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* Vedant Fashions (VFL) reported a healthy quarter, with revenue/PAT growth of 15%/23% (13% beat) led by steady 11% growth in store additions and cost optimization (including a reduction in director remuneration). Growth of 21% in sales to customers and SSSG of 14% in 4QFY23 (~7% revenue growth for 2HFY23) are positive factors after a 3% decline in customer sales witnessed in 3QFY23 as wedding dates shifted to 4QFY23.

* A consistent 15% CAGR in footprint addition over FY23-25 and 5% SSSG should translate into consolidated revenue/EBITDA CAGRs of 20%/21%. Positive commentary on emerging brands (Mohey and Twamev) and plans to launch 8-10 independent stores offer an upward bias. We retain our BUY rating with a TP of INR1,435.

PAT growth of 23% YoY aided by revenue growth and cost control

* Net revenue grew by 15% YoY to INR3.4b (in line), led by 11% store growth YoY and 14% SSSG YoY.

* Total sales to customers grew 21% YoY to INR4.8b v/s a 3% decline in 3QFY23 as the shift in wedding dates was witnessed to 4QFY23.

* Blended revenue per sqft grew by 1% to INR2,390 and revenue per store (Calc.) increased by 3% YoY to INR5.3m.

* Gross margins contracted 310bp YoY to 71.8%, mainly hit by higher RM costs. As a result, gross profits grew by 10% YoY to INR2.5b (in line). GP (incl. Job worker) grew by 15% YoY to INR2.2b, with margin at 66%.

* The decline in gross margin was offset by lower employee costs and other expenses (including savings from lower director remunerations.) This led to EBITDA growth of 17% YoY to INR1.7b (6% beat) and margin expansion of 50bp YoY to 49.1%. Accordingly, PAT grew 23% YoY to INR1.1b (13% beat).

* VFL added net 9/66 stores in 4QFY23/FY23, taking the total store count to 649. Area addition for FY23 was 0.17m sqft to 1.47m sqft.

Highlights from the management commentary

* Emerging brands witnessed good traction in terms of footfalls and conversion ratios. VFL expects to open 8-10 of Twamev and 10-15 stores of Mohey on the pilot basis to monitor the performance for a further scaleup.

* It expects SSSG to be in the range of mid-to-high single digits annually. Gross and EBITDA margins are expected to be in the range of 66-67% and 30%, respectively.

* The company will look to deploy additional cash toward growth and dividend distribution. It will also look at any external M&A opportunities.

* VFL expects to launch the Phase 2 of its digital transformation in the next 2- 3 months. It will look to integrate online demand with offline stores to improve offerings and experience.

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