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Recovery continues to be impacted by rural/semi‐urban slowdown and Unlimited consolidation; maintain ADD

Our view

V‐Mart delivered a 3% SSSG decline in Q4 (vs pre‐COVID levels) partially impacted by Omicron wave disruptions and weakness in rural demand in a seasonally weak quarter. Company passing on full RM inflation through ~17% price hike which protected margins and positive EBITDA at Unlimited during Q4 were key positives. Unlimited benefitted from better urban sentiment due to its larger presence in Tier‐1, 2 markets which led to better than expected throughput but still lower than pre‐covid levels. While management indicated that gross margins will be 3‐5% higher than normal levels in next 1‐2 years, operating margin will not scale upwards to the same extent due to Unlimited’s higher cost of retailing. While it will take considerable time to transform Unlimited stores’ operating metrics to match V‐Mart’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 10‐12 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 capability‐ building 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 near‐term 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 but maintain ADD rating given near‐term demand concerns in tier 3, 4 markets. 

Result Highlights

Result summary – Revenue came in at Rs 4.6bn, growth of 30% YoY with 16% contribution from Unlimited;  ‐3% SSSG from VMart standalone stores. Gross margin expansion of 510bps to 34.9% due to Unlimted‘s higher GM, EBITDA margin came in at 11.5% vs 9.5% due to higher cost of retailing at Unlimited.

Key metrics ‐ Footfalls up 11%, conversion rate up from 61% to 63%, transaction size increased from Rs 851 to Rs 981 due to Unlimited’s Rs 1,776 transaction size, V‐Mart’s apparel ASP increased 17.5% to Rs 384, shrinkage down from 2% in FY21 to 1.3% in FY22, inventory marginally up to 121 days during the same period.

Valuation

We tweak our estimates to incorporate Unlimited’s higher gross margin and cost of retailing and now to build in revenue/EBITDA CAGR of 46%/47%% over FY22‐24E and revise our TP to Rs 3,651 based on an unchanged 50x FY24E earnings translating to 18x FY24 EV/EBITDA and maintain our ADD rating on the stock

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