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Demand softness persists

* Vedant Fashions’ PAT/EBITDA growth remained soft at 5%/8% YoY (10%/8% miss) as subdued revenue growth persisted despite the festive period. Revenue growth of 7% YoY was mainly supported by footprint addition; same store sales declined 2.1% YoY in 3QFY24.

* Given the weak outlook and soft management commentary, we have cut revenue/PAT by 5%/3% for 25, factoring in revenue/PAT CAGR of 10%/11% over FY23-25, mainly driven by footprint expansion. The stock is trading at valuations of ~51x P/E on FY25E after the recent correction. However, concerns around demand revival would remain a key monitorable for any re-rating. We reiterate our Neutral stance on the stock with a TP of INR1,200, valuing it at 45x P/E on FY26.

EBITDA/PAT up 8%/5% (miss), dragged by soft revenue growth

* Consolidated revenue grew 7% YoY to INR4.7b (6% miss) in 3QFY24, mainly led by footprint additions.

* Sales to customers reported a growth of 11% YoY and stood at INR6,504m.

* The reported SSSG for 3QFY24 declined 2.1%, given that the month of Oct’23 was adversely impacted by “Shraddh”.

* Gross profit grew 5% YoY to INR3.4b (8% miss), with gross margin at 71.7% (vs. 73.3% estimated). Gross margin (including Job Work) remained flat YoY at 67.8%.

* Employee costs declined 10% YoY to INR138m, while other expenses remained flat YoY at INR842m (~10% below our estimates each).

* As a result, EBITDA grew 8% YoY to INR2.4b (8% miss), dragged by lower revenue and GM, offset by robust control measures implemented. The EBITDA margin expanded YoY and stood at 51%.

* Depreciation/Finance costs grew 37%/50% YoY, while ‘other income’ increased 55% YoY.

* Consequently, PAT rose 5% YoY to INR1.6b (10% miss) during the quarter.

* For 9MFY24, revenue reported a marginal decline of 1% to INR10b, while EBITDA declined 4% YoY to INR4.8b. PAT declined 7% YoY and stood at INR3b.

* SSSG for 9MFY24 declined 12.7% as the period saw significantly reduced number of wedding dates, general slowdown adversely impacting consumer sentiments, and a higher base effect of the last year.

Highlights from the management commentary

* Sales was adversely affected by weaker performance in Oct’23 and from the latter half of Dec’23 (mainly in Tier 2 and below cities); however, festive sales grew 30.7% on a YoY basis.

* Early trends from Jan’24 suggest continued softness in demand; however, improved demand traction is expected in 4QFY24, primarily driven by the increased prevalence of wedding dates during the period.

* Within emerging brands, the company will look to open another 2-3 stores for Twamev in addition to the flagship store for Mohey.

* The company is now looking to enter the South Indian market by introducing a new format and re-calibrating merchandising strategies to align with the specific demands within the region.

Valuation and view

* Manyavar has successfully achieved scale within the growing Men’s celebration and occasion wear market. This accomplishment is challenging to replicate.

* While the company has a healthy growth runway through the expansion of Manyavar’s footprint and the introduction of Mohey (women’s celebration wear) and Twamev (premium celebration wear) in the upcoming quarters, weak consumption remains a concern.

* The stock, owing to a weaker revenue trajectory, witnessed in the past couple of quarters has corrected ~25%, and is now trading at 51x P/E and 33.5x EV/EBITDA on FY25 basis, which we feel is fairly priced, given the observed slowdown in consumption. Recovery within the demand and scaling up of emerging brands would remain a key catalyst for the stock to move going ahead.

* We are building a revenue/PAT CAGR of 10%/11% over FY23-25 on the back of steady footprint addition.

* We ascribe a P/E of 45x on FY26E EPS and arrive at a TP of INR1,200. We reiterate our Neutral stance on the stock.

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