Brokerage firm Kotak Institutional Equities tried to solve the conundrum of DMart’s inflated market capitalisation of Rs 2.95 lakh crore. The brokerage firm said the current market capitalisation suggested the market expects the company to be valued at Rs 70-90 lakh crore by 2050. For context, the market capitalisation of top 10 Nifty50 stocks currently is Rs 78 lakh crore.
According to Kotak Equities’ analysis, taking a weighted average cost of capital of 11 per cent gives a market capitalisation of Rs 70 lakh crore for D-Mart by 2050. If the WACC is increased to 12 per cent, the market capitalisation could be at Rs 90 lakh crore. The top-10 Chinese retailing (largely e-commerce) companies have a combined market capitalisation of $1 trillion (Rs 75 lakh crore), Kotak Equities said.
It is important to note that many Chinese retail companies have other valuable businesses also, unlike DMart, which is only into grocery retailing.
What is important is that the Chinese retail companies are valued at $1 trillion at a time when China’s per capita GDP is $11,000, whereas India’s per capita GDP is near $2,000. The market’s valuation of D-Mart inherently assumes that by 2050, India’s per capita GDP will rise to the levels being seen in China now. For that, India’s per capita GDP will have to grow at 6 per cent annually. “We are hopeful about an acceleration in India’s GDP growth on the back of economic reforms and a multi-year investment cycle, which could result in a virtuous cycle of investment and consumption,” Kotak Equities said.
The other assumption that the market may be making with regards to Avenue Supermarts is that the company will clock sales of Rs 70 lakh crore, operating profit of Rs 5.3 lakh crore and a net profit of Rs 4 lakh crore by 2050 to justify current valuations. To garner such numbers, DMart will need to enjoy close to 8 per cent market share of the grocery market and 23 per cent of the formal grocery market in 29 years. “The current market capitalisation also implies rapid expansion of DMart’s digital and physical infrastructure that will enable it to meet the implied revenue and profit numbers (if not higher) for FY2050,” Kotak Equities said.
