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Healthy revenue recovery at 100% pre-Covid levels

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 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)

Q2FY22 Results: The company exhibited strong revenue traction with V-Mart recording 100% revenue recovery on Q2FY20 base (excluding Unlimited format)

* On a favourable base, revenue grew 93% YoY to | 338 crore. Newly acquired 74 Unlimited Stores in September contributed 6.9% to sales

* Better gross margins and positive operating leverage resulted in V-Mart reporting EBITDA margins of 6.1% vs. loss of | 0.4 crore in Q2FY21

* The base quarter had higher other income (| 15 crore in Q2FY21 vs. | 4 crore in Q2FY22) owing to rental waivers. Subsequently, net loss was at | 19.4 crore vs. | 25.6 crore in Q2FY21

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

* We maintain BUY recommendation on the stock

Target Price and Valuation: We value V-Mart at | 5120 i.e. 22x FY24E EV/EBITDA

Key triggers for future price performance:

* 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 46%, 51%, respectively, in FY21-24E (on favourable base)

* Recent acquisition of ‘Unlimited’ store brand (74 stores) will enable V-Mart to cater to the fashion needs in western and southern markets of India (where V-Mart has minimal presence)

* We expect total retail space to increase at ~19% CAGR in FY21-24E with total area of 3.8 million square feet by FY24E (excluding Unlimited stores)

* Robust liquidity position (| 155 crore as on Q2FY22) to fund store capex requirements and set up new integrated warehousing facility

Alternate Stock Idea: Apart from V-Mart, in our retail coverage we also like Trent.

* Inherent strength of brands (Westside, Zudio, Zara) and proven business model position Trent as a key beneficiary of economy unlock theme

* BUY with target price of | 1300/share

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