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Navigating turbulent times; downgrade to ADD

* Result summary – In‐line performance with 6% yoy revenue growth, gross margin expansion of 130bps and EBITDA margin expansion of 110bps to 9.5% and lower yoy net loss of Rs 15mn.

* Key metrics  ‐  Footfalls down 11%, conversion rate up from 55% to 61.1%, transaction size up 7.7% yoy, Apparel ASP down 8.4% to Rs 327, shrinkage down by 30bps to 1.3%.

* Store addition  ‐ Net addition of 5 stores in 4Q taking total store count to 279, opened 20 and closed 7 stores in FY21.

* Commentary  ‐ Fresh merchandise and pent‐up demand coupled with improved sentiment drove strong recovery with March clocking positive SSSG, expect recovery from 2Q onwards, comfortable on current inventory despite some overstocking due to expected festive and summer demand.

Valuation and view –

V‐Mart reported an in‐line performance which looks better than its urban retail peers but still a tad disappointing given the low base indicating some underlying demand weakness. While demand momentum was picking up well till mid‐March driving positive SSSGs in March, the second wave has again disrupted that and should take a couple of quarters to pick up again. The company did well on the margin front passing on yarn price increases and maintaining fresh merchandise which led to margin improvement.

For now, the company expects to open 40‐45 stores in FY22 with demand recovery expected from 2Q onwards, while margins could again be below normal levels given limited room for further cost savings. Its investments on the new warehouse and omni channel capability development will continue unabated. Despite near term headwinds, company is placing itself in a strong position to capture share especially from regional peers.

Given the expected washout in 1QFY22, weak consumer sentiment and some inventory build‐up, growth would definitely be impacted in FY22 but should rebound in FY23. Earnings would also be impacted by aggressive capex plans on both new stores and the warehouse. We, therefore cut our FY22 and FY23 EPS estimates by 23% and 11% respectively (build in a 49% revenue and 54% EBITDA over FY21‐23E from a low base) which leads to a lower upside despite a higher multiple of 60x vs 55x earlier which balances the near‐term weakness with structural long‐term positives. Therefore, we downgrade the stock to ADD from Buy with a revised PT of Rs 3,000 (from Rs 3,089 earlier) based on 60x FY23E earnings and 19x EV/EBITDA.

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