Radhakishan Damani: An Ace Investor

Since the days of Harshad Mehta, he's known to be the man with the Midas touch in the stock markets. Rakesh Jhunjhunwala's guru and now India's ace retailer, Radhakishan Damani is obsessively low profile but is revered among traders and investors. Kala Vijayraghavan deconstructs the man — the reclusive investor and retailer:

They are three of the best investors in India. Rakesh Jhunjunwala, Ramesh Damani and RK Damani—the last two, no relation to the other—are competitors and players on Dalal Street, but hearty friends off it for nearly three decades now. Whenever they meet, they have plenty to discuss, gossip, share and ask, says Ramesh Damani.

For the past few years, he adds, a poser from Jhunjhunwala to RK Damani has become a fixture during these meetings: "When are you going to list your business and let me buy 10% in it?" It's a poser that usually draws a gentle smile from RK Damani, a pause for silence, before the room reverberates with Jhunjhunwala again. "He doesn't like to talk, he is more willing to listen," says Ramesh Damani.

Radhakishan 'RK' Damani, 59, likes to let his work speak for itself. And it speaks volumes. It tells about a value investor whose portfolio of listed investments, at its last-known market value of Rs 1,731 crore, is an eight-bagger. It tells about a stock market trader who has eyeballed Harshad Mehta and ITC in their prime, and made a killing. It tells about the retail business that Jhunjhunwala covets, one that checks out about Rs 4,500 crore through its cash counters and yet barely registers in the happening retail landscape of India.

For the past few years, the imagery of the Indian retail story has been the naked ambition of its biggest players—the building and breaking by Kishore Biyani, the try-again approach of Mukesh Ambani, the tripping of Walmart on its own toes. They have all grown. But they have also bled. Amid these upheavals, Damani's retail chain, D-Mart, has grown consistently and profitably— and, in trademark Damani style, silently and unobtrusively.

Since the days of Harshad Mehta, Damani is known to be the man with the Midas touch in the stock markets. He's been Jhunjhunwala's guru. He's revered by traders and investors. But outside that community, even in the larger business community, few know about him. He's obsessively low profile. So few images of his are available on the Internet that a mention of RK Damani leads people to think about his more high-profile friend and namesake, Ramesh Damani. And that is just fine by RK Damani.

After two weeks of cajoling, Damani met ET late in the evening at his Dalamal Estate office in Nariman Point, South Mumbai. He is dressed, as always, in white shirt and white trousers—an appearance that earned him on Dalal Street the nickname 'White and White'. His first words reveal anonymity as a defence mechanism. "Why don't you just write about D-Mart? I am too small a person," says the man whose net worth, market players estimate, is Rs 5,000 crore. And this is without considering the value of the 52% he directly holds in Avenue Supermarts, the company that controls D-Mart; his investment company, Bright Star Investments, holds another 16% in D-Mart.

D-Mart has not shut a single store since it started in 2000. At last count, it had 73 stores—a fraction of that owned by Ambani and Biyani, but generating per store revenues even they would like. Its revenues have increased from Rs 260 crore in 2006-07 to Rs 3,334 crore in 2012-13, and are projected to hit Rs 4,500 crore this year, which would make it India's third-largest branded retail chain.

It has posted profits at the net level for each of the last seven years. Damani iterates basics. "There are some 25 things that we possibly do differently and consistently," he says. "He is a very focused retailer," adds Kishore Biyani, CEO of Future Group, who knows Damani personally. "There is a simplicity and clarity of thought in his approach to the business."

Investor To Retailer :

That comes from his days in investing. "Whatever I learnt in life is by investing," says Damani. In spite of a business that is in its growth stages, investing is what takes up most of Damani's time. "Most of the week, I am into investing," he says. "My weekends are for D-Mart."

For Damani, the idea of what a business should be was shaped by analysing companies as investments. On the stock market, he wears two hats. There is Damani the trader, trying to guess the market's swings. There is Damani the value investor, with a liking for brands, cash flows, predictability and the long term—much like the most famous value investor of our times, Warren Buffett (See box). "I liked the consumer business and I invested in such stocks too," he says. "So, there was this strong affinity to start something in the same sector."

