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Key-man risk addressed; stake sale overhang remain

We interacted with senior management and heads of key businesses of Vishal Mega Mart (VMM). The key takeaways are as below:

* The central message of the meeting, in our view, was to showcase the senior leadership depth to address the key investor concern about the key-man risk (its longstanding CEO is ~66 years old).

* Management is confident of sustaining double-digit SSSG on an annual basis (quarterly deviations might happen due to change in festive season, etc.), driven largely by volume-led growth while maintaining leadership in opening price points.

* Management believes there is a potential to add 1,200 stores in the large format (~17k sqft) in the next 10-12 years. The company has also piloted a small-store format to cater to towns with less than 50k population in relatively more saturated states such as UP and Haryana. Management expects a runway of 4k stores in the small format over the longer run.

* The company has recently launched a new store format ‘Belong & Co’, which will focus primarily on mid-premium apparel to cater to the rising affluence of its customers.

* VMM will continue to reinvest the savings on gross margin from scale benefits to improve the product quality and price proposition. Operating leverage, technology interventions (warehouse automation, RFID implementation) and savings on logistics costs (plans to have a central warehouse across all four regions) should drive higher EBITDA margins.

* VMM’s digital commerce offerings have scaled up to 500+ towns, with its share varying between 2-10% of in-store sales, depending on competitive intensity in towns. Management noted that its digital commerce offering has already achieved cash break-even, and the aim is to increase the digital contribution as the offering adds new customers to its ecosystem.

* We remain positive on VMM considering its consistent growth trajectory and potential for operating leverage led margin expansion. We reiterate our BUY rating with a revised TP of INR135, premised on ~27x DCFimplied Sep’28E pre-INDAS 116 EV/EBITDA (implies ~42x Sep’28 EPS).

* The stake sale by promoter (PE with ~40% stake) remains a key overhang to the stock’s performance, despite the stellar operating performance.

Confident of sustaining double-digit SSSG on an annual basis

* VMM management is confident of sustaining double-digit SSSG on an annual basis, though on a quarterly basis, there could be deviations due to the change in the festive calendar, among other factors.

* VMM’s differentiated proposition (~75% of revenue from own brands), ownership of opening price points and loyal customer base (~95% of sales to repeat customers) remain key drivers for sustained SSSG.

* Management noted that stores across various vintages are delivering double-digit SSSG, primarily driven by volume growth and select premiumization to gain higher wallet share from customers.

Long runway for store expansion; piloting small-store and premium formats

* Management indicated that VMM could open 1,200 more stores in its traditional large format (~17k sqft) over the next 10-12 years.

* Customer response to VMM’s recent forays in Maharashtra, Gujarat and Kerala has been encouraging, and these markets, alongside Tamil Nadu, are the key whitespaces for VMM to expand its large-format stores in the medium term.

* The company has also piloted a small-store format in states (UP, Haryana) with relatively higher saturation. Management believes there is a potential to open ~4k small-format stores over the medium term.

* The performance of small stores has been comparable to large-format stores (on SPSF, RoCE, etc). However, management will currently focus on opening larger-format stores in relatively less penetrated states as the effort on opening new stores is similar in both formats.

* The company has also launched a new format ‘Belong & Co’, which will focus primarily on mid-premium apparel category

Valuation and view

* VMM remains among the most consistent retailers within our coverage. We believe its diversified category mix, ownership of opening price points, 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.

* We believe the recent extension of its long-term CEO’s tenure for another five years, alongside redesignation as Founder, provides comfort on the continuity of the business strategy.

* However, concerns about potential promoter stake sales and long-term ownership still remain key overhangs for the stock.

* Our estimates are broadly unchanged. We model a CAGR of 19%/24%/27% in revenue/pre-IND AS EBITDA/PAT over FY26-29E, driven by ~10% CAGR in area, consistent ~10%+ SSSG, and ~50bp annual pre-IND AS EBITDA margin expansion.

* We reiterate our BUY rating on the stock with a revised TP of INR135 (earlier INR165). Our TP is premised on a DCF-implied ~27x Sep’28E pre-IND AS 116 EV/EBITDA (implying ~42x Sep’28E EPS). The cut in multiple (from ~34x earlier) is driven by a potential increase in contribution of small-format stores, which would contribute to lower absolute profitability (vs. large-format stores).

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