Buy Vishal Mega Mart Ltd for the Target Rs 125 by Motilal Oswal Financial Services Ltd
Festive shift affects 2Q growth and profitability
* Vishal Mega Mart (VMM) delivered a slightly weaker 2QFY27, with revenue rising ~14% YoY (vs. our est. of ~16% YoY), led by 5.4% SSSG (a 300-400bp dent due to the festive shift) and ~10.5% YoY area addition.
* Pre-Ind AS EBITDA margin contracted ~90bp YoY to 7.2%, due to a weaker gross margin (-30bp YoY, ~20bp impact due to the festive shift) and higher employee costs (minimum wage hikes and ESOP costs). Pre-Ind AS EBITDA and PAT inched up ~1%/4% YoY, missing our estimates by 5%.
* Festive demand started strongly in 3Q, with no moderation in demand. VMM reiterated its target of ~10% SSSG for FY27. Growth was led by market share gains, with no further price hikes planned at current levels.
* Gross margin is expected to remain stable in 2H as cost reengineering is likely to offset RM inflationary pressures. Operating leverage should help deliver ~30bp annual EBITDA margin expansion over the medium term.
* VMM’s operating performance remains robust, led by its differentiated product mix, strong own-brand portfolio, and best-in-class cost controls. However, concerns on promoter stake sales and long-term ownership (postPE exit) remain key overhangs.
* We cut our FY27-29 EBITDA and PAT estimates by ~2-4% due to higher employee expenses and a slight moderation in our SSSG estimate.
* We model a CAGR of 18%/24%/26% in revenue/pre-IND AS EBITDA/PAT over FY26-29E, driven by ~10% CAGR in area, double-digit SSSG and ~45bp of annual pre-IND AS EBITDA margin expansion.
* We reiterate our BUY rating on the stock with a revised TP of INR125, premised on a DCF-implied valuation of ~24x Dec’28E pre-IND AS 116 EV/EBITDA (implying ~38x Dec’28E EPS).
Resilient revenue growth and margins in 1HFY27 despite the festive shift
* Consolidated revenue at INR71.3b grew ~16% YoY, driven by ~7.7% adj. SSSG (~9.5% adjusted for the festive shift) and ~10.5% store area additions.
* Gross profit at INR20.2b grew ~16% YoY as GM remained stable YoY at 28.3%.
* Reported EBITDA at INR9.6b was up ~12% YoY as the margin contracted ~50bp YoY to 13.4%, due to festive shift and higher minimum wages.
* Pre-IND AS 116 EBITDA (post-ESOP charges) grew ~13% YoY to INR6.2b, with the EBITDA margin contracting ~30bp YoY to 8.7%.
* Reported PAT at INR4.2b rose ~16% YoY, driven by EBITDA growth and higher other income (up 92% YoY).
* For 2HFY27, the required growth rates for revenue/pre-IND AS EBITDA/PAT growth are 21%/21%/23%.
Valuation and view
* VMM remains among the most consistent retailers within our coverage. We believe its diversified category mix, ownership of opening-price-point products, significant contribution from its own brands, and lean cost structure provide it with a strong moat against intense competition from both offline and online value retailers.
* However, concerns over potential promoter stake sales and LT promoter ownership (post the private equity’s exit), remain key overhangs for the stock.
* We cut our FY27-29 EBITDA and PAT estimates by ~2-4% due to higher employee expenses and slight moderation in SSSG estimate.
* We model a CAGR of 18%/24%/26% in revenue/pre-IND AS EBITDA/PAT over FY26-29E, driven by ~10% CAGR in area, double-digit SSSG and ~45bp annual pre-IND AS EBITDA margin expansion.
* We reiterate our BUY rating on the stock with a revised TP of INR125 (earlier INR135), premised on a DCF-implied valuation of ~24x Dec’28E pre-IND AS 116 EV/EBITDA (implying ~38x Dec’28E EPS).
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