In 1999, when retailing was yet just a concept in India, Damani and Damodar Mall, who is currently the CEO of Reliance Retail but was then a brand manager in Hindustan Unilever, took a 5,000 sq ft Apna Bazaar franchisee in Nerul and added one more in Navi Mumbai. Two years on, D-Mart was set up and it took over Apna Bazaar. Damani left the stock market, for six years, marking another professional turn—from trader of ball bearings to investor to entrepreneur.

The early days were about intensive learning, on the job—store layout, billing systems, gaining the confidence of vendors. Mall and Damani would pore over books on Sam Walton, who built Walmart into the world's largest retailer. They would travel to the APMC market in Vashi or Crawford Market, in Mumbai, to interact with wholesalers and traders. "Within six to nine months, we knew we were on to a good thing and had the confidence to apply the model to multiple locations," says Mall, who left D-Mart to join the Future Group in 2005. According to Mall, Damani was hardworking and unassuming.

"He is as comfortable chatting with vendors as with the lowest level of employees," says Mall. "He is not seen as this formidable owner, but as a very simple, unassuming man who is happy chatting with employees with an arm around their shoulders." In the choices he made for D-Mart, Damani focused on three things: customers, vendors and employees.

Business Values 

Take customers. All of D-Mart's stores are in, or close to, residential areas and not in malls. Since it owns 90% of its stores, it ends up paying more upfront but insulates itself from rising rentals or relocation risk. That works for it because D-Mart can use its capital steadily.

It is not chasing growth, it is well capitalised and debt-light, and its operations generate spare cash. As of March 2013, it had Rs 786 crore in shareholder funds and debt of 432 crore. "With owned properties and no cost of rentals, they are, in fact, building assets on their books," says Ruchi Sally, director at retail consultancy Elargir Solutions. Further, in terms of size, D-Mart does not aspire to meet every consumer need like a Big Bazaar. Instead, it aims to meet most regular consumer needs, while offering value for money. "They have a relatively smaller format, which helps them reach store-level profitability much quicker," says Sally. At Rs 53 crore, D-Mart's revenues per store is said to be the highest among grocery chains (a comparison is not possible as Future and Reliance house multiple formats).

"They (D-Mart) buy it low, stack it high and sell it cheap without undercutting," says George Angelo, executive director, sales, Dabur India. Adds a senior manager at a Mumbai based supermarket chain, not wanting to be named: "There is an unsaid rule not to open any store within a radius of one km of a D-Mart. We have come to terms that we cannot beat them on prices."

Vendor relationships are the second pillar of D-Mart's model. "His (Damani's) biggest strength was vendor relationships, having come from a trader background," says Mall. Against the payment norm in the FMCG industry of 12-21 days, D-Mart pays vendors on day 11, a trait that keeps them in the good books of vendors and avoids stock outs. "As a retailer, they are reasonable with vendors," says Angelo of Dabur, for some of whose products D-Mart is the leading seller. "There is a Lakshman Rekha (a line they won't cross) to haggle with vendors."

Nilesh Shah, a seasoned investor himself, sees financial logic in such vendor engagements, which he explains in a way that, initially, sounds counter-intuitive. "The sole motive of RK Damani is not to make money through D-Mart," says the MD and CEO of Axis Capital.

Shah compares D-Mart to Subhiksha, a discount chain that grew using debt and ended up going under. Subhiksha took credit from suppliers to sell to customers, and used its cash for overheads and acquisitions. It was always a spiral where cash disappeared and no wealth was created. "D-Mart, on the other hand, pays suppliers well in time. So, it buys goods cheaper since there is no interest loaded on them and, therefore, its turnover per square foot also increases," says Shah. "Since there is no expansion spree and no interest to be loaded, the model is hugely successful."

That's not to say D-Mart does not rile suppliers. "Since D-Mart buys in bulk to earn higher margins, at times, they run their own promotions through the year," says a sales head of a large regional food company, on the condition of anonymity. "This erodes brand positioning, especially of smaller brands, which find it difficult to sell without a discount tag." Counters Neville Noronha, CEO of D-Mart: "That is an immature view since this is not a one-day game. The incremental volume that D-Mart sells allows us to offer that additional value to the customer."

Profits Over Growth:

Employees are the third pillar of D-Mart's model. What it does not offer by way of money, it makes up by way of flexibility, empowerment and a relaxed, but efficient, work culture. "We are happy even with a 10th standard fail, but with the right attitude and commitment," says Noronha. "What we do is invest heavily in training. And so, even from a basic front-end, when they rise to store-level managers, they are not seen as target candidates by others, who cannot accept a 10th standard fail."

