Invest in D’mart IPO?
So it was the 14th ping that set me thinking that I should do a note on the D’mart IPO aka Avenue Supermarts. This is going to be a longish note, so keep about 20 minutes to read and digest the whole thing.
While all other Retailers are struggling, D’mart has hit all the right tones on the piano and is doing well. Its sales and profitability have grown and RK Damani the guru of the stock exchange is now here to market his ware. Great show. More details about the company are available on the DRHP and on various websites and news papers. Please access them before you decide.
Of total FY 16 sales, food was 53.3%, Fmcg 20.6% and general merchandise 26.4%. Inventory turnover for Avenue Supermarts was 9.1% in FY 16 compared with 3.7% and 1.5% in case of Trent and Future Retail, respectively. I have seen Subhiksha’s model – sell simple food and other items that people need and you do not have to worry about anything else.
Most people forget that smart retailing is about smart BUYING and BRILLIANT Finance handling – who else but RKD to do this? He has shown us this in the past and those of us who know him from the early times, will swear by that. He knows how to smell value – and he has smelt it well in the chain. One of the persons whose shops got taken over repeated what we knew already. RKD is a good businessman and knows how to keep the shareholder happy, relax.
In FY16, Avenue Supermarts recorded an EBIT margin of 6.6% compared with 2.8% for Trent and 1% for Future Retail. Return on equity (RoE) for Avenue, Trent and Future Retail was 21%, 4.4% and 0.8%, respectively. RoE is the measure of the strength of business model and shows the return generated on the average equity invested during the fiscal.
According to reports, Avenue may raise around Rs 1,800 crore and command a valuation of close to $1 billion, or Rs 6,700 crore. Which means, it will demand a multiple of 21 times the FY16 earnings. It remains to be seen whether the IPO also draws large crowds like the ones seen at its outlets.
IPOs are priced in a very funny sort of a process. People who have not been on the other side of the equity table will be shocked to know how big IPOs get priced. It is a function of the promoter’s ego, market mood (boom or super boom), the greed of the merchant banker, the willingness of the merchant banker to lose reputation…….oh ha the EPS, projected p/e etc are then ‘adjusted’ to suit the SELLER.
When you buy an IPO you are given a price (fixed price) or a range (book building). As an ordinary investor, the best thing to do is to ignore it. Completely. As soon as the share is listed, it will find its true level.
Let us take the example of 2 companies – Speciality Restaurants and Mahindra Holiday Resorts. SR came out with a public issue at Rs. 150, and there was a very big promoter holding and the issue got subscribed without much effort. When an issue opens above the issue price, it hurts the promoter – and I am sure he must have screamed at the Merchant Banker for pricing it cheap. Lo and Behold the share went to Rs. 210 – or maybe even higher. Then the quarterly / six monthly results started coming in. The cash flows were not justifying the price (I am not passing a judgement about the current price, this is not a buy/sell call).
Maybe the company is still in its investing mode, maybe there has been some heavy selling……….I am not getting into any of those stories. However the market discovered price (far far superior to the merchant banker decided high price) is Rs. 112 – half of the top price that the company saw and 70% of the IPO price.
Of course much worse was the pricing of Reliance Power. The company issues shares to the promoter at Rs. 16 and in a few months thought it worthwhile to price it at Rs. 450. I laughed at the price then, and said (check the past posts) that a price of about Rs. 75 was justified, not Rs. 450. Of course other than blogging or laughing one could not do much – I could not have put options of an IPO. Then of course all the bad news started coming in and then I did see the price at Rs. 75. At that point I was not willing to buy even at that price because a much better company like NTPC was available at Rs. 130/-
Look at Mahindra Holiday Resorts. Very small issue, reputed promoter, successful issue. Issue was priced at Rs. 300, then it shot up to Rs. 574. Then the results started coming in. I am still looking for the cash flow. Go to Google and you find the millions of unhappy customers, and ‘000s of happy customers. Sadly a million is greater than a thousand.
No cash flows, no price. Today the share price is closer to Rs. 420 and nowhere near the issue price. This is a pathetic price performance.
Merchant bankers – the less said about them the better. Market is a fantastic pricing mechanism. So if you look at companies with say 15 quarters of rising EPS, or 3 years of increasing dividends, etc. etc. , has a market capitalisation of at least Rs. 5000 crores, and has decent promoters, do take a look. Look at the share price movement, if you are happy with the EPS, dividends, pe ration – this share is likely to be much much safer and better than a IPO,
So RK Damani comes out with a good issue for sure. It will be oversubscribed 80 times (my guess), nobody in the financial media has really understood the numbers – face it it is only for the analyst to see it!
In terms of the valuations, on the upper price band of Rs. 299, the stock is valued at 32.5x on FY17 basis (annualized 9MFY17 EPS of Rs. 6.90). I believe the share is valued at reasonable valuations given the listed peers such as Future retail and Trent trading at ~37x FY17 & ~50x FY17 respectively. IN a weak market all the PE would have been a joke, but the current market is terribly over valued, if not FULLY overvalued.
Strong financial performance (CAGR 40% against industry Avg.CAGR: ~10-15%, Avg.OPM: 7.3% against industry average: ~5-7% and Bottom-line CAGR 52% over the period FY12-16) may provide more opportunities to demand higher valuations in the coming time. Further, an increase in the penetration among different Tier 2 & Tier 3 cities in the years to come may give them more market share and provides strong financial performance visibility going ahead.
NOBODY in the capital market place will ever, ever say do not buy to a RK Damani share, so it must be a good buy. All the merchant bankers and brokers will have a buy / SUBSCRIBE recommendation on this.
Great. However if you apply for say 1000 shares @ 299, it means you will be investing Rs. 299,000. You are likely to get 10 shares. Even if it opens at 600 and you earn Rs. 3000 as profit, is it worth the trouble of filling up the form?
Caveat: I do not subscribe to any IPO ever. The last IPO I subscribed to was TCS. Luckily for me when it listed I bought more shares.
My view on D’mart: I will not apply. You have to decide for yourself.
Himanshu
Sir an exceptional post and take it from me, the next pings are going to be around writing a book on India stock markets, how to invest, shortlist companies,and exit
Kamelia B
Great reasoning Subra sir!
I thing SEBI also has a part to play in this. It can increase the minimum ASBA amount or mandate a 3 year lock in like ELSS. It will help in curbing the ‘get rich quick’ sentiment around IPOs.