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Strong recovery and solid start to festive season, but valuations out of comfort zone; ADD on dips

Our view

V‐Mart’s 85% SSSG recovery during quarter which is seasonally weak is one of the best among peers in fashion retail. Recovery in footfalls with higher conversion rates, improving margins with tight control on cost of retailing are other key positives. We believe Q3FY22 will clock positive SSSG given festive season is already witnessing flattish SSSGs with pre‐winter sales receiving strong response. 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 on the margin front fully passing on yarn inflation which will benefit margins in the coming quarters. For now, the company expects to open 40 plus stores in FY22 and its investments on the new warehouse and omni channel capability development will continue. With its continued capability‐building on manpower and technology front coupled with entry on South, the company looks well placed to capture share especially from regional and unorganized players. But with valuations seemingly running ahead of actual delivery, we would suggest waiting for corrections for a fresh entry, and hence revise our rating to ADD from Buy.

Result Highlights

* Result summary – Revenue came in at Rs3.4bn, growth of 93% YoY, up 8% from 2QFY20 levels with 7% contribution from Unlimited and 1% from VMart standalone. Gross margin expansion of 190bps to 30.7%, EBITDA margin came in at 6.1% vs ‐0.2% due to operating leverage playing out.

* Key metrics  ‐  Footfalls up 89%, conversion rate up from 59.5% to 64.6%, transaction size flat at Rs 838, Apparel ASP increased 19% to Rs 302, shrinkage down by 160bps to 1%, inventory normalized during the quarter.

* Store addition  ‐ Company opened 12 stores during the quarter taking the total store count to 294 stores on 30 September 2021 and 7 thereafter till now to take the total count to 301 stores, in addition to 74 Unlimited stores.

* Outlook – Better than expected SSSG recovery of 85% in Q2 should translate to positive SSSG in Q3FY22 which is the key quarter for the company. Unlimited integration will give a one‐time boost to growth.

Valuation

Incorporating Unlimited numbers from September 2021 onwards, we now build in revenue/EBITDA CAGR of 52%/55% over FY21‐24E. We increase our TP to Rs 4,516 but revise our rating from Buy to ADD (given the recent run‐up and limited further upside) based on 50x FY24E earnings translating to 19x FY24 EV/EBITDA.

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