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Visible green shoots before 2nd COVID wave; expect swift recovery

* V-Mart Retail (VMART)’s revenue was up 6% YoY (8% beat), driven by pentup demand for shopping. The EBITDA beat was much stronger (99% beat), led by improving gross margins and cost measures.

* We revise down our FY22 revenue/EBITDA estimates by 31%/33% due to the impact of the second wave, but maintain FY23 revenue/EBITDA estimates given the expectation of swift recovery. The company’s strong cost leadership, lean balance sheet, and secular growth opportunity should keep it in good stead. Maintain Buy.

Revenue/EBITDA beats estimates; company remains debt-free

* V-Mart’s 4QFY21 revenue was up 6% YoY (Westside/SHOP: nil/-5%), 8% above estimates, led by recovery in footfall in 4QFY21.

* Over the last 3–4 quarters, VMART has consistently performed better than other retail apparel peers. This is attributable to a lower impact in Tier II/III regions and downtrading by consumers in line with our channel checks.

* The gross margin improved 130bp YoY and is at the higher end of the longterm margin of 29–30% garnered in 4Q historically. Cost savings in fixed SG&A have been healthy (~25%), but below normal levels.

* EBITDA was up 21% YoY to INR336m, with a 120bp margin improvement to 9.5%, beating our estimate by nearly double.

* VMART posted net loss of INR15m v/s loss of INR84m YoY (est. -INR170m) – as revenue is estimated to still be 10% below normalized levels.

* Same-stores sales growth (SSSG) was up 10% YoY on account of the low base of last year; the company added five new stores in 4Q, taking the total store count to 279.

* FY21 revenue/EBITDA declined 35%/39% to INR11b/INR1.3b; net loss stood at 62m (v/s PAT of INR493m in FY20) as the company added 13 new stores in FY21 (v/s 52 new stores in FY20).

* OCF/FCFF increased 73%/3.4x to INR1.5b/INR1b in FY21 on account of release of cash from working capital and lower capex during the pandemic year. Net cash stood at INR3.5b as of Mar’21.

Highlights from management commentary

* Recovery:

Only 20–30 stores are operating (with fewer operating hours) in 1QFY22, but monsoon and agricultural incomes have been good. Hence, the management expects sharp demand recovery post the easing of the lockdowns.

* It targets omni-channel sales of over 5% of total sales over the next few years, with increased digital investments, the focus on digital adoption, and changing customer preferences.

* The management maintains a target of 40+ store openings (~20% new stores) as pandemic conditions relax.

* It is negotiating with landlords for rental waivers once again, but given that its rentals are among the lowest in the industry, waivers may be lower than in FY21.

Valuation and view

* Apparel retailer sales have trailed to other discretionary category sales – which have achieved strong growth v/s pre-COVID levels as consumers have been very selective with their discretionary spending.

* While demand for apparel was already below pre-COVID levels – due to the lack of social gatherings and weddings – the second COVID wave has further pushed recovery for apparel retailers.

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

* The management remains committed to investing in scaling up the online platform and targets online sales to form ~5% of the sales over the next 3–5 years. At the same time, it would invest in warehousing and technology infrastructure to support demand and sales growth.

* We factor in FY23E revenue at 31% above FY20 levels on the back of 42% footprint addition during this period, thus leaving further room for improvement in throughput. The EBITDA margin at 13.5% is estimated to be 60bp above FY20 levels. This is attributable to the lower EBITDA margin seen in 4QFY20 due to the COVID impact and the expectation that of better cost efficiency coming out of the COVID crisis in FY23.

* We assign a 22x FY23E EV/EBITDA multiple to arrive at TP of INR3,500. 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). We retain our Buy recommendation.

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