V-MART Retail - Best play in value fashion segment; initiating with BUY - ICICI Securities

V-MART (value fashion retailer) is well positioned to capture growth opportunities in tier 2-4 cities with aggressive store openings and first-mover advantage. It has already built a successful and highly profitable business model. However, near term focus would be on preserving cash through cost reduction, rationalising capex and optimising working capital. Rising competition, increasing share of new stores vs matured stores, and investment in supply chain will keep margin range-bound and return ratios steady. We like the company's revenue growth potential, timely execution and best-in-class return ratios. Initiate with BUY and DCF-based target price of Rs2,500/share on Sep'22E.

- Large opportunities in value fashion segment: Tier 2-4 markets provide huge opportunities based on demand and under-serviced appetite for quality products. V-MART, being one of the low-cost value fashion retailers, will be key beneficiary as it bridges this gap to match consumer aspirations. Company currently has 266 stores in 191 cities across 19 states (out of 600+ districts and 5,000+ cities and towns). Post lockdown relaxations, currently >90% of network is operational and has witnessed a positive recovery trend in sales.

- Aggressive store additions to resume from FY22E: V-MART's revenues have grown at 18% CAGR led by network additions which have more than doubled over FY15-20 coupled with average SSSG of ~6%. Management usually targets 18-20% area addition p.a. through cluster-based expansion strategy. Given Covid-19 disruptions in FY21, the store addition plans are likely to take a halt in FY21E; but should resume from FY22E. Accordingly, we model average 39 stores additions p.a. with area additions at 12% CAGR over FY20-23E.

- Margins to remain range-bound; albeit industry leading: Company's focus is on market share gains by passing the cost benefits over margin expansion. Increasing share of new stores and investment in supply chain (warehouse, omni channel, etc.) would keep margins range-bound. Nevertheless, margins would remain industry- leading on the back of its low costs structure (low rentals and A&P spends), cluster-based store expansion strategy, better negotiation terms with vendors, & operating leverage. The steep cost arbitrage also acts as safety tool vs online players.

- Lean balance sheet; better than peers return ratios: V-MART's entire growth in the past few years has been funded via internal accruals and IPO proceeds. The company is net cash since FY16 and guided to exit even FY21E with same status. Recently, the company has passed an enabling resolution to raise upto Rs5bn to explore various growth opportunities. We model FCF generation of Rs620mn post factoring-in working capital blockage and capex of Rs1bn and Rs1.8bn respectively over FY20-FY23E. V-MART's industry-leading return ratios (300-500bps higher than peers) are likely to remain steady at 16-17% over FY21E-FY23E.

- Initiate with BUY: We model 11-14% revenue / EBITDA / EPS CAGR over FY20-FY23E after factoring-in 45% YoY drop in EBITDA in FY21E. DCF based our target price on Sep'22E implies 18% EBITDA CAGR over the next 10 years discounted at 11% WACC and assuming 6% terminal growth.

Shares of V-MART RETAIL LTD. was last trading in BSE at Rs.2029.95 as compared to the previous close of Rs. 2007.3. The total number of shares traded during the day was 225 in over 134 trades.

The stock hit an intraday high of Rs. 2094.7 and intraday low of 2014.7. The net turnover during the day was Rs. 460382.

Source : Equity Bulls

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