Shah
Editor, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)

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