Buy Vishal Mega Mart Ltd for the Target Rs.170 by Emkay Global Financial Services Ltd
We attended VMM’s analyst meet to assess progress on our thesis around the sustenance of double-digit SSG, long-term expansion opportunity, and retention of best-in-class ROIC. VMM is confident of sustained double-digit SSG on an annual basis, aided by its differentiated private-label strategy, and healthy traction in Q-Com business (2-10% mix across stores); however, it may see quarterly SSG volatility due to festive/seasonal shift. While penetration opportunity for existing large-store format remains robust at ~1,200 stores (100+ per annum), the new smaller-store format is off to an encouraging start with similar ROIC, and provides ~4,000 store potential in towns with even ~40,000 population (vs ~80,000 for larger format). Also, VMM has piloted a relatively premium apparel-only format ‘Belong & Co.’ in Delhi, which is targeting younger and more affluent consumers. Customer loyalty continues to improve as VMM is investing back its scale-led sourcing benefits, to provide best-in-class fashion, functionality, and feel across its products. Utilizing a healthy balance sheet, VMM is increasing its warehousing capacity and is gradually implementing RFID tags, which has potential to improve inventory control and reduce shrinkage. The meet also provided an opportunity to interact with function and business heads, exemplifying organizational depth to deliver long-term growth. We expect VMM to deliver ~18%/27% revenue/PAT CAGR over FY26-29E; retain BUY and TP of Rs170. The stock is currently trading at an attractive valuation of ~47x/36x FY27/28E EPS.
Committed to preserving entry price point; retail space expansion to continue
Despite an inflationary environment, VMM remains committed to preserving entry price points and maintaining its meaningful price discount (vs branded category leaders); this should reinforce VMM's value perception and support market share gains. Initial traction in the under-penetrated South/West India and the small-format store pilot for lower-tier cities is encouraging and progressing in line with expectations. Together, these lend confidence on continued retail space expansion of 10-11%. We maintain our positive stance, aided by VMM’s differentiated private label strategy and disciplined expansion with healthy unit economics (~50% ROIC; ex-goodwill).
Small-format unit economics similar to large; expansion pace likely to increase
VMM added three small-format stores in 1Q, taking the total count to 16. Small-format stores are approximately half the size of regular stores but deliver comparable revenue per square foot and ROCEs. Having validated the unit economics, VMM plans to accelerate expansion of this format in markets where the opportunity for large-format stores is largely exhausted. The rollout is currently focused in Uttar Pradesh and Haryana, with the management estimating a long-term opportunity of ~4,000 small format stores across the country. VMM has also piloted a relatively premium apparel-only format ‘Belong & Co.’ in Delhi, which is targeting a younger and more affluent consumer base.
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