Buy Vedant Fashions Ltd For Target Rs. 930 By JM Financial Services
Redefining retail in ethnic wear
Vedant Fashions Limited (VFL) is the largest player in the wedding and celebration (W&C) wear market with ~35% branded market share in the men’s segment in FY24 (refer exhibit – 11). VFL has achieved industry leading economics led by (i) multi-brand aspirational-yet-value-for-money product portfolio catering to the entire family, (ii) targeted marketing, driving top-of-the-mind brand recall with a multi-channel presence (iii) fully integrated and ITenabled supply chain and back-end system, and (iv) an asset-light model.
Revenue growth over the last couple of years has been impacted due to (1) Increased competitive intensity, (2) Slowdown in overall discretionary consumption, and (3) High rentals, which have kept the pace of expansion in check (added ~85k sqft in FY25). However, we believe these issues are temporary. Entry of new players has only led to increased acceptance of ethnic wear; near-term slowdown coupled with aggressive network addition by regional players is resulting in higher revenue impact for VFL. But, given ethnic wear is a difficult category, the near-term slowdown will impact small/unorganised players more and may lead to consolidation.
Growth for VFL going ahead will be driven by (1) “Mohey”, its women’s ethnic wear brand, allowing it to tap a much larger segment, pegged at INR 900bn, ~6x of the men’s W&C market (refer exhibit - 1), (2) Expansion of the premium ethnic wear segment under brand “Twamev” (3) Entry into men’s mass ethnic wear segment through “Diwas” (4) Network addition at ~10% of the overall network to accommodate these multiple brands under one roof. The stock currently trades at a sharp discount of 20-50% to the likes of Metro, Titan and D-Mart despite similar return ratios or slightly lower revenue/PAT CAGR. We initiate coverage with BUY rating and a target price of INR 930 based on 45x Mar’27 EPS.
Huge TAM, largely unbranded, which provides large headroom of growth: We estimate that the Indian branded W&C wear market was INR 281bn in FY24, ~23% of the INR 1.2trln W&C wear market. The branded market is expected to see higher growth (~16% CAGR over FY24-28E to INR 510bn) vs. the W&C wear market (~11%) led by shift towards organised players (refer exhibit -1). VFL is expected to benefit from this shift as (i) it is the market leader in the men’s W&C market and has strong brand recall in the category, and (2) it is expanding its portfolio, catering to a wider set of customers; ‘Diwas’ “Twamev” and ‘Mohey’ are targeted at unbranded men’s mass, premium and women’s W&C market.
Strong brand image and robust supply chain key leadership enablers: VFL’s brand Manyavar is synonymous with the category, which helps it to up-sell and cross-sell other brands’ products and help them scale faster. Over the years, VFL has been able to organise the fragmented vendor and manufacturing ecosystem, which, coupled with its strong supply chain and inventory management system, enables it to keep the manufacturing cost at the lowest. This has enabled it to withstand market volatility in a tough category and retain its leadership.
Industry leading margins led by asset-light model and efficient inventory management: VFL operates on an asset-light model, with all its stores operating on FOFO model and manufacturing being outsourced. This, coupled with a strong discipline on inventory and discount management (zero discounts) helps it to keep cost structure lean. VFL, therefore, is able to operate on highest Gross/EBITDA margin in apparel retailing. Given that franchise partners also make handsome pre-tax RoI of ~16% (refer exhibit - 7), it is able to retain and increase its franchisees and expand at a robust pace (~10% area addition CAGR over FY19-24).
Rare combination of cash flows and healthy margins: VFL has shown robust performance in revenue, cash flows and return ratios. We expect 12% revenue/EBITDA /PAT (Pre-Ind AS) CAGR over FY25-28E. After an exceptional performance in FY23, margins normalised in FY25 and are expected to gradually improve from here. We expect RoE/RoCE/RoIC of 23%/27%/54% by FY28 and cumulative OCF/FCF of INR 10.2bn/10bn over FY25-28.
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