BY TAPONEEL MUKHERJEE
A look at the year-to-date rally in the shares of Dmart and the share price action over the last five years
have interesting pointers for investors and policymakers alike. Operational excellence in what is considered a highly competitive sector has led to the creation of a company that has not only created significant value for its shareholders over the last two decades but has also served the consumers well. The idea of “Everyday Low Prices”, the core idea behind Dmart, was neither new nor innovative as a concept. However, what was the game changer as is visible today was the execution.
The success of Dmart shows that a successful business in India or an investment that generates significant value need not necessarily be driven purely by technology. While the concept sounds obvious, it is more vital that attention is paid to the ability to operate efficient businesses, which can be the real game-changer. As the experience of certain financial investors, especially on the credit side, shows investment success in India is driven as much by financial mastery as by operational excellence. While any market requires both financial and operational efficiency, India presents a case whereby the same operator might have to fill both the shoes — thereby creating both a challenge and an opportunity.
Investors who are willing to take on the mantle of high operational involvement along with financial due
diligence, and, more importantly, can deliver both, will probably be the ones standing to benefit from the
success stories in India.
Additionally, careful study of the issues faced by investors in both distressed consumer and infrastructure companies in India will illustrate that a lack of visibility around cashflows was probably one of the primary reasons why the investments went sour. More so, as an investor, one must have the capacity not just to have a high level of visibility around cashflows but also control the cashflows. Controlling the cashflows is where the point about having a significant operational involvement comes into the picture. Effectively, “hands-on” investors in India will have a substantial advantage with both generating returns and protecting their downside.
Dmart also has valuable lessons for policymakers, regardless of whether one is looking at the consumer or the infrastructure sector. The need to have a high level of involvement in both the operational and financial aspects of the business implies that regulators must look at how the concept of efficient credit institutions in India be taken further to create credit institutions that have both the capacity to finance and operate a business.
One major issue lenders faced over the last decade was the debt holders did not have enough protection on the financial side and weren’t equipped to be involved in the business operationally. To ensure that mistakes of the past are not repeated, a new set of credit institutions will have to come to the fore. While pure-play financial lenders will have a significant role in the economy, at least in the wholesale financing markets, more dual capacity operators will be needed to indeed finance the investments that India needs.
While the Dmart success story was built on the consumer retail side, there are some additional takeaways for policymakers as well. Low prices for consumers was ensured in a space that allowed for both business profits, a competitive industry and consumer benefits without any price regulation. While certain infrastructure sectors do tend to be more “monopolistic” in nature and lessons from a consumer business may not be directly applicable, a move towards greater competition combined with more price deregulation must be considered.
Primarily, India will have to think of price deregulation, albeit to some extent, to create yields on investments that are globally competitive. Indian returns need to attract not just global capital but more
importantly, domestic capital. While policymakers must, of course, ensure that consumers benefit, a robust market will need attractive assets. Price deregulation, combined with a competitive market, will be required. India must avoid the peril of artificially low prices that discourage investments, thereby leaving India with infrastructure that suffers in both quality and quantity.
A two-decade success story of a retail business in India has much to teach investors and policymakers. The holy grail of investor returns and value generation for consumers can happen in parallel if investors and policymakers adopt the appropriate approach.
(The views expressed in this article are personal and that of the author. The author heads Development Tracks, an advisory firm. You can contact him at [email protected] or @Taponeel on Twitter)