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Rural slowdown delayed recovery while inflation and higher cost of retailing at Unlimited impacted margins; maintain ADD

Our view

V‐Mart’s 9% SSSG decline in Q3 looks underwhelming in a seasonally strong quarter given the impact of slowdown in its key smaller towns/rural markets and competition from large organized retailers. Unlimited benefitted from better urban sentiment due to its larger presence in Tier‐1, 2 markets which led to better than expected throughput. Liquidation of old inventory and higher cost of retailing at Unlimited impacted V‐Mart’s overall profitability. 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. The company did well in passing on yarn inflation (8‐10% pricing benefit) which should help protect margins in the coming quarters, but will continue to impact volume growth. For now, the company expects to open 60 plus stores in FY23 and its investments on the new warehouse and omni channel capability development will continue. 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 challenges on volumes and margins, we see any further decline on this result disappointment as an opportunity to accumulate the stock which should restart its upward journey from FY23 which should be a strong growth year for the company. We remain structurally positive on the story but maintain ADD rating given relatively rich valuations which limits absolute upside.

Result Highlights

* Result summary – Revenue came in at Rs6.9bn, growth of 47% YoY, up 11% from 3QFY20 levels with 17% contribution from Unlimited; 1% growth and ‐9% SSSG from VMart standalone stores. Gross margin expansion of 30bps to 37%, EBITDA margin came in at 19.6% vs 22.1% due to higher cost of retailing.

* Key metrics  ‐  Footfalls up 34%, conversion rate down from 62.1% to 60.6%, transaction size increased from Rs 968 to Rs 1,096, Apparel ASP increased 13% to Rs 503, shrinkage up by 100bps to 1.9%, inventory marginally up in 9MFY22.

Valuation

We trim our margin estimates to build in higher cost of retailing at Unlimited which will take a few quarters to streamline in addition to margin pressure in the base business on account of inflation. We now build in revenue/EBITDA CAGR of 50% each over FY21‐24E and revise our TP to Rs 3,912 based on an unchanged 50x FY24E earnings translating to 19x FY24 EV/EBITDA and maintain our ADD rating on the stock.

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