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Buy V-Mart Retail Ltd For Target Rs.3,920

Recovery in sight; poised for steady growth

* V-Mart Retail (VMART)’s revenue was up 2.3x YoY, 61% below pre-COVID levels (1QFY20). This is closer to other retailers’ performances, as the second COVID wave has seen lower impact. EBITDA loss at INR20m recovered 67% YoY (6% miss).

* Given the expectation of swift recovery from the second COVID wave lockdowns by 3QFY22, we raise our FY23E revenue/EBITDA estimates by 7%, factoring in a revenue/EBITDA CAGR of 12%/14% over FY20–23E. The recent acquisition announcement of the “Unlimited” Value Retail chain and aggressive store additions in core markets should drive steady growth – which may be well-supported by a lean balance sheet, supported by the recent QIP. Maintain Buy.

Rev at 61% below pre-COVID levels; EBITDA loss at INR20m (6% miss)

* V-Mart’s 1QFY22 revenues were up 2.3x YoY to INR1.7b (4.3% miss). However, revenues were down 61% v/s pre-COVID levels of 1QFY20. (ABFRL / Shoppers Stop / Trent were down by 63%/76%/57%).

* Gross margins remained stable YoY at 31% (+20bps YoY) and improved 120bps on a QoQ basis despite rising RM costs. This was attributable to a 19% increase in ASP on the back of a 5–6% price increase and a favorable mix of higher value products.

* EBITDA loss came in at INR20m, recovering 66.5% YoY (5.7% miss), aided by strong recovery in revenues. Adjusted for an INR20m ESOP cost impact, EBITDA achieved breakeven during the quarter.

* Other income grew 3.2x YoY to INR45m. Subsequently, net loss stood at INR287m – recovery of 14.6% YoY (4.4% miss).

* It opened up three new stores (two in Jharkhand and one in UP) during the quarter, taking the tally of total stores to 282.

* Footfall increased 115% YoY to 3.1m during the quarter; Average Selling Price for Fashion increased 19% and Average Bill Size 3% YoY.

Highlights from management commentary

* Recovery in sight: The lockdowns continue to impact store operations in UP, Bihar, and the eastern region. However, strong demand in June/July, gradually easing restrictions, and strong festive/wedding demand should lead to pre-COVID throughput by 3QFY22.

* Margin profile to improve: The gross margin was maintained at 31%, with a price hike of 5–6% cushioning the RM increase; incrementally, cost efficiencies should help improve the operating margin to above preCOVID levels.

* Steady capex plan: The target is to expand its retail space by 20–25%, with capex of INR1b for FY22. Of this, ~INR500m would be spent towards each store adds and new warehouses. Additionally, ~INR1,500m towards the acquisition of the “Unlimited” Retail business.

* Unlimited biz deal integration: This is in-line; it aims to complete the deal and take a handover of the business by 30th August 21.

Valuation and view

* The apparel retailer saw the slowest recovery during the first COVID wave lockdown, but the swift recovery from the second wave lockdowns has been a welcome positive.

* VMART is strongly positioned to compete with regional and national players in the Value Retail segment, given its (a) better performance v/s national peers, (b) strong liquidity (INR3.5b cash as of Mar’21, post the INR3.8b fundraise in 4QFY21), and (c) prudent inventory management amid the pandemic.

* The recent acquisition of the Unlimited business – value retail store chain from Arvind Fashion Ltd, which has a complementing presence in the southern and western markets – at an attractive valuation should certainly give impetus to growth

* Ongoing investments in warehousing and technology infrastructure should debottleneck the backend, supporting sales growth.

* Given the expectation of swift recovery from the second wave lockdowns by 3QFY22, we raise our FY23E revenue/EBITDA estimates by 7%, factoring in a revenue/EBITDA CAGR of 12%/14% over FY20–23E on the back of 40/55 store adds in FY22/FY23E. Furthermore, the Unlimited brand could potentially contribute ~INR350m in EBITDA over the next 2–3 years, i.e., 11% of FY23E EBITDA.

* We assign a 23x FY23E EV/EBITDA multiple to arrive at our TP of INR3,920 (v/s INR3,880 earlier). Given the huge growth opportunity in the Value Fashion segment and V-Mart’s strong execution capability, it has the potential to garner 25–30% EBITDA/PAT growth sustainably for a prolonged period – backed by 20%+ revenue growth (SSSG + new store adds). Maintain Buy.

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