Dheeraj Kampani, who has been with D-Mart for nine years after joining from Spencer's Retail, values the empowerment. "You are just told once about the value system and policies at D-Mart and then given the freedom to operate without somebody constantly looking over your shoulder," he says. "There is a clear focus on what has to be achieved, but there is no mad scramble to achieve targets. If you have stayed a year at D-Mart, it is unlikely that you will ever leave."

In 2004, Neville Noronha was in Hindustan Unilever and interacting with Damani as a vendor. Today, after being convinced by Damani to join as head of business, he is the main man at D-Mart; and unlike the HUL brigade, he neither has an IIT or an IIM degree. "I had nothing more than the passion to compete and be the best," adds Noronha. Noronha iterates Damani's philosophy for D-Mart. "We are not looking at any numbers play," he says. "We do not look too far into the horizon to generate this much or more revenues. What we are, however, very clear about is in following Damani's vision that the business has to be profitable."

That also puts into context D-Mart's expansion startegy, which follows a cluster approach. D-Mart is in Maharashtra (45 stores) and Gujarat (18 stores), and has six stores in Hyderabad and four in Bangalore. "Supermarkets have to have local sourcing and supply to be successful," says Harminder Sahni, managing director of retail advisory firm Wazir Advisors.

"That is where other bigger players faltered because supply chain cannot be pan-India." "We play to our strengths," says Noronha. "Our management bandwidth and cost structures do not allow us to go national for now." Damani, who meets the management once a month, says he is neither looking too far ahead nor interested in tying up with a foreign retailer. He visits D-Mart stores regularly, interacts with employees, looks at merchandise and gives insights.

His two daughters, Manjri Chandak and Jyoti Kabra, are involved on a day-to-day basis, especially in merchandising; Chandak is also on the D-Mart board. "Both like consumer businesses," says Damani. "So, I guide them. They are being groomed more as stakeholders possibly than someone who will actively run the business."

The market buzz is that Damani might yet list D-Mart when sentiment in the stock market improves for good, the main reason being to offer an exit option to employees, friends, family and well-wishers who own equity. "As an investor, I think, D-Mart is a great, profitable model and RK Damani has it in him to deliver great value to shareholders," says Ramesh Damani. "He is exceptionally gifted."

The Value Investor:

For all his mild mannerisms, the legend of Radhakishan Damani was born in a pitched battle. In 1992, when Harshad Mehta, the Big Bull of the time, was ramping up share prices, Damani kept looking at the astronomical valuations— and shorting.

Mehta bought more, prices rose further, Damani sold more. Someone was going to be killed. When it was revealed that Mehta had been siphoning off funds from the banking system, the market collapsed, and Damani made a killing. Damani's conviction was borne out of a notion of 'right price'—or the hunt for value.

Much as he likes to dive into the rush of trading, there's also an old school part of Damani where value is a notion that takes many years to be realised. "He's a brilliant and successful investor, with a combination of being practical and humble at the same time," says Anand Rathi, founder of Anand Rathi Financial Services.

Damani, who joined his brother's stockbroking business at the age of 32 following their father's death, built his fortune by buying multinational stocks during the late-80s and early-90s. "My philosophy is long term, with a horizon of five to 10 years," he says. "If I like something and believe in it, I am committed to it."

That philosophy is demonstrated in his investment portfolio, which is housed in a company called Bright Star Investments. The subset of listed companies in it is a compilation of 31 companies, most of them blue chips, most of them chunks, most of them bought at low valuations.

As of March 2013, the cost price of this subset was Rs 212 crore. Its market value: Rs 1,731 crore. Its largest holding is also its most dramatic. 

In February 2001, Bright Star announced it held 15% in cigarette maker VST Industries, owned by British American Tobacco, and wanted to buy another 20%. It had bought that 15% at an average price of Rs 88 a share. A bidding battle ensued with ITC. VST stayed with BAT. Yesterday, the VST stock closed at Rs 1,700. This values Bright Star's Rs 51 crore holding at Rs 681 crore. And the legend of RK Damani grew.

Source : Above mentioned article appeared in Economic times. Click here for the original link