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Signs of normalization visible with recovery pivoted on upcoming festive season; maintain BUY

* Result summary – Revenue growth of 127.3% yoy but still lower 60% vs 1QFY20, gross margin expansion of 20bps to 31%, EBITDA margin loss reduced to 1.1% vs 7.5% yoy due to operating leverage. Employee costs were higher than our expectations (Rs20mn additional ESOP costs) while other expenses were stable.

* Key metrics  ‐  Footfalls up 107%, conversion rate up from 68.2% to 70.7%, transaction size up 2.9% yoy, Apparel ASP increased 19.4% to Rs 295, shrinkage down by 540bps to 4.9%, inventory normalized during the quarter.

* Store addition ‐ Net addition of 3 stores in 1Q taking total store count to 282 (356 including Unlimited’s 74 stores) with no closures.

* Outlook – Rapid spread of COVID second wave has severely disrupted operations in the company’s key markets with still some states enforcing strict restrictions. June and July trends have started indicating that demand is coming back to normalcy and should see strong momentum starting with the festive season. Price hikes should increase ASPs despite some discounted inventory liquidation.  

Valuation and view –

1Q performance is not a true reflection of VMART’s earnings potential as pandemic‐led operational restrictions impeded growth. While demand momentum is already picking up well in July, the festive season should boost the recovery momentum driving positive SSSGs in 2HFY22. The company did well on the margin front passing on yarn price increases which will benefit margins in coming quarters. For now, the company expects to open 40‐50 stores in FY22 with demand recovery expected from 3Q onwards. Its investments on the new warehouse and omni channel capability development will continue. Despite near term headwinds, company is placing itself in a strong position to capture share especially from regional peers.

Given the soft performance in 1QFY22 and weak consumer sentiment, growth would be impacted in FY22 but should rebound in FY23. Earnings would also be impacted given aggressive capex plans on both new stores and the warehouse. We are maintaining our estimates as hopes remain high from the key third quarter. We are building in Unlimited’s numbers from FY23E, however, if the acquisition is completed in FY22E itself, we will revise our FY22E estimates. Currently, we estimate a revenue/EBITDA CAGR of 53%/52% over FY21‐24E and maintain our BUY rating with PT of Rs 3,979 based on 50x FY24E earnings translating to 19x FY24 EV/EBITDA.

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