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Strong SSSG and lower LR losses drive 2Q beat

* V-Mart Retail’s (VMART) revenue grew 20% YoY in 2QFY25, led by strong SSSG and store additions. EBITDA beat our estimate by 30%, aided by better productivity, improvement in gross margin for offline format, and lower losses in LimeRoad (LR).

* We broadly maintain our revenue/EBITDA estimates for FY25/FY26. We expect revenue/EBITDA CAGR of 17%/39% over FY24-27 as we build in improved SSSG and lower losses in the online segment.

* Consistent demand recovery in the value fashion category could be the key growth driver for VMART. Reiterate Neutral with a TP of INR4,750.

Big beat on EBITDA led by strong SSSG and reduction in LR losses

* Revenue grew 20% YoY to INR6.6b, driven by 15% blended SSSG and 7% YoY store additions.

* VMART opened 21 new stores (16 in V-Mart and 5 in Unlimited) and closed two V-Mart stores during the quarter, taking the total store count to 467 (V-Mart: 384 and Unlimited: 83).

*  Gross profit grew 17% YoY to INR2.2b (in line), as gross margin contracted 100bp YoY to 33.6% (50bp miss), due to lower commission from LR. For offline business, gross margins improved 60bp YoY.

* Employee expenses grew 21% YoY to INR865m on incentive payouts.

* Other expenses declined 18% YoY to INR969m, mainly on account of lower losses in the online segment (LR EBITDA loss down 63% YoY) and closure of the unprofitable stores. * Consequently, EBITDA stood at INR386m (30% beat) with margin at 5.8% (135bp beat).

* 2QFY25 pre-Ind AS EBITDA margin came in at -2.8% (vs. -9% YoY).

* Depreciation and interest grew 11% and 9% YoY, respectively.

* Loss before tax stood at INR580m (vs. our estimate of INR624m loss).

* For 1HFY25, revenue/EBITDA rose 18%/2.6x YoY, but net loss continued at INR444m. For 2HFY25, we expect revenue/EBITDA growth of 21%/55%, led by 11% SSSG.

* Despite an increase in EBITDA, the company’s FCF (outflow) stood at INR613m in 1HFY25 (vs. outflow of INR387m YoY) due to the amount blocked in WC (higher inventory for festive period) and capex of INR610m. This led to a rise in net debt to INR1.38b (vs. INR781m in FY24).

Highlights from the management commentary

*  Guidance: GM of offline business is expected to remain stable over the medium term; however, the drag from lower LR commissions could impact blended gross margins. Overall, VMART expects to get back to pre-Ind-AS EBITDA margin of 7-8% (pre-Covid margins) in the next 2-3 years.

* Demand trends in 2Q: The management indicated there has been a slight recovery in overall demand after elections. Some parts of rural markets have recovered, while urban demand is still under pressure.

*  Store additions: The management guided for the addition of 55-60 stores in FY25. Store renovation is driving higher capex; however, average capex per store has not increased meaningfully. The management aspires for 12-13% annual sq. ft. additions over the long term.

*  Demand outlook: The management highlighted that Oct’24 demand was below its expectation due to delayed winters in North. Further, it indicated that growth in Pujo sales in East India was also softer.

* Inventory: The company has a conservative inventory policy. Any item that is not sold is provisioned after two seasons. Inventory days have improved by 11% to 111 days.

Valuation and view

* Improved performance of V-Mart/Unlimited stores, closure of non-performing stores and lower losses in the online segment have addressed 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 triggers. These drivers can help VMART potentially sustain double-digit revenue growth for an extended period, led 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, in our view.

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

* We broadly maintain our revenue/EBITDA estimates for FY25/FY26. We expect revenue/EBITDA CAGR of 17%/39% over FY24-27 as we build in improved SSSG and lower losses in the online segment.

* We value VMART at 20.5x Dec’26E EBITDA to arrive at our TP of INR4,750. We maintain our Neutral rating on VMART.

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