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Recovery impacted by rural/semiurban slowdown and price hikes taken during Q1; upgrade to BUY due to inexpensive valuation

Our view

V-Mart delivered a 20% SSSG decline in Q1 (vs preCOVID levels) partially impacted by weakness in rural demand in a seasonally weak quarter and excessive price hikes taken. Company passing on full RM inflation through ~20% price hike which protected margins, but footfall and conversions impacted adversely. Unlimited benefitted from better urban sentiment due to its larger presence in Tier1, 2 markets which led to better than expected throughput. While Q1 gross margins were higher, management indicated that gross margins will be 3334% in FY23, operating margin will also be in the range of 9% preInd AS due to Unlimited’s higher cost of retailing. While it will take considerable time to transform Unlimited stores’ operating metrics to match VMart’s, progress on this front should be a key monitorable in coming quarters and management expects to deliver similar margin profile over the long term. For now, the company expects to open 60 plus stores including 1012 stores for Unlimited and its investments on the new warehouse and omni channel capability development will raise overall capex to ~Rs 160cr and bring down inventory level from 110 days to 90 days in FY23. With its continued capabilityuilding on manpower and technology fronts coupled with entry in South, the company looks well placed. As stock has already corrected significantly from its peak to factor in nearterm demand weakness, we see any further decline as an opportunity to accumulate the stock which should restart its upward journey from 2HFY23 onwards when we expect demand trends to improve. We remain structurally positive on the story upgrade to BUY rating due to inexpensive valuation.

Result Highlights

* Result summary – Revenue came in at Rs 5.9bn, growth of 230% YoY with 20% contribution from Unlimited;  20% SSSG from VMart standalone stores vs pre covid. Gross margin expansion of 630bps to 37.3% due to Unlimted‘s higher GM and additional price hikes taken, EBITDA margin came in at 15.1% vs 1.1% due to higher GM

*  Key metrics   Footfalls at 10.2mn vs 11.2mn in Q1FY20, conversion rate down from 70.7% to 62.2%, transaction size increased from Rs 848 to Rs 994 due to higher ASP, apparel ASP increased 25% to Rs 370, shrinkage down from 4.9% to 0.05% in Q1FY22, inventory marginally from 100 days to 104 days during the same period.

Valuation

We maintain our estimates to incorporate Unlimited’s higher gross margin and cost of retailing and now build in revenue/EBITDA CAGR of 46%/47%% over FY2224E with unchanged TP of Rs 3,651 based on an unchanged 50x FY24E earnings translating to 18x FY24 EV/EBITDA and upgrade from Add to BUY rating on the stock.

* Store addition  Company opened 11 stores during the quarter taking the total store count to 391 stores as on 30 June 2022, in addition to 77 Unlimited stores.

* Earnings – PAT at Rs 205mn vs Rs 287mn in Q1FY22.

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