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‘Unlimited’ to provide expansion into South India…

About the stock:

V-Mart, having over the years built its fortress in non-tier I cities, is well poised to capture market share in the growing ~| 2.5 trillion value fashion industry. The company enjoys strong moats that would provide an edge over increasing competition in tier III-IV regions.

* V-Mart follows a cluster based approach of adding stores within a radius of 50-100 km. This gives it better economies of scales, supply chain efficiencies and better understanding of fashion needs of the specific region

* The company, over the last two years, has expanded its reach in the interior parts of the country by opening stores in tier IV cities (~12% of total stores)

Conference call highlights:

We attended the V-Mart conference call with regard to its acquisition of ‘Unlimited’ store brand from Arvind Fashions.

The key highlights of the same are mentioned below:

* V-Mart has signed definitive agreements to acquire 74 existing stores from Arvind Lifestyle Brands, a subsidiary of Arvind Fashions, for a cash consideration of | 150 crore. The company will also make some contingent payments (2% of revenue in first two years and 1% of revenue in the third year) based on achievement of certain revenue related milestones

* V-Mart is one of the strongest players in value fashion in the northern and eastern region, primarily operating in tier II/III cities. It operates on a cluster based philosophy and did not have a presence in southern India. With the acquisition of ‘Unlimited’ store brand from Arvind Fashions it will be able to have another 74 stores in its portfolio and cater to the fashion needs of family in western and southern markets of India

* V-Mart is likely to continue its one nation one brand strategy. However, they may decide further course of action depending on customer response. VMart currently has 282 stores and post this acquisition the store network would increase to 356 stores with presence in 229 cities

What should investors do?

V-Mart has been a consistent compounder with stock price appreciating at 45% CAGR in the last five years.

* We continue to remain structurally positive and maintain BUY rating

Target Price and Valuation: We value V-Mart at | 4100 i.e. 22x FY23E EV/EBITDA

Key triggers for future price performance:

* Factoring in the acquisition, we increase our FY22E-23E EBITDA estimates by 6-10%, respectively

* We like V-Mart as a structural long term story to play the unorganised to modern retail shift. We pencil in revenue, EBITDA CAGR of 62%, 66%, respectively, in FY21-23E (on favourable base)

* Robust liquidity position (| 415 crore as on FY21) to fund capex requirements and investments towards ‘Unlimited’ format.

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