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We maintain BUY on VMM with an unchanged TP of Rs170 (55x Jun-28E EPS). Q1 results were strong, in line and significantly ahead of peers, with ~19/26% revenue/PAT growth. SSG at 10% was much better than the 5.5%/7.0% for DMART/RIL big-box grocery; the 10% SSG was driven by 7-8% new customer additions and a 3% higher ticket size of existing consumers. Despite an inflationary environment, VMM remains committed to preserving entry pricepoints and maintaining its meaningful price discount (vs branded category leaders); this should reinforce VMM's value perception and support marketshare 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. Both combined lend confidence on continued retail space expansion of 10-11%. A minimum wage increase across a few states restricted EBITDA margin gain to 10bps, while gross margin improved 30bps on lower promotions. We maintain our positive stance, aided by its differentiated private label strategy and disciplined expansion with healthy unit economics (~50% ROIC; ex-goodwill). The Board's approval for capping foreign ownership at 49.99% is merely a regulatory compliance measure for the future, as current regulations do not permit >50% foreign ownership in multi-brand retail; Jun26-end foreign ownership stands at only ~20%.

Healthy topline growth; gross margin increase on lower promotional spends

VMM continued its healthy topline growth trajectory in 1Q, with ~19% yoy growth to Rs37.3bn (in line with our estimate), supported by a healthy SSG of 10% and the rest via store additions. Revenue mix was stable in 1Q, with the apparel/general merchandise mix at ~47%/27%. Despite the stable mix, GM improved ~30bps to 28.7% in 1Q (higher than our estimate of 28.1%), as promotional intensity was lower during the quarter. EBITDA margin stood at 14.6% and was flat yoy, as higher employee/ESOP expenses (up ~30bps) offset the benefit of gross margin gains. Reported EBITDA at Rs5.4bn was up ~18.5%, while pre-IndAS, pre-ESOP EBITDA at Rs3.87bn was up ~19% (10.4% margin; up 10bps). Store additions remained healthy, with 24 net additions in 1Q, improving the total store count to 819. Encouragingly, 9 stores were added in the south region, where the company is incrementally increasing its focus. North/East/West regions saw 6/7/2 store additions.

Small-format unit economics similar to large; expansion pace likely to increase

VMM added three small-format stores in 1QFY27, taking the total count to 16. Smallformat stores are approximately half the size of regular stores but deliver comparable revenue per square foot and ROCEs. Having validated the unit economics, the company plans to accelerate expansion of this format in markets where the opportunity for largeformat stores is largely exhausted. The rollout is currently focused on Uttar Pradesh and Haryana, with the management estimating a long-term opportunity of ~3,000 smallformat stores across the country. The company will also pilot a new retail format, with the first pilot store expected to launch shortly.

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