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Steering ahead in a weak market

* Weakness in revenue continued – down 16% YoY (6% below est) thus far – while EBITDA/PAT decline was cushioned (down 11%/18% YoY, ahead of est.) on the back of better GM and good cost management in a weak quarter.

* Maintain EBITDA estimates for FY22E at 10% growth over FY20 on the back of a) -11% same-store sales growth (SSSG), b) 30% footprint adds over FY20–22E, and c) recovery in the EBITDA margin to FY20 levels. Maintain Buy.

EBITDA beat of 17%, driven by sharp cost measures

* V-Mart Retail (VMART)’s 3QFY21 revenues declined 16% YoY to INR4.7b (6% miss) as weakness in customer footfall continued. However, revenue performance was better v/s 2QFY21 (down 44% YoY) and v/s urban-centric peers (which reported 29% revenue declines YoY). This suggests the rebound in tier 2/3 cities has been better than in the urban market.

* Gross margins recovered to 36.7% (+40bps YoY) v/s a 400bp fall in 2QFY21, attributed to limited discounting and a lean inventory position with no provisioning.

* Overall cost-cutting was fairly healthy, with employee/other expenses down 21% YoY – despite the complete resumption of operations and aggressive marketing by the management to drive sales. 2QFY21 saw 41% YoY decline in costs on account of stores being non-operational.

* EBITDA declined 11% YoY (17% beat) to INR1b on account of better-thanexpected cost measures. Subsequently, PAT came was down 18% YoY to INR479m (32% beat).

* Same-stores sales dropped 19% YoY on account of restricted activity. Nevertheless, the company added 11 new stores in 3Q, taking the total store count to 274.

Highlights from management commentary

* Gradual MoM improvement is seen in sales despite the COVID impact and weak wedding shopping – as consumer spending remains constrained. However, expect gradual market recovery in the coming quarters.

* The company achieved INR210m rental savings in 9MFY21 (INR20m in 3QFY21); no major savings are expected in 4Q.

* Maintain the long-term target of 25–30% new store adds/year.

* V-Mart plans to refurbish stores in the ‘Value’ dial-up and ‘Fashion’ dial-up formats; the company would renew stores in the new format design. Capex would remain at similar levels for the refurbishing of the new format stores.

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