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D-Mart IPO: Buy now and hold it for the long-term
Updated on7 Mar 2017
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Disruptive online retailers, backed by the funding from foreign funds, and sky-high real estate prices have hurt most brick and mortar retailers. But Avenue Supermarts-owned retail chain, D'Mart stands out. Since FY12, it has doubled revenue every two-three years with consistent improvement in profitability .The momentum is likely to continue in the coming years given the opportunity to scale up the existing business.

Even though, the company's initial public offer (IPO) looks richly valued, investors seeking exposure to the retail sector may consider the IPO given its growth prospects.

The Indian retail industry is growing at over 10% annually. The penetration of organised retail in the categories that D'Mart operates is 3-10%. It derives over half of the revenue selling food items, 20% from home and personal care and the remaining 27% from general merchandise and apparel.

Its store count has risen to 118 currently (3.6 million square feet in 45 cities, 9 states and one union territory) from 45 stores in FY11. The company has not shut a single store yet.

The operating margin before depreciation (EBIDTA margin) rose from 6.2% in FY12 to 8.8% in the first nine months of FY17. Its return on capital has increased from 11% to more than 23% in the same period.

These numbers are superior than most of its peers, such as Future Retail.
Its future growth will be driven by the rate at which footfalls increase in its existing stores and the pace of opening new outlets. With debt-equity ratio rising to 0.8 in FY16 from 0.5 in FY11, the retailer expects to fuel further expansion through equity.

Of the IPO proceeds worth `1,870 crore, 58% will be used to repay a part of the debt and around 20% will be used for construction and purchase of properties for new stores. The management has not given any guidance on the number of stores that it will open in the coming year, however, made it clear that it would like to further penetrate the existing regions that it understands well.