Buy V‐Mart Retail Ltd For Target Rs.2,400 - Yes Securities
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3Q investor call takeaways
Underlying demand still weak, good work on cash flows and margins; expect some correction post recent run‐up
* Our view – After the recent run‐up, we believe some correction can be expected in the near term with underlying demand still exhibiting weakness, competition not reducing significantly and some pressure on margins expected with normalization of costs and yarn inflation. While the medium to long term outlook remains strong with V‐Mart expected to gain market share and successfully scale up its presence in new geographies, current valuations look rich. We would suggest waiting for corrections for fresh entry in the stock. The upcoming equity fund raise can also lead to some correction. We maintain our estimates for now with a TP of Rs 2,400 based on 40x FY23E earnings.
* Management commentary – Industry situation has improved significantly as festive demand was good and social events have restarted; frequency of visits from shoppers remained low but average bill size increased; farmer income increased but spending still cautious given uncertainties; urban businesses also coming back to normalcy gradually; winter portfolio did well supported by good marriage season but still not fully normalized; small unorganized apparel retailers under pressure due to supply chain, liquidity and social distancing issues; some regional retailers also faced inventory and cash flow issues; national retailers continued to expand footprint; e‐com following discounting strategy.
* Quarter highlights – Smaller towns have fared relatively better than larger cities, operational restrictions in few states even in Oct‐Nov; festive period muted in October but recovered sharply around Diwali and winter season; seeing some slowdown again towards late December post marriage season; sharp reduction in inventory from 550 to 360cr yoy in beginning of quarter but still did decent sales; reduced discounting and promotional activities; ASP up 2%, avg bill size up 16%, conversion rate high at 62%; gross margins up 40bps given fresh inventory and high pricing power; per store inventory lower by 35% without aggressive liquidation, shrinkage normalized to 0.9%, 11cr capex in 3Q and 17cr in 9M, 100cr cash on books; restarted expense normalization (21 cr rental savings in 9M); scaling up and streamlining online operations, still less than 1% of sales.
* Demand outlook – Full recovery is still some time away for fashion consumption, could reach 84% of normal sales despite multiple tailwinds like good festive, winter and marriage season indicating some underlying weakness given smaller size of social gatherings and need‐based buying; but don’t see long term impact on demand.
* Regional competition – Consistent execution and growth discipline remain key competitive advantages.
* New store formats – Pilots being run for last year in 6‐7 locations for new formats; new stores will be opened in new formats – Value Dialup format for Tier 4 towns is a value pricing format and Fashion Dialup is a fresh look and feel; will gradually refurbish all stores under new format.
* Employee cost – No reduction in salaries but company did not fill up some positions at store level which will gradually increase now but still remain below historical levels.
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