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Winds of change

V-MART (VMART) has reported a weak earnings trajectory over the last few years, primarily due to factors such as weakness in the core business, sluggish performance/ recovery in the Unlimited format, and losses within Limeroad. However, we believe there are signs of gradual reversal in trend, with noticeable changes in the business. These changes are being driven by strong actions taken by the management, which may bring about a significant transformation. The key trends of visible changes are outlined below:

? Improvement in the core business is expected from 3QFY24 onwards, driven by healthy same-store sales growth (SSSG) due to increased demand during festive periods. Although it is expected to be below the normalized level, this trend is now seen to have bottomed out.

? Unlimited, which is operating with suboptimal profitability (3-4% pre IND-AS 116 EBITDA margin) due to weak revenue productivity, is likely to close more than 15 stores in 4QF24. These stores have low productivity and high rental costs. This should help in recovering margins to reach levels of 6-7% from FY25 onwards. The newer stores opened with smaller footprints, better locations, and lower rentals are already experiencing higher productivity.

? Management is now looking to reduce investments in Limeroad, revisit the previous strategy of higher spending to expand the business and achieve operating leverage. This should help in curbing losses from INR600m to breakeven in FY25 (we estimate FY24 losses at INR900m).

Weakness in core business bottoming out

The weak performance of the core segment is now seeing a recovery. We expect the festive period to see decent traction, with high single-digit SSSG. The wedding category is also expected to perform well during this time. However, while the Oct-Nov’23 period saw a strong traction with a high single-digit LTL growth led by the festive season compared to the previous year, the delayed onset of winter could potentially hurt demand in Dec’23. This situation is similar to what was experienced in 3QFY23. VMART’s EBITDA margin for 3QFY24 could be affected by the inventory clean-up, low SSSG, and the decision to pass on the benefits of raw material (RM) pricing to stimulate growth (as competition remains stiff from regional players who operate at a 20% gross margin). The decrease in average selling prices (ASPs) is expected to be offset by increased demand, which will help revive volume growth.

Limeroad to curtail losses

The company’s plan to accelerate growth and drive operating benefits within the Limeroad segment is now undergoing a change. The management is now focusing on reducing marketing expenses and prioritizing profitability over growth. As a result, losses within the segment could further decline ~40% QoQ to INR120m in 3QFY24 vs. INR198m in 2QFY24 (our estimate of INR220m in 3QFY24) and further drop by 50% (~INR50m) in 4QFY24). This will help meet the company’s guidance of INR600m losses vs. our estimate of INR900m losses for FY24 (i.e. 20% of overall EBITDA and 2% margin impact). Subsequently, operating losses may reduce to INR150m in FY25, thereby resulting in a benefit of ~200bp on EBITDA. On the other hand, prioritizing profitability over growth may lead to a sequential decline in revenue at Limeroad. This, however, could be expected to remain inconsequential.

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