In this week's wrapup we talk about changing fortunes for the top dogs in their industries and we will start with the mercurial retail store DMart.

India’s own Walmart — DMart.

This is a company that has done extremely well. If you’ve been to one of their stores, you probably already know why. If you haven’t, let me break it down to you.

DMart is an Indian hypermarket chain but unlike most other hypermarkets like a Big Bazaar or a Reliance Retail, they follow a very different approach. Instead of diversifying into high-value products like electronics, jewellery, etc., DMart mostly sticks to essentials like groceries.

The idea here is simple.

High-value items offer you higher margins but they also take time to sell. However, if you sacrifice margins for volumes you could get products moving out of your storefront like hot potatoes. Anything that doesn’t sell quickly is replaced with something that does. And while these stores might not exactly offer you a lot of variety or rich customer experience, it does offer you bargain deals.

In effect, DMart sells daily use items to consumers at a price often below MRP in a bid to keep turning over inventory. And this strategy allows them to negotiate with their suppliers and seek a better price. The better price translates to more discounts. And more discounts translate to higher sales volume.

In the end, DMart makes a ton of money.

Or at least that’s the popular narrative.

But that’s not entirely true.

You see, DMart also sells general merchandise and apparel — a segment that offers higher margins than your run of the mill groceries. And during the nine months that ended on December 31st 2019, this segment accounted for 29% of DMart’s revenues. Unfortunately, they couldn’t sell this stuff during the lockdown, and that in turn brings us to the results.

The company released its results for the March quarter last week, revealing that revenue was up by 23% compared to the quarter last year and profits were up 41% on the back of some excellent performance and a slight reduction in tax outgo.

However do bear in mind, businesses were up and running for most of March. And the 9 days of muted sales (during which the nationwide lockdown was in force), had little bearing on the company’s overall performance. However, things are probably going to take a turn for the worse in the ongoing quarter (June).

And here's why

We already know they couldn’t sell the high margin apparels. They also had to close down nearly 50% of its stores when the lockdown began. There’s also this concern about footfall. After all, DMart stores are notorious for being overcrowded all the time. With social distancing rules in force, overcrowding isn’t something we are likely to see anytime soon.

And DMart has already confessed that sales for the month of April were down 45% compared to last year. Meanwhile, operational costs increased as the company paid hardship allowance to its frontline staff and bore higher hygiene and sanitation costs. Great stuff from DMart but it does hurt the bottom line.

So despite being one of the most prodigious stocks in the Indian markets for a while now, this lockdown has been a strong levelling force even for the mighty DMart.

And now you know why.

Indigo's Dollar problem

Also Indigo posted a loss for the March quarter - ₹873 Crores. You can find a detailed analysis of the results here. But we have something more interesting for you. You see, a bulk of the loss could be attributed to an unusually high foreign exchange expense. It's not something that's often talked about. But it's still remarkable how this little expenditure can sour an airline's prospects.

So here's how this works.

Indigo doesn't buy all of its aircraft. Instead, they purchase them on lease. So technically they owe the aircraft manufacturers billions of dollars and they make a note of this liability on their accounting statements.

However, do bear in mind that this debt burden is denominated in dollars. But they are making notes out here in rupee terms. And so if the value of the rupee depreciates, that debt burden has to be revalued as well.

Think of it this way

A $100 million lease liability equals ₹700 crores (When $1=70)

But if the Rupee depreciates

That $100 million liability now equates to ₹756 crores (When $1=75.6)

The additional 56 Crore is treated as a loss. That’s accounting for you. And since the rupee depreciated drastically during the March quarter, the company recorded a whopping loss of ₹1040 crore from just revaluing this liability.

Ouch!!!

The Takeaway

Now the results aren’t exactly a surprise. Everybody knows that the airline industry is in a spot of bother. People are afraid to take to the skies. The travel & tourism industry is crippled. And we still can’t see the light at the end of the tunnel. But Indigo is still the market leader. It’s still the most robust airline in the country. And so, despite the precarious conditions plaguing the industry, Indigo is still the top dog.

As they say, in a blind man's world, the one-eyed man is king.

Quote of the week

Whilst addressing Real Estate Developers, Honourable Minister Piyush Goyal had this to say -

"Unless you reduce your rates, you are stuck with your material. You can choose to be stuck with your material and default with the bank and let the material go away, or you can choose to get rid of whatever you bought at high prices. You can think it as a bad decision or an unfortunate situation and move forward"

Double Ouch!!!

There’s been a concerted effort from multiple corners to boycott Chinese products of late. While the sentiment is understandable, the approach is unlikely to yield the desired outcomes. And so, here’s a story from our daily newsletter, explaining why replacing boycotts with incentives might be a better alternative.

Finshot's Special - The "right" way to boycott china

Read more

• Stake for everyone – Also, Jio Platforms continues to raise money from outside investors in an attempt to reduce RIL’s (Reliance Industries Limited) debt burden and here’s a neat infographic to make sense of what's been happening on this front.

• It just got Moody in here – In other news, there was that ratings downgrade from Moody’s that upset a lot of people. They were basically telling investors our country is no good i.e. that lending money to the Indian government could potentially be catastrophic. Not everybody agrees with this assessment of course but it is what it is. Here’s a quick explainer on the subject to get you up to speed.

See you next week ...