Neutral Vedant Fashions Ltd For Target Rs.475 by Motilal Oswal Financial Services Ltd
Muted performance; recovery in 2H remains key watch
* Vedant Fashions (VFL) reported a muted 2QFY27, with customer sales largely flat YoY due to ~5.8% YoY SSS decline and continued store closures, amid a shift in the festive and wedding calendar.
* Gross margin (after job charges) contracted ~35bp YoY to 64.9% (~110bp beat), while reported EBITDA declined ~5% YoY (3% miss), as margin contracted ~310bp YoY to 39% (~215bp miss), due to operating deleverage.
* Domestic EBO count declined to 497 stores (vs. 501 QoQ), with retail area largely stable QoQ at ~1.67m sqft. Management expects store additions to accelerate in 2H and targets mid-single digit network expansion in FY27.
* Management noted that SSSG was in positive territory in 2Q, when adjusted for last 10 days. It reiterated the aim to achieve high single digit to early double digit SSSG over the medium term.
* We fine-tune our FY27-28 estimates and now forecast a ~6-8% CAGR in revenue, reported EBITDA and PAT over FY26-29.
* The wedding calendar improves over the next few quarters, which should help VFL, however, we await evidence of a sustainable demand recovery and earnings acceleration before turning constructive. Maintain Neutral rating on VFL with a revised TP of INR475, premised on 25x Dec’28E EPS.
Muted quarter; operating deleverage drives EBITDA margin below 40%
* Customer sales grew 0.6% YoY at INR3.5b, as SSS declined ~5.8% in 2Q.
* Domestic EBO count declined to 497 in 2QFY27 (vs. 501 in 1QFY27), while EBO area remained stable QoQ at 1.67m sqft.
* 2Q revenue grew ~2% YoY to INR2.7b (vs. our estimate of flat YoY).
* Gross profit (after job charges) inched up ~2% YoY to INR1.75b (vs. our est. INR1.68b), as gross margin contracted ~35bp YoY to 64.9% (~110bp beat).
* Employee expenses increased ~5% YoY (4% above our est.), while other expenses rose ~18% YoY (22% above estimates), reflecting elevated operating costs amid subdued revenue growth.
* Reported EBITDA declined ~5% YoY to INR1.05b (3% below our est.), as EBITDA margin contracted ~310bp YoY to 39.0% (~215bp miss), due to weaker gross margin and operating deleverage.
* PAT remained flat YoY at INR562m (in line), despite the ~5% decline in EBITDA, supported by lower finance costs (-14% YoY) and higher other income (+17% YoY).
Valuation and view
* Over the past few years, VFL’s sales have stagnated (<3% CAGR since FY23) due to higher competition, subdued demand sentiment in mid-premium categories, and an uneven wedding calendar.
* While the wedding calendar creates quarterly fluctuations, VFL’s growth has been structurally weak for the past few years despite a largely stable number of wedding days in FY24 and FY26 (refer: Exhibit 4 and 5).
* We believe rising organized competition in ethnic wear, coupled with a slowerthan-expected shift from unorganized to organized in ethnic wear, has been the key headwind for VFL.
* We fine-tune our FY27-28 estimates and now forecast a ~6-8% CAGR in revenue, EBITDA and PAT over FY26-29.
* The wedding calendar improves over the next few quarters, which should help VFL, however, we await evidence of a sustainable demand recovery and earnings acceleration before turning constructive. Maintain Neutral rating on VFL with a revised TP of INR475, premised on 25x Dec’28E EPS.
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