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Strong performance amid weak environment

* VMART’s EBITDA jumped 89% YoY (beat) in 1QFY25, aided by 11% SSSG, a reduction in Limeroad losses and controlled ad spending.

* We raise our EBITDA estimates by 14%/11% for FY25/FY26, considering strong cost-control measures (rationalizing losses in Limeroad), the closure of non-performing stores, and improved SSSG (as indicated in our report) appeared to have played out in VMART’s favor.

* We estimate a CAGR of 17%/48% in revenue/EBITDA over FY24-26. The ongoing demand recovery in the value fashion category could be a key growth driver for VMART. Reiterate Neutral with a TP of INR3,500. EBITDA up 89% YoY (big beat) led by SSSG and reduction in LR losses

* Revenue grew 16% YoY to INR7.9b (in line), led by 11% blended SSSG and 4% footprint addition. SSSG for V-Mart (core) and Unlimited has improved for the third straight quarter and stood at 12% and 8%, respectively.

* The company opened 7 new stores (5 in V-Mart and 2 in Unlimited) and closed 3 stores of Unlimited (none in V-Mart) during the quarter, taking the total store count to 448 (V-Mart 370 and Unlimited 78).

* Gross profit grew 14% YoY to INR2.8b (in line), but margins declined 60bp YoY, led by a decline in Limeroad’s revenue contribution.

* Other expenses declined 21% YoY to INR937m, which could mainly be due to lower losses in Limeroad, closures of loss-making stores, and lower ad spending.

* Resultantly, EBITDA grew by 89% YoY to INR990m (47% beat), with margin expansion of ~490bp to 12.6%. Pre Ind-AS 116 EBITDA stood at INR437m with 5.6% margin.

* PAT stood at INR121m (vs. est. loss of INR176m), led by EBITDA improvement.

Highlights from the management commentary

* Demand recovery: The management expects better demand trends going forward as employment is picking up on the ground level. The management is getting a good response in July, similar to 1Q.

* Guidance: The company guided for SSSG of ~10% or high single digits, which should bring back pre-Ind-AS EBITDA margin of ~8.5%.

* Store addition: The management plans to add 50 new stores in FY25. While most of the unprofitable store have already been closed now, 3-4 closures are expected.

* Inventory: Inventory management will led to improvement in working capital and freshness in the upcoming festive season. The company has also reported higher shrinkage due to strict provision policies and provisioning on aged inventories.

Valuation and view

* Improved performance of V-Mart/Unlimited stores and the company’s decision to close down non-performing stores and reduce losses in the online segment will address 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 recovered from its recent lows; a recovery in demand and improved profitability in the online segment remain the key catalysts for the stock going forward.

* We raise our EBITDA estimates for FY25/FY26 by 14%/11%, factoring in a CAGR of 17%/48% in revenue/ EBITDA over FY24-26. We reiterate our Neutral rating with a TP of INR3,500 (premised on 35x pre Ind-AS EV/EBITDA on Mar’26E).

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