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Good 4Q; profitability improves across formats

* V-Mart Retail’s (VMART) revenue grew 17% YoY in 4QFY25, led by 8% SSSG and 12% store additions. EBITDA jumped ~70% YoY (in line) on account of gross margin improvement and lower losses in online segment.

* Management has guided for 17-20% revenue growth in FY26E, driven by mid- to high-single digit SSSG and ~12% store area additions.

* We keep our FY26-27E revenue and EBITDA estimates broadly unchanged, though we significantly raise our PAT estimates, driven by the change in lease accounting. We model a CAGR of 18%/27% in revenue/EBITDA over FY25-27, driven by high-single-digit SSSG, ~65 (~12%) annual store additions and further reduction in LR losses.

* We value VMART at ~13x Mar’27E EV/EBITDA (~25x FY27E pre-IND AS 116 EBITDA) to arrive at our TP of INR3,600. We maintain Neutral on VMART.

In-line EBITDA; robust GM expansion offset by ESOP costs

* Revenue grew 17% YoY to INR7.8b, driven by 8% blended SSSG (vs. 15%/10% YoY in 2Q/3Q) and ~12% YoY store addition.

* V-Mart opened 13 new stores (12 V-Mart and one Unlimited) and closed four stores (three V-Mart and one Unlimited) during the quarter, bringing the total store count to 497 (412 V-Mart and 85 Unlimited).

* Gross profit grew 22% YoY to INR2.6b (8% beat), as gross margins expanded 140bp YoY to 33.1% (230bp beat), driven by better full price sale-through.

* Employee expenses grew 45% YoY to INR974m (17% higher vs. our est.), largely led by ESOP expenses in 4Q (INR161m in FY25 vs. Nil in FY24).

* Other expenses declined 12% YoY to INR926m, largely driven by a 20% YoY decline in advertisement expenses, with ad expenses in LR reducing to INR43m from INR119m YoY.

* As a result, EBITDA stood at INR681m (+70% YoY, in line), with margins improving 270bp YoY to 8.7% (20bp beat).

* Pre-Ind AS EBITDA margin expanded YoY to 0.8% (vs. -1.7% in 4QFY24).

* Depreciation and interest declined 11%/51% YoY.

* V-Mart accounted INR242m as a net exceptional gain on account of the reassessment of leases.

* V-Mart reported a PAT of INR185m (vs. our estimate of INR434m loss), led by lower depreciation/finance costs and exceptional gains.

LR losses reduce; margins improve in V-Mart and Unlimited

* V-Mart (core) revenue grew ~20% YoY to INR6.6b, with an annualized throughput of ~INR7,950/Sq.ft. SSSG moderated further to 7% (vs. 10%/16% in 2Q/3Q). EBITDA improved 46% YoY to INR623m as margins expanded ~170bp YoY to 9.5%.

* Unlimited revenue stood at ~INR1.2b, up 11% YoY, with annualized throughput of ~INR5,820/Sq.ft (+11% SSSG). EBITDA came in at INR126m (+33% YoY) as margins expanded ~170bp YoY to 10.8%.

* Limeroad (LR) revenue declined 47% YoY to INR80m. Adjusted for LR, VMart revenue (including Unlimited stores) was up ~18% YoY. Operating loss declined 43% YoY to INR68m (vs. INR121m YoY).

Strong FY25 led by SSSG recovery and reduction in LR losses

* FY25 revenue at INR32.5b grew 17% YoY, driven by 12% SSSG (vs. 1% YoY) and ~12% YoY store additions.

* Reported EBITDA grew ~77% YoY as margins expanded ~400bp YoY to 11.6%, largely driven by a sharp ~260bp reduction in ad expenses.

* V-Mart’s pre-IND AS 116 EBITDA improved sharply to INR1.4b (from INR96m YoY) as margin expanded ~410bp YoY to 4.4%.

* V-Mart reported a PAT of INR457m (~INR215m excluding exceptional) in FY25, compared to a loss of ~INR0.97b in FY24.

* Inventory days increased slightly to ~111 in FY25 (vs. 107 in FY24), while payable days moderated, leading to YoY stable WC days.

* V-Mart reported an FCF outflow of ~INR0.3b in FY25 (vs. INR0.4b FCF YoY), largely due to adverse working capital changes.

Highlights from the management commentary

* Demand environment: Demand trends improved, particularly in tier 2/3 cities, supported by a continued shift from unorganized to organized, while Tier 1 markets also witnessed some upswing. Although macroeconomic signals remain mixed, management does not expect any material impact on consumption in smaller towns. An early tapering of winters, despite delayed onset, impacted sales in the initial part of 4Q, which was offset by early Holi and Eid.

* Growth guidance: Management is targeting ~17-20% revenue growth, driven by ~12% store additions and mid- to high-single-digit SSSG.

* Margin: Gross margin improvement was largely attributed to better full-price sale-through and better inventory management. EBITDA margin improvement was driven by lower losses in LimeRoad and closure of unprofitable stores. Management expects healthy SSSG with operating leverage to be the key lever for further margin expansions.

* Store additions: During FY25, V-Mart added 62 new stores and closed nine stores. For FY26, management is targeting ~65 new stores, with expansion focused on South India (TN, Kerala) and North India (Uttarakhand, GJ, MP and RJ) while strengthening its presence in its core markets of UP and Bihar.

Valuation and view

* The improved productivity of V-Mart/Unlimited stores, the closure of nonperforming stores, and lower losses in the online segment have led to improvement in V-Mart’s profitability.

* V-Mart continues to be a beneficiary of the shift from unorganized to organized and the massive growth opportunity in the value fashion segment.

* However, with aggressive store expansion by many value retailers, rising competition in value retail remains a key thing to watch out for, given lower profitability and less price elasticity among V-Mart’s typical customer base.

* Our FY26-27E revenue and EBITDA remain broadly unchanged, while PAT rises sharply, driven by the change in lease accounting. We model a CAGR of 18%/27% in revenue/EBITDA over FY25-27, driven by high-single-digit SSSG, ~65 (~12%) annual store additions and further reduction in LR losses.

* We value VMART at ~13x Mar’27E EV/EBITDA (~25x FY27E pre-IND AS 116 EBITDA) to arrive at our TP of INR3,600. We maintain Neutral on VMART.

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