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Healthy SSSG drives operating performance

* V-Mart Retail (VMART)’s EBITDA jumped 75% YoY (beat) fueled by 13% YoY revenue growth (in line), mainly supported by store additions and a 5%/5%/ 13% SSSG for Blended/VMart/Unlimited stores. This, along with the controlled costs of retailing, supported earnings for 4QFY24.

* Strong cost-control measures in the form of rationalizing losses within the online segment, the closure of non-performing stores, and improved SSSG (as indicated in our recent report) appeared to have played out in VMART’s favor. We estimate its revenue/EBITDA CAGR at 13%/38% over FY24-26. A demand recovery within the value fashion category could be a key driver of growth. Reiterate Neutral with a TP of INR2,200.

Revenue growth in line; continues to post a Pre-Ind-AS operating loss

* VMART’s revenue grew 13% YoY to INR6.7b (in line), led by 6% SSSG and 5% footprint additions in 4QFY24.

* The company opened nine new stores (eight VMart and one Unlimited) and closed 19 stores (10 VMART and nine Unlimited) during the quarter, taking the total store count to 444 (365 VMart and 79 Unlimited).

* Gross profit grew 12% YoY to INR2.1b (in line) but margin dipped 20bp YoY.

* Employee and other expenses declined 2% QoQ but grew 6% YoY (11%/8% lower than est). This could mainly be because of reducing losses within the online segment (Limeroad) and the closure of loss-making stores.

* Resultantly, EBITDA grew 75% YoY to INR402m (53% beat) with a margin expansion of ~210bp to 6.0%. However, the company reported a Pre-Ind-AS operating loss of ~INR116m and a margin of -1.7% for 4QFY24.

* VMART reported a loss of INR389m (5% beat) due to higher depreciation (26% YoY) and finance costs (7% YoY). Adjusted for the tax related to the previous year, the loss stood at INR605m (vs. INR523m loss in 4QFY23).

* VMART’s revenue grew 13% YoY, while EBITDA declined 21% YoY in FY24; it reported a loss of INR968m (vs. INR78m loss) during the year.

* OCF stood at INR1.8b in FY24 (vs. -INR23m in FY23), led by a release of WC amounting to INR1.7b. Capex dipped to INR1.2b (from INR2.8b in FY23). FCF after interest stood at INR431m (vs. cash outflow of INR2.8b in FY23). Consequently, this led to a net debt reduction of INR411m to INR781m in FY24.

Highlights from the management commentary

*  Demand recovery trends: Management expects a better environment going forward, led by: 1) early signs of recovery in MP/RJ/UP, 2) good monsoons and rabi crops, 3) a decline in prices of food and staples (due to controlled inflation in 4QFY24), and d) rising customer footfalls, who are at the base of the pyramid.

* Current environment: Sales improved in 4QFY24 on the back of festivals – Holi/Eid. Post-Diwali, the company anticipated recovery, particularly in the small towns of East India. To date, April and May were good despite the slow marriage season. Post-election, there could be a revival in growth. Management witnessed a recovery after 7-10 days of the previous elections.

* ASP has stabilized: The corrections in prices/ASP are almost over and are stable along with inventory optimization. From here on, the company wants to keep building the growth momentum.

* Store addition: Management anticipates adding 40-50 stores in FY25, with the possibility of closing 5-7 stores.

Valuation and view

* Improved performance within VMart stores, driven by festive demand and the company’s decision to close down non-performing stores and reduce losses in the online segment, addresses the near-term profitability concerns mentioned earlier in our report.

* The massive growth opportunity in the value fashion segment and VMART's strong execution capability remain key drivers of VMart's success. These drivers have the potential to sustain double-digit revenue growth for an extended period, underpinned by new store additions. With its low price points, cost leadership, strong liquidity, and prudent inventory management, VMART has a competitive edge over its rivals.

* The stock has seen a healthy recovery from its recent lows; a recovery in demand and improved profitability within the online segment would remain the key catalysts for the stock going forward.

* We broadly maintain our revenue/EBITDA estimates, factoring in a revenue/ EBITDA CAGR of 13%/38% over FY24-26. We reiterate our Neutral rating with a TP of INR2,200 (premised on 15x EV/EBITDA on Mar’26E)

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