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Continues to lead apparel universe in recovery

V-MART recovered ~84% (LTL growth at 81%; HSIE: 80%) of base quarter sales (most within our apparel universe along with Trent). Recovery was led by strong festive and marriage season along with early winter sales. Better inventory relevance/control (translating into lower discounting) led to gross margin expansion. GM expanded 40bp to 36.7% (HSIE: 35%). EBITDAM expanded 131bp to 22.1% (the highest since FY14), led by strong cost control. Working capital (WC) remains smartly managed and the company remains net cash positive. Note: VMART recently raised Rs. 3.75bn (for furthering growth aspirations). We revise our FY22/23 EBITDA estimates by ~3% each YoY to account for marginally higher margins, courtesy a struggling ecosystem. Ergo, revise our DCF-based TP to Rs. 2,650/sh (implying 22x FY23 EV/EBITDA)

* 2QFY21 highlights: Revenue declined 16.4% YoY to Rs. 4.7bn (HSIE: Rs. 4.5bn) - the fastest recovery within our apparel universe given its predominant Tier 2-4 presence and a strong festive and marriage season along with the tailwind of an early winter. LTL growth stood at 81% YoY. Note: footfall recovery (72%) continues to lag top-line recovery (84%). The ASP/average bill sizes/conversion rates remain elevated (+2%/+16%/62% respectively) as consumers continue to prefer purposeful shopping. GM expanded 40bp to 36.7% (HSIE: 35%). EBITDAM expanded 131bp to 22.1% (the highest since FY14), led by strong cost control. Working capital (WC) remains smartly managed and the company remains net cash positive. Inventory levels were down Rs. 1.7bn and -37% on a per store level basis since 4QFY20 – the only apparel retailer to achieve this. PAT declined 18% to Rs. 479mn (HSIE: Rs. 422mn).

* Outlook: VMART’s 9MFY21 gives a glimpse of how an efficient retailer operates during a crisis. We believe that market share gains would expedite in the post-pandemic world as VMART’s strong balance sheet (even so post the Rs. 3.75bn fund raise) meets precariously-placed regional peers (suffering from liquidity challenges). Hence, we maintain our ADD recommendation with a DCF-based TP of Rs. 2,650/sh (implying 22x FY23 EV/EBITDA). FY22/23 EBITDA estimates revised upwards by ~3% each respectively.

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