D’Mart - Balancing the Ownership Verses Leasing Act..!
By Mr. Pankaj
Renjhen, JLL India
The recently closed
Rs. 1,870-crore D’Mart initial public offering (IPO) got listed at
Rs. 604.40 - a 102.14% premium over its issue price of Rs. 299 per share. It
received bids for 463.61 crore shares against the total issue size of 4.43
crore shares, recording a staggering 104.48 times oversubscription. Owner
Mr. Radhakrishna Damani is understandably a happy man.
Mr. Radhakrishna
Damani and his family started D’Mart to address the growing need
of Indian families for one-stop-shops for the daily requirements - groceries,
vegetables and household goods, as well as electronics and apparel - at the
lowest-possible prices.
Its focus on
maintaining its presence in the low margins business was a shrewd strategy
which has worked very well for the company. While the margins have been low,
sticking to selling daily items has helped in achieving a quick inventory
turnover.
This has, in turn,
helped D’Mart to maintain an excellent track record in its vendor
payments. Industry insiders state that suppliers rush to them because they can
expect payments from D’Mart outlets within 10-12 days - other
retailers take upto 21 days to at time months to make payments.
D’Mart’s Real
Estate Strategy
Radhakrishna Damani has
focused on running the business he knows best in locations he knows best. From
the launch of its first store in Mumbai’s Powai in 2002, D’Mart still
has the maximum number of stores in Maharashtra. This is followed by Gujarat,
Andhra Pradesh, Madhya Pradesh, Karnataka, Telangana, Chhattisgarh and NCR.
D’Mart has
consistently followed the ownership model, owning most of the stores or having
them on 30– year long-term leases. Since real estate leasing usually eats up4-6% of revenues, the ownership model has kept costs low.
However, in its red
herring prospectus filed with SEBI, the company has mentioned that since the
ownership model requires higher capital allocations, D’Mart may not
be able to launch new stores at the earlier pace.
The prospectus states:
“As a new store location should satisfy various parameters to make an
attractive commercial proposition, finalization of location and property
acquisition for our new stores is an evolving process which may not progress at
the same pace as in the past or at the expected pace.
Further, the ownership
model requires greater capital for opening of each store due to which we may
not be able to expand at our historical rates. We may be required to obtain
loans to finance such expansion and there can be no assurance that such loans
will be available to us on commercially acceptable terms, or at all.”
In another section in
the prospectus it mentions: “We have no control over future increases in real
estate prices. If real estate prices increase, we will require greater capital
to buy land or incur higher operational costs due to higher leasing or rental
costs. If there is limited availability of real estate in the future,
competition for such real estate may increase which may result in a further
increase in prices. This may lead to delays and cost overruns in opening new stores.”
The capital
expenditure of the company (a large part of which has been towards purchase of
freehold land, leasehold land and buildings) has been growing, as evidenced by
the numbers filed in the prospectus (FY 2014-Rs. 3,057 mn; FY 2015-Rs.
4,399 mn; FY 2016- Rs. 6,668 mn).
A Multi-Format
Approach
D’Mart has
followed three formats for setting up new stores:
1. Greenfield
stores, where the company purchases land, constructs the
store building and
fits the out as per its requirements
2. Buyout
stores, where it purchases the land with ready building and fits them out as
per its requirements, and
3. Occupying
properties on leasehold basis or rental basis.
As a part of its
strategy, the company proposes to utilize Rs. 1,879.50 million out of the net
proceeds of the capital raised recently towards purchase of fit outs for its
new stores with an aggregate built-up area of 2,100,000 sq. ft. and utilize Rs.
1,786.50 million to undertake construction of new stores with an aggregate
built-up area of 900,000 sq. ft. to be undertaken in fiscals 2018, 2019 and
2020.
The issue of capital
requirement can be resolved through the equity raised.
However, the land
ownership model has inherent risks associated with it, which can include
· Lack
of proper title records
· Lengthy
legal proceedings in case of law suits
· Overvaluation
of land parcels, and
· Delayed
approvals for usage conversion.
Future Moves
Going forward, D’Mart plans
to expand to new locations. To ensure success, it will have to play a fine
balancing act between the ownership model and the lease model for its stores.
With all the inherent
risks in land, as well as the lack of flexibility in relocation and expansion,
leasing may be worth a closer look if fast-track growth is a leading objective.
However, maintaining margins could be a challenge, as lease rentals will
continue to escalate at prime locations.
D'Mart has correctly
chosen establish and maintain its presence in highly-populated middle income
and lower middle income markets, as it works best for this business. These
locations are typically high on lease rentals, too.
However, the foresight
with which Damani has planned his real estate strategy will
definitely serve him well going forward, too. More than most, this savvy
businessman and retailer has unfailing instincts that will guide his strategy
on ownership and leasing.
Mr. Pankaj Renjhen, Managing Director -
Retail Services, JLL India
Managing Director - Retail
Gurgaon
+91 124 460 5000
For media contact
Arun Chitnis
Head - Corporate Communications & Media Relations
JLL India
Level 6, Amar Avinash Corporate Plaza
Bund Garden Road,
Pune 411001.
Tel: (020) 40196100 Fax: (020) 40196101
Mob: 91 9657129999
Website: www.joneslanglasalle.co.in
Blog: www.joneslanglasalleblog.com/realestatecompass
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