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Key takeaways from V-MART’s Q3FY21 earnings: 1) bundling of festive and early winter seasons restricted revenue decline to 16% YoY; management mentioned full recovery will take some time; 2) average basket size, apparel average selling price, and footfall conversion were higher by 9%, 2% and 7% YoY; 3) company added 10 stores (net) during the quarter taking the total store count to 274; maintained guidance of 20-25% p.a. area additions in coming years; 4) net cash was >Rs1bn as of Dec’20. V-MART is well positioned to capture growth opportunities in tier 2-4 cities with aggressive store openings and first-mover advantage. We like the company’s revenue growth potential, timely execution and best-in-class return ratios. Factoring better cost efficiencies on increasing scale, we raise our FY22E-FY23E pre-Ind AS 116 EBITDA by 10% and raise our DCFbased target price at Rs2,900/sh (earlier: Rs2,500) on FY23E (on half-yearly rollover). Key risks: slower recovery in discretionary spends, and increasing online competition.

* Revenue declined restricted to 16% YoY to Rs4.7bn with LTL sales at 81% owing to bundling of festive and early winter seasons. Company’s two largest markets (Uttar Pradesh and Bihar) accounted for 66% of sales in Q3FY21. Customer footfalls declined by 28% YoY owing to partial curfews and restrictions on public movement in some markets. This was more than offset by 9%, 2% and 7% YoY higher average basket size, apparel average selling price, and footfall conversions.

* Pre Ind-AS 116 EBITDA likely declined 19% YoY to Rs764mn owing to lower revenues and higher rental costs. Gross margin expanded 36bps YoY to 36.7% on better sales mix. Lower employee costs (down 20% YoY) was more than offset by increase in all other overheads. Accordingly, EBITDA margin shrunk 55bps YoY to 16.2% in Q3FY21. Management mentioned cost structure is likely to increase in coming quarters with higher yarn prices and restoration of some costs. V-MART witnessed rental savings of Rs20mn in Q3FY21 (Rs210mn in 9MFY21) with no major savings expected in Q4FY21. Post Ind-AS EBITDA (including other income) declined 11% YoY to Rs1bn. PAT declined 18% YoY to Rs479mn.

* Opened 11 stores (10 on net basis) in Q3FY21 taking the total store count to 274. Capex for the quarter stood at Rs110mn. Management maintained its guidance of area additions of 20-25% p.a. in coming years. In Sep’20, the company passed an enabling resolution to raise up to Rs5bn to explore various growth opportunities, which is still under evaluation.

* We model 12-17% revenue / EBITDA / PAT CAGR over FY20-FY23E. Our DCFbased target price implies 18% EBITDA CAGR over next 10 years discounted at 11% WACC and assuming 6% terminal growth.

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