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Earning trajectory remains weak

* Vedant Fashions (VFL) saw a weak quarter with revenue/PAT declining 12%/29% YoY (16% miss), owing to a shift in the festive period and reduced number of weddings. This resulted in sales to customer and same-store sales declining 8.2%/18% YoY, partially offset by 7% store additions.

* We have revised down our FY24/25E PAT by 5%, on the back of weak consumption trends, factoring revenue/PAT CAGR of 13%, led by footprint expansion. The rich valuations of 57.7x P/E on FY25E and concerns around demand revival leave limited upside potential. Subsequently, we downgrade the stock to Neutral, with a TP of INR1,250.

EBITDA/PAT down 20%/29% YoY (miss) due to weaker revenues

* Consolidated revenues for 2QFY24 declined 12% YoY to INR2.2b (8% miss).

* Sales to customers declined 8.2% YoY to INR2.7b. This decrease could be attributed to a shift in the festive season and a notable decrease in the number of weddings nationwide during the quarter. However, the management remains optimistic about the overall business outlook for the year, driven by the prospects in the H2 period.

* Same-store sales declined 17.7% on a YoY basis.

* Gross profit declined 15% YoY to INR1.6b (11% miss) with Gross margins at 73.6% (vs. 75.8% estimated). Gross margins (incl. Job Work) contracted 10bp YoY to 66.4%.

* Employee cost grew 8% YoY to INR146m, while ‘other expenses’ declined 12% YoY to INR533m (5%/10% below the estimated values, respectively).

* As a result, EBITDA declined 20% YoY to INR928m (12% miss), dragged by lower revenues and GM, partially offset by the implementation of robust cost-control measures. EBITDA margins contracted sharply by 420bp YoY to 42.5%.

* Depreciation/Finance cost grew 30%/38% YoY, while ‘other income’ increased 56% YoY to INR151m.

* Consequently, PAT reported a sharp decline of 29% on a YoY basis to INR487m (16% miss)

Highlights from the management commentary

* Subdued demand during the quarter was mainly due to a shift in wedding dates and slowdown in discretionary demand. The management expects the festive period and the higher number of weddings in 2HFY24 to compensate for the weak 1HFY24.

* Apart from adding 35,000 sq.ft., the company renovated ~0.1m sq.ft. area to capitalize on the upcoming festive demand.

* The company is planning to expand the emerging brands by adding 4-5 more stores under Twamev and establishing one flagship store for Mohey (two small stores already added). These new stores will be operated on a pilot basis before finalizing the expansion strategy.

* Working capital remained elevated due to an increase in receivables and inventory days, primarily attributed to the addition of new stores and lowerthan-expected revenues. Additionally, there was a buildup of inventory to meet the festive demand.

Valuation and view

* Manyavar has successfully established a strong presence in the expanding market for Men’s celebration and occasion wear, a feat that is challenging to replicate.

* Although the company has substantial growth potential through the expansion of Manyavar, along with the growth in Mohey (women’s celebration wear) and Twamev (premium celebration wear) in the coming quarters, weak consumption continues to be a cause of concern.

* Despite a weaker trajectory witnessed in the past couple of quarters, the company is trading at rich valuations of 57.7x P/E and 36.8x EV/EBITDA on FY25 basis.

* We have revised down our FY24/25E PAT by 5% each on weak consumption trends. We expect revenue/PAT CAGR of 13% each over FY23-25, on the back of steady footprint addition.

* We ascribe a P/E of 55x on FY25E EPS and arrive at a TP of INR1,250. We downgrade the stock to Neutral.

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