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Outperformance driven by strong SSSG

*  Vedant Fashions (VFL) delivered good quarter with revenue/PAT rising 23%/37% YoY (10%/21% beat) driven by strong SSS growth of 17% YoY, lower base (-12% YoY in 2QFY24), and a favorable shift in festive dates.

* Our estimates are broadly unchanged. We build in FY24-27E CAGR of 15%/17%/19% in revenue/EBITDA/PAT, mainly driven by footprint expansion and single-digit SSSG.

* Demand revival in 2HFY25 on account of the festive season and higher wedding dates remains a key trigger for re-rating. Reiterate Neutral with a TP of INR1,500, valuing the stock at 55x Dec’26E P/E.

Revenue/PAT decline 23%/37% YoY (10%/21% miss)

* Customer sales grew ~24% YoY to INR3.3b, driven by healthy ~17% SSSG.

* Consolidated revenue grew 23% YoY to INR2.7b (10% beat), driven by: 1) a lower base (revenue -12% YoY in 2QFY24), 2) 17% SSS growth in customer sales and 7% YoY area addition, and 3) a shift in festival dates.

* VFL closed 12 stores sequentially. The closures led to a reduction in Manyavar’s presence in 7 Indian and 1 international cities. The total store count stood at 650, with ~1.7m sq.ft store area.

* Gross profit increased 26% YoY to INR2b (12% beat) as margin expanded 180bp YoY to 75.4%.

* Employee costs were largely flat YoY, while other expenses grew 23% YoY (7% ahead). The growth in other expenses could be due to the launch of the new brand “Diwas by Manyavar”.

* EBITDA increased 31% YoY to INR1.2b (17% beat), driven by revenue growth and GM expansion.

* EBITDA margin expanded 300bp YoY to 45.5% (280bp beat).

* Depreciation/finance costs grew 15%/28% YoY and other income increased 27% YoY during the quarter.

* Consequently, PAT grew 37% YoY to INR669m (21% beat).

* For 1HFY25, VFL’s revenue/EBITDA/PAT declined 4%/3%/8% YoY. The implied revenue/EBITDA/PAT growth for 2H is 15%/18%/16% on our estimates.

* FCF outflow of INR56m in 1HFY25 (vs. +INR310m in 1HFY24). The cash outflow was due to: 1) a decline in EBITDA and b) the amount blocked in WC (inventory stocking ahead of the festive season).

* WC days increased YoY to 243 (vs. 215 days YoY).

Highlights from the management commentary

* Demand trends: In Q2, the business returned to normalcy. Q3 saw a decent start with Diwali being couple of weeks earlier (vs. last year). Management remains upbeat on 2H growth on account of higher and spread-out wedding dates starting Nov’24.

* Store expansion: The management indicated that store expansions are likely to be higher in 2H, with some spillover anticipated into FY26. Some store openings in Q2 were postponed to the first week of Q3 (because of the Shradh period). The company usually closes 2-2.5% of its retail area every year. However, this year, the closure is expected to be higher at ~4-5%(a major clean up like this happens once in 4-5 years).

*  Diwas: VFL has launched a festive and celebration wear brand called Diwas. It is a digital-first brand available on online marketplaces, VFL’s D2C website, and the distributor network. The price point for Diwas is at INR1-2k (vs INR2-6k for Manyavar) and management does not expect any cannibalization on Manyavar sales, given the difference in channels and target consumption (festive vs. wedding).

Valuation and view

* Manyavar has successfully achieved scale within the growing men’s celebration and occasion wear market, which is difficult to replicate.

* VFL has a long runway for growth with footprint expansion in Manyavar. Further, the ramp-up of Mohey (women's celebration wear) and Twamev (premium celebration wear), coupled with the company’s foray into newer categories (Diwas by Manyavar, fragrances, etc.), provides additional growth triggers. However, sustained demand revival remains the key near-term trigger for a re-rating.

* Our estimates are broadly unchanged. We build in FY24-27E CAGR of 15%/17%/19% in revenue/EBITDA/PAT, mainly driven by footprint expansion and single-digit SSSG.

* Demand revival in 2HFY25 on account of the festive season and higher wedding dates remains a key trigger for any re-rating. Reiterate Neutral with a TP of INR1,500, valuing the stock at 55x Dec’26E P/E (vs. 65x average LT 1-year forward P/E).

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