D-MART

A stock market maverick is listing one of India’s most profitable retail chains

Quartz india
Quartz india

In his mid-40s, when ace stock market investor Radhakishan Damani decided to start a chain of supermarkets, investors and traders watched his transition closely.

It was the early 2000s and India’s liberalised economy was booming. Rising demand for everyday household goods had prompted conglomerates and entrepreneurs to put their money into supermarket stores. So Damani, who spent two successful decades in the stock market and mentored well-known equity investor Rakesh Jhunjhunwala, launched D-Mart, a chain of value-retail stores under parent company Avenue Supermarts.

From a single store in Mumbai’s Powai area in 2002, as of January 2017 there were 118 D-Mart outlets across 45 cities, selling groceries, vegetables, electronics, apparel, and household goods usually cheaper than the competition. It has taken 15 years, along with Damani’s knack for understanding consumer-focused businesses, for D-Mart to build a loyal customer base.

The company is profitable, a milestone that most other Indian organised retailers, who expanded too fast and ran up high operating costs, haven’t crossed. For fiscal 2016, D-Mart posted net profit after tax of Rs321.2 crore on a turnover of Rs8,606 crore, the company’s red herring prospectus states, making it one of the most profitable retail chains in the country.

Today, the 62-year-old veteran with an estimated wealth of $1.15 billion in 2015, ranking 98 on the Forbes list of rich Indians, is gearing up for another milestone: an initial public offering (IPO). The IPO could raise some Rs1,870 crore, a large part of which will be used to clear the company’s debt and open more stores. The company declined to comment on Quartz’s queries.

So what makes Damani a stock market ace and an idol, even to fellow organised retail veterans?

Dalal Street

The investor-entrepreneur’s story dates back to the late 1980s.

When his father passed away, leaving behind a ball-bearings business, a 32-year-old Damani decided to tread a different path: blue-chip stocks.

Damani made a name for himself in the share market by investing in companies such as men’s grooming brand Gillette, tobacco-maker VTS, and 3M.

In the 1990s, when brokers like “Big Bull” Harshad Mehta ruled the trade with aggression, Damani was the typical bear, conservative in his stand and selling consistently. Then came the busting of Mehta’s big scam that led to the market crash in 1992. And guess who made a killing.

By the late 1990s and early 2000s, though, Damani went easy on the bets. Yet, trading remains his first love, which he manages today through his firms Bright Star Investments, Derive Trading, and Damani Estate.

He, however, used the insights gained from his 15 years in the stock market in his new venture. “Damani is known to look at the fundamentals first as an investor and he chooses companies after proper due-diligence,” KR Choksey, who heads a broking and wealth management firm by the same name, told the Business Standard newspaper.

Damani’s street-cred was to soon come handy.

Retail game

“I liked the consumer business and I invested in such stocks too,” Damani told The Economic Times newspaper in 2014. “So, there was this strong affinity to start something in the same sector.”

India’s $600-billion retail market is dominated by small, neighbourhood mom & pop stores. Large chains such as Future Group-owned Big Bazaar and Mukesh Ambani-owned Reliance Retail rule the remaining 10%.

Success, though, has remained largely elusive for the organised players because real estate prices, a large chunk of their operational costs, have risen dramatically over the years. Besides, margins are low in the grocery business. To top it all, India’s stringent FDI laws make it tough to raise funds.

Yet, Damani made the right moves. “There are some 25 things that we possibly do differently and consistently,” Damani told The Economic Times newspaper.

He knew Indian households are extremely value-conscious. In the early days of his retail business, Damani spent time negotiating the best prices with wholesalers in Mumbai’s crowded Crawford market and the Maharashtra government’s Agriculture Produce Market Committee bazaars in Vashi in the Navi Mumbai area. To this day, he has maintained that rapport with suppliers. The chain is known to pay vendors’ dues in 11 days as opposed to the industry standard of 12-21 days.

In the meantime, Damani bought plenty of real estate in the 2000s when land prices were still relatively low. So by the time he was in expansion mode, this property bank helped keep operating costs low.

According to the red herring prospectus, the retailer runs on an ownership model (including long-term lease arrangements, where the lease period is over 30 years and the company owns the building) rather than rental. “We open new stores using a cluster approach on the basis of adjacencies and focusing on an efficient supply chain, targeting densely-populated residential areas with a majority of lower middle, middle, and aspiring upper-middle class consumers,” the prospectus says.

The company also enters into long-term leases to minimise rental costs, procures goods directly from vendors and manufacturers, and maintains a high inventory turnover ratio at its stores. It has also built a strong supply chain of 21 distribution and six packaging centres to feed its 112 stores.

Besides, its limited interest, too, has worked well for the chain.

In the 2000s, buoyed by the growth of India’s middle-class, most larger retailers expanded hurriedly. They opened stores in substandard malls and entered categories such as electronics, home goods, and furniture through large stand-alone stores. In the process, they piled up debt, eventually forcing them out of business altogether.

D-Mart stuck to the basics: an affordable one-stop shop for all categories of goods.

“The guiding philosophy was that we will do just this and nothing else right from the beginning. We have stayed committed to it,” Neville Noronha, CEO, Avenue Supermarts, told the Mint Newspaper in 2015.

Here’s a quick comparison: In fiscal 2016, Future Retail posted a turnover (pdf) of Rs6,845 crore with a net profit of Rs14.55 crore, lower than that of D-Mart’s. Reliance Retail, a subsidiary of Reliance Industries Ltd that operates supermarket chains across categories such as grocery, apparel, and jewellery, posted revenues of Rs21,612 crore (pdf) for the year ending March 31 2016.

Miles to go

For all his success, Damani has a lot more to achieve. Expanding the chain, for instance. The company is expected to spend Rs366 crore from the IPO funds on expansion. It is also embracing technology through a mobile app, and soliciting online orders to compete with Amazon and Flipkart.

Organised retail is still a tough business to scale. “We need to understand that the market share of this company is insignificant, which makes the opportunity to grow virtually infinite,” Arun Kejriwal, director of financial services firm Kejriwal Research and Information Services, told Mint newspaper.

For now, Damani has his fans. “He is a very focused retailer,” Kishore Biyani of Future Group said of Damani once. His “simplicity and clarity of thought” has helped him build a successful business, Biyani noted.

Coming from a rival, that amounts to a big deal.

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