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Growth momentum returns; turnaround of Unlimited remains key

* VMART saw a resurgence in growth, with 12 store additions and 93% YoY jump in revenue, 8% above pre-COVID levels (2QFY20). Excluding onemonth revenue from the recently acquired ‘Unlimited’ stores, it reached pre-COVID levels. LTL stood at 90%. It reported an operating (pre Ind AS 116)/net loss of INR57m/INR141m.

* Recent acquisition of the Unlimited Value Retail chain and aggressive store additions in its core markets should drive steady growth (FY23E PAT revised upward to 25% on incorporating Unlimited stores in our estimates), which can be well supported by a lean Balance Sheet, backed by a recent QIP. We factor in 21%/34% revenue/PAT CAGR over FY20-24E, but a near term improvement in Unlimited stores will be key. We maintain our Buy rating.

Revenue touching pre-COVID levels; store additions gathering pace

* Revenue rose 92.6x YoY to INR3.4b (22.2% beat) in 2QFY22. Revenue grew 8% v/s pre-COVID levels (2QFY20) and 1% above pre-COVID levels after adjusting for revenue from Unlimited stores.

* Gross margin expanded by 190bp YoY to 30.7%, but is still 50bp below pre-COVID levels (-30bp QoQ). ABFRL/TRENT saw a gross margin rise of 350bp/400bp v/s pre-COVID levels, while SHOP saw a 330bp decline.

* Other income included rent concession of INR146.2m in 2QFY21. Adjusting for it, it stood at a mere INR4m.

* Overall cost grew on a YoY basis, with employee/other expenses up 38.6%/99.4%, much below a revenue recovery. As a result, EBITDA recovered to INR206m. On a pre Ind AS 116 basis, operating loss stood at INR57m in 2QFY22, with a net loss of INR141m.

* Net cash declined to INR866m in 1HFY22 v/s INR3.5b in Mar’21 on account of the liquidation of INR2.5b in investments towards working capital (INR1.3b) and funding of losses (INR580m).

* VMART opened 13 stores and closed one store in 2QFY22, taking its total store count to 368. Total stores included 74 stores of Unlimited, which was integrated from 1 st Sep’21. Footfalls, at 6.6m, touched ~80% of preCOVID levels (2QFY20).

Highlights from the management commentary

* Recovery: The management is seeing a healthy improvement, with strong festive/wedding demand as mature stores reach 100% recovery in Sep’21.

* Store expansion: It aims to increase its retail space by 20%-25% and plans to open more than 40 stores in FY22.

* Unlimited stores should reach VMART’s level of throughput and profitability in 1-2 years.

* The management may need to raise prices over and above the 8% price hike taken a few months back, if cotton prices continue to remain at elevated levels. This could impact its volume target. The proposed increase in the GST rate to 12% from 5% for lower price products from Jan’22 could push up prices.

Valuation and view

* A swift recovery from the second COVID wave and a good festive season has led to an improved confidence in its growth trajectory. VMART is strongly positioned to compete with regional and national players in the Value Retail segment, given its better performance v/s national peers, strong liquidity, and prudent inventory management.

* Recent acquisition of the Unlimited Value Retail chain and aggressive store additions in its core markets should drive steady growth (FY23E PAT revised upward to 25% on incorporating Unlimited stores in our estimates), which can be well supported by a lean Balance Sheet, backed by a recent QIP. We factor in 21%/34% revenue/PAT CAGR over FY20-24E, but a near term improvement in Unlimited stores will be key.  We have upped our FY23E/FY24E estimates on the back of: a) higher store additions of 65/75 in FY23E/FY24E, given its aggressive growth plans and VMART’s good execution capability; and b) revenue/EBITDA (pre Ind AS 116) potential of INR5.4b/INR0.3b from Unlimited stores.

* We revise our TP to INR4,900/share on rolling over our valuation to Sep’23E (assigning 23x EV/EBITDA) and incorporating Unlimited stores in our estimate. Given the huge growth opportunity in the Value Fashion segment and VMART’s strong execution capability, it has the potential to sustainably garner 25%/30% EBITDA/PAT growth for a prolonged period, backed by over 20% revenue growth (SSSG + new store additions). We maintain our Buy rating.

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