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Good 3Q; focus remains on volume growth over margin

* V-Mart Retail’s (VMART) revenue grew 16% YoY in 3QFY25, led by strong SSSG (10%) and store additions. EBITDA beat our estimate by 12%, aided by improvement in gross margin for offline format, lower losses in LimeRoad (LR), and benefits from unprofitable store closures in Unlimited.

* VMART management indicated that it is focusing on volume-led growth and would even look to reduce prices of certain products to drive growth amid rising competition in value retail.

* Our FY25-26E revenue is broadly unchanged, while we raise our EBITDA estimates by 7-10% on account of improved profitability in Unlimited and a reduction in LR losses. We expect a CAGR of 17%/42% in revenue/EBITDA over FY24-27, driven by high-single-digit SSSG and lower losses in LR.

* We value VMART at 15x Mar’27E EV/EBITDA (implies ~25x FY27E pre-IND AS 116 EBITDA) to arrive at our TP of INR3,850. We maintain our Neutral rating on VMART.

Strong performance; 12% EBITDA beat on lower LR losses

* Overall revenue grew 16% YoY to INR10.3b (in line), driven by 10% blended SSSG and 7.5% YoY store addition.

* V-Mart (core) delivered ~10% SSSG, while Unlimited reported higher ~11% SSSG, with quarterly throughput rising to INR1,900/sqft.

* LR revenue declined 38% YoY to INR105m. Adjusted for this, VMART revenue (including Unlimited stores) was up ~17% YoY.

* VMART opened 21 new stores (19 in V-Mart and 2 in Unlimited) during the quarter, taking the total store count to 488 (V-Mart: 403, Unlimited: 85).

* Gross profit grew 16% YoY to INR3.7b (largely in line), as gross margins expanded 25bp YoY to 35.8% (75bp beat).

* Other expenses declined 16% YoY to INR1b, mainly due to lower losses in the online segment (LR) and lower other expenses in Unlimited.

* Reported EBITDA grew 43% YoY to INR1.7b (12% beat), with margins at 16.7% (180bp beat).

* Pre-Ind AS EBITDA margin improved 320bp YoY to 10.8%.

* Profit before tax stood at INR697m (30% beat vs. our estimate of INR535m).

* For 9MFY25, revenue/EBITDA grew 17%/79% YoY, while PAT remained modest at ~INR273m.

Highlights from the management commentary

* Demand environment: VMART witnessed a healthy performance during the festive season; however, it was not at par with management’s expectations. Demand trends picked up after the festive season, driven by weddings and the onset of winter. A delayed winter affected sales, but winterwear demand picked up in December. The sentiment in semi-urban and rural markets has been promising, and management expects a further improvement going ahead as disposable incomes are expected to grow after the recent tax cuts.

* Geographical: East region saw muted growth due to a shift in Pujo days to 2Q. North India saw good growth on a low base. UP has now started showing good growth. South India, especially Tamil Nadu, is showing good growth. Telangana is not doing well as per the expectation of the management. ? Store expansion: VMART opened 21 stores in 3Q and 49 so far in FY25. Management expects to end the year with 50+ net store addition, with some closures in 4Q. A one-time correction on stores was done last year, and going ahead, management expects only 1-2% closure annually.

* Margin: Gross margin improved by 30bp despite 38% YoY lower revenue from LR (flows directly in margins). EBITDA improvement was led by the closure of unprofitable stores and lower Unlimited losses.

* Volume over margin: Management highlighted that going ahead it will take price corrections on certain products and focus more on volume growth rather than margin improvement. Further, it indicated that margins are unlikely to improve to pre-Covid levels, as earlier the competition was low and VMART had a monopoly in certain markets.

Valuation and view

* The improved performance of V-Mart/Unlimited stores, the closure of nonperforming stores, and lower losses in the online segment have partly addressed the near-term profitability concerns.

* The massive growth opportunity in the value fashion segment and VMART's strong execution capability, along with new store additions, can help VMART sustain double-digit revenue growth for the long term.

* We believe the shift from unorganized to organized will continue. However, with aggressive store expansion by many retailers, rising competition in value retail remains a key thing to watch out for, given VMART’s low profitability.

* Our FY25-26E revenue is broadly unchanged, while we raise our EBITDA estimates by 7-10% on account of improved profitability in Unlimited and a reduction in LR losses. We expect a CAGR of 17%/42% in revenue/EBITDA over FY24-27, driven by high-single-digit SSSG and lower losses in LR.

* We value VMART at 15x Mar’27E EV/EBITDA (~25x FY27E pre-IND AS 116 EBITDA) to arrive at our TP of INR3,850. We maintain Neutral on VMART.

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