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Well poised to capture value fashion opportunity…

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. We like V-Mart owing to its a) immaculate record of high revenue growth trajectory (revenue CAGR: 23% in FY13-20), b) higher cash conversion model (CFO/EBITDA: ~60%), c) stringent working capital cycle (average NWC days: 50), d) capital efficient business model RoCE: ~25%. The recent QIP worth | 375 crore would further strengthen balance sheet with proceeds being utilised in meeting long term supply chain infrastructure needs by setting up a new warehouse.

Sustained focus on enhancing retail footprint in tier II-IV cities

V-Mart is always believed to possess the first mover advantage having built a robust store network with immense experience (~18 years) in tier II/III cities. The company has 274 stores of which 78% are in non-tier 1 cites. VMart 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, in the last two years, has further expanded its reach in the interior parts of the country by opening stores in tier IV cities (~12% of total stores). The markets in the non-tier 1 cities are largely penetrated by regional and unorganised players. Hence, we believe there lies an immense opportunity to scale up business from current levels. V-Mart is currently present in ~190 cites and expects to penetrate 500 cities and towns.

Robust business model with best in class operating metrics

V-Mart has over the years established profitable store economics with new stores breaking even in the first year of its operations and having a payback period of two and half to three years. With high asset turn of ~6x (capex/sq ft: ~| 1400) and 14% EBITDA margins (ex-corporate expenses), the company generates healthy pre-tax RoIC of ~40% at the store level. Tight leash on operating overheads and lower rental costs (~ | 35/sq ft per month), enables the company to deliver consistent profitability.

Valuation & Outlook

Over the last few years, V-Mart has been able to fund its business growth through internal accruals and IPO proceeds. Barring FY20, the company has over the years consistently generated FCF (cumulative FCF in FY15-19: ~| 86 crore) leading to virtually debt free status. Given the inherent strength of the business model, it has withstood pandemic challenges with revenues recovering to ~84% pre-Covid levels in Q3FY21. While the pandemic may cause near term challenges, we like V-Mart as a structural long term story to play the unorganised to modern retail shift. We pencil in revenue CAGR of 46% in FY21-23E (on a favourable base) with square feet addition CAGR of 20% in the same period. We expect EBITDA margins to remain range bound at ~9% (pre-Ind-AS) as the company focuses on enhancing market share by passing on the benefits on margin. We initiate coverage on the stock with a BUY recommendation and target price of | 3500 (20x FY23E EV/EBITDA).

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