Buy Vedant Fashion Ltd for the Target Rs.800 by Motilal Oswal Financial Services Ltd
Growth revives on a weak base; consistent SSSG recovery key
* Vedant Fashions (VFL) delivered 17%/23% YoY growth in reported/ customer revenue in 1Q (albeit on a very low base), driven by ~17.6% SSSG and ~4% YoY net area additions. However, VFL’s 1QFY26 revenue remains below 1QFY23 levels, driven by muted consumer demand sentiments.
* Margin pressures persisted with ~85bp/410bp YoY contraction in gross/ EBITDA margins due to a shift in product mix, 330bp rise in A&P spends (on a low 1QFY25 base), and operating deleverage due to lease costs.
* Management is focused on boosting SSSG and improving the quality of the retail area to drive growth in FY26, as overall net retail area addition is likely to remain muted due to network consolidation.
* We slightly cut our FY26–27E EBITDA by 2-3% due to lower retail area expansions, but raise our FY26-27E PAT by ~1% due to higher other income.
* We model an 8-10% CAGR in revenue/EBITDA/PAT over FY25–28E. While the stock is currently trading ~37% below its average P/E, we await signs of demand recovery before we turn more constructive on VFL. Reiterate Neutral with a revised TP of INR800, premised on 40x Sep’27E P/E.
Revenue growth picks up on a low base; higher opex hurts profitability
* Customer sales grew ~23% YoY to INR4.1b, led by ~17.6% SSSG (on a very weak base of -27.2% SSS decline in 1QFY25) and ~4% YoY area additions.
* Reported revenue rose ~17% YoY to INR2.8b (5% above our estimate, but in line with consensus), aided by a favorable base (-23% YoY in 1QFY25).
* However, we note that 1QFY26 revenue is still lower than revenue in 1QFY23 and 1QFY24 (INR3.1-3.25b).
* VFL added six net new stores, primarily led by the SIS count, which increased by 14, while it had net closures of eight EBOs (six in India and two internationally). As a result, net area declined 6.4k sqft QoQ to 1.78m sqft (though it grew 4% YoY).
* Gross profit (GP) increased 15% YoY to INR2b as gross margin contracted 140bp YoY to 72.4% (125bp miss).
* GP (including job work charges) grew 16% YoY with margins contracting ~85bp to 66.9%.
* Other expenses rose ~36% YoY (14% higher than our estimate), mainly due to 230bp YoY increase in A&P spends, while employee costs increased 7% YoY (2% above).
* As a result, EBITDA grew ~7% YoY to INR1.2b (2% below our estimate), due to operating deleverage as other expenses outpaced revenue.
* EBITDA margin dipped ~410bp YoY to 42.9% (~315bp miss).
* Depreciation/finance costs grew 7%/2% YoY, while other income jumped ~20% YoY (16% higher).
* Reported PAT grew ~12% YoY to INR0.7b (3% above us), driven mainly by higher other income.
Highlights from the management commentary
* Demand trends: VFL continues to face weak consumer sentiment in the midpremium segment, though regions such as AP and Telangana have rebounded in 1Q. While early trends for FY26 are positive, management remains cautious, expecting clearer visibility over the next 1–2 quarters.
* Margins: Gross margin contracted ~80bp YoY due to a higher mix from structurally lower-margin brands (Mohey, Twamev), but management isn’t too bothered with quarterly fluctuations and is comfortable with gross margin above 65%. EBITDA margin fell ~410bp to 43.2%, largely due to a 230bp YoY increase in A&P spends (spends were curtailed in 1QFY25 due to a lack of wedding dates).
* Store expansion: Management is focused on improving the quality of the retail area in FY26 and is planning ~8-10% YoY increase in gross area. However, net area growth is expected to be flat or slightly negative due to the closure of certain underperforming stores and the right-sizing of some stores.
* SSSG: Improvement in SSSG remains the key focus area for FY26. Management indicated that ~3-4% category-wide ASP increases and ~70-80bp improvement in ASP driven by premiumization (higher growth in Twamev and Mohey), along with improvement in volume and ABV, are the key growth drivers.
* Competitive intensity: After 8–10 quarters of aggressive expansion by peers, the intensity on store openings by peers seems to be easing due to pressures on profitability.
Valuation and view
* VFL’s 1QFY26 witnessed a modest recovery (albeit on a low base), though overall customer sales still remain below the 1QFY23 levels. Management noted weak consumer demand in the mid-premium segment to be a key reason for relative underperformance. However, we believe that apart from the weaker consumer sentiments, rising competition, and slower-than-expected shift from unorganized to organized in the ethnic wear category have also been the key headwinds.
* Growth recovery in Manyavar (on a low base of the last few years), scale-up of Mohey (women’s celebration wear) and Twamev (premium offering in celebration wear), along with improved traction in recent forays in the newer categories (Diwas, a value brand catering to festive wear) remain the key growth drivers for VFL.
* VFL’s focus on boosting SSSG and improving the quality of the retail area is positive and remains key for the re-rating of the stock.
* We slightly cut our FY26–27E EBITDA by 2-3% due to lower retail area expansions, but raise our FY26-27E PAT by ~1% each due to higher other income.
* We model an 8-10% CAGR in revenue/EBITDA/PAT over FY25–28E. While the stock is currently trading ~37% below its average P/E, we await signs of demand recovery before we turn more constructive on VFL. Reiterate Neutral with a revised TP of INR800, premised on 40x Sep’27E P/E (vs. INR775 earlier).
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