V-Mart Retail Ltd - Q2 FY21 Result Update - YES Securities

3Q is progressing well with early onset of winter and improved consumer sentiment, well placed to grow ahead of market, reiterate BUY

- Valuation and view - The early onset of winters coupled with an uplift in consumer sentiment in the festive season has raised hopes of a return to positive growth trajectory in 3Q itself. Company's efforts on inventory liquidation resulting in fresh inventory, timely vendor payments resulting in better procurement and restoration of employee salaries have placed it in a strong position to grow ahead of the market in the near and medium term. We reiterate our BUY rating with a TP of Rs 2,400 based on 40x FY23E earnings.

- Result Highlights - V-Mart reported a revenue decline of 44% yoy vs our expectation