Neutral Vedant Fashions Ltd for the Target Rs.460 by Motilal Oswal Financial Services Ltd
Resilient quarter, but await sustainable demand recovery
* Vedant Fashions (VFL) delivered a decent 1QFY27 with ~3.4% YoY/~7% YoY growth in customer sales/revenue, despite the lack of weddings for a month due to Adhikmaas.
* Despite a ~125bp YoY gross margin contraction (linked to GST rate changes), reported EBITDA grew 9% YoY (12% beat) and margin expanded ~60bp, aided by robust cost controls.
* Net retail area declined by ~15k sqft as VFL prioritized store closures ahead of the lull period. Management reiterated its focus on improving the quality of retail network and expects to accelerate gross store expansions, alongside the recovery in demand momentum (likely in 2HFY27).
* We fine-tune our FY27-28 estimates and now forecast a ~6-7% CAGR in revenue, EBITDA and PAT over FY26-29E.
* Following a steep correction, VFL now trades at ~25x FY27E EPS, undemanding for a franchise generating ~INR3b annual FCF and ~18% RoE. While valuations have meaningfully reset, VFL’s growth has stagnated and profitability has weakened since FY23.
* Maintain Neutral with a revised TP of INR460, premised on 25x Sep’28E EPS (earlier Jun’28). We await evidence of a sustainable demand recovery and earnings acceleration before turning constructive on the stock.
Decent beat on our muted expectations
* Customer sales grew 3.4% YoY to INR4.2b despite the lack of weddings for a month due to Adhikmaas, though they remained 16% below 1QFY23 levels.
* SSSG stood at 3.8% (vs. 17.6% in 1QFY26 and ~2.7% in FY26), with equal contributions from price hikes and volume.
* Revenue growth was higher than customer sales growth at ~7% YoY to INR3b (6% ahead), though it remained below 1QFY23 and 1QFY24 levels.
* Network expansion was muted as VFL net closed ~15k sqft, taking the total area to 1.77m sqft (-1% YoY). Store count stood at 651 (-18 QoQ, -33 YoY) as it closed seven domestic EBOs, eight SIS and three international EBOs.
* Gross profit (incl of job charges) grew ~5% YoY to INR1.98b as gross margin (GM) contracted ~125bp YoY to 65.7%.
* Employee expenses declined ~3% YoY, while other expenses remained broadly flat YoY, reflecting continued cost discipline.
* Reported EBITDA stood at INR1.3b, up ~9% YoY (12% beat). EBITDA margin expanded ~60bp YoY to 43.5% (~235bp beat), driven by better growth and operating leverage.
* Depreciation and amortization increased ~6% YoY, while finance costs declined ~8% YoY and other income grew ~15%.
* Reported PAT grew 15% YoY to INR806m (25% beat), aided by higher EBITDA and lower D&A. 1QFY27 PAT was still lower than 1QFY24 and 1QFY23 levels
Valuation and view
* Over the past few years, VFL’s sales have stagnated (<3% CAGR since FY23) due to higher competition, subdued demand sentiment in mid-premium categories, and an uneven wedding calendar.
* While the wedding calendar creates quarterly fluctuations, VFL’s growth has been structurally weak for the past few years despite a largely stable number of wedding days in FY24 and FY26 (refer: Exhibit 4 and 5).
* We believe rising organized competition in ethnic wear, coupled with a slowerthan-expected shift from unorganized to organized in ethnic wear, has been the key headwind for VFL.
* We fine-tune our FY27-28 estimates and now forecast a ~6-7% CAGR in revenue, EBITDA and PAT over FY26-29E.
* Following a steep correction, VFL now trades at ~25x FY27E EPS, undemanding for a franchise generating ~INR3b annual FCF and ~18% RoE. While valuations have meaningfully reset, VFL’s growth has stagnated and profitability has weakened since FY23.
* Maintain Neutral with a revised TP of INR460 (earlier INR440), premised on 25x Sep’28E EPS (earlier Jun’28). We await evidence of a sustainable demand recovery and earnings acceleration before turning constructive on the stock.
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