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In for the long haul

* In the last one-year, the Apparel retail sector has been one of the worst hit and is still operating below pre-COVID levels, raising concerns of a permanent business impairment risk to retailers. Yet what we like about VMART is:

* With a focus on smaller towns and largely on high streets, VMART has seen a better recovery than other Apparel retailers. Footfalls are expected to normalize in the coming 1-2 quarters.

* Value retail has a long runway for growth, with a large lower tier market and a compelling value proposition.

* VMART’s disciplined and strong execution capability is reflected in its healthy store economics, efficient working capital, and largely internally funded growth.

* Its low-cost structure allows it to remain competitive in the market. The liquidity constraints caused by COVID-19 are expected to lower competition.

* VMART is currently valued ~18x FY23E EV-to-EBITDA against its long term sustainable EBITDA growth potential of 20-25%, implying an EV-to-EBITDA to EBITDA growth ratio of 0.7-0.9x. This makes it an attractive bet given the long runway of growth.

Long runway for growth

There is a wide gap of 4-5x between a branded and an unbranded product in the Indian Apparel market. Despite the huge unorganized market in India, growth of Apparel brands has tapered beyond a point. This has led to the emergence of Value retail in the last 7-8 years as it offers consumers products that are priced 20-50% higher compared to unorganized mom and pop shops, but at a much superior and with consistent quality in a healthy modern retail environment. There is a huge dearth of modern retail Apparel stores in smaller towns and cities, given a) Value retail constitutes ~60% of the Apparel market and continues to grow, and b) Only one-third of it is organized and is estimated to grow at 13% CAGR over FY20-25E. VMART has the potential to grow its store count by 2-3x from 274 stores at present.

Extremely disciplined and strong execution capability

In the last 5-7 years, VMART has consistently delivered growth with an efficient capital management. This is reflected in its:

* Very healthy store economics, which is driven by best-in-class cost structure, revenue throughput, and among the lowest capex across peers (refer Exhibit 17 and 24).

* Efficient working capital is key in the cyclical Apparel business as one bad cycle can have a huge impact. The management has ensured that despite steady growth in the number of stores, payable and inventory days remain in a narrow range. During the COVID-19 pandemic, when stressed working capital is straining liquidity, it is operating at 62/187 payable/ inventory days (refer Exhibit 15 and 16).

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