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VMart channel check: “Unlimited” opportunities ahead

After acquiring 74 stores of “Unlimited” from Arvind Fashion, VMart aims to achieve profitability by: a) improving store productivity, b) optimizing cost and c) shutting loss making stores. The company is targeting to achieve an EBITDA margin of 5-6%/7-8% in the near term/long term, respectively. In that context, we visited a few ‘Unlimited’ Stores in Hyderabad along with some peer sets to get a perspective on: a) the changes made since the acquisition as well as store value propositions v/s peers in the region, and b) the store operating metrics and profitability.

Key Highlights

The inventory level improved 15-20%, particularly through new category additions, sharper price points and introduction of VMart’s popular products in the north. However, VMart is yet to see material progress in the “Sarees” segment that is a big pull in the southern market.

The store operating metrics were decent with productivity at INR7.2k/ sq.ft. annually (15% below pre-COVID level), achieving ~5% store-level EBITDA margin, as fixed overheads saw 5-10% cost optimization. Rent remained the biggest drag at 14% of sales; inventory turns were at ~3x.

While comparing the product profiles of regional chains such as KLM Fashion Mall and South India Shopping Mall with ‘Unlimited’, we noticed a marked difference. These regional peers have: a) nearly onethird contribution from Sarees, b) been operating at low gross margin of ~25% but very high (>2x) throughput (v/s ‘Unlimited’) at INR20k/sq.ft. annually

We believe productivity improvement will primarily drive the recovery in “Unlimited” stores as cost has limited lever. The recovery could take more than 4-6 quarters with closures of 7-8 non-profitable stores. This will remain the key to VMart’s overall earnings growth.

Unlimited growth opportunities ahead; reiterate BUY

While the improved throughput and profitability under ‘Unlimited’ value retail chain along with aggressive store additions are expected to drive steady growth for VMart, the sluggishness in rural markets witnessed in 3QFY22 as well as the adverse impact on demand due to the increase in prices could remain the key overhangs that need to be monitored. We factor in 36%/46% revenue/EBITDA CAGR over FY22- 24E, respectively.

Consequently, we maintain our TP of INR4,450 on the stock, assigning 20x EV/EBITDA on Mar’24. Given the huge growth opportunity in the value fashion segment and VMart’s strong execution ability, it has the potential to achieve 25-30% EBITDA/PAT growth sustainably in the long run backed by 20%+ revenue growth (SSSG + new store adds). Reiterate BUY.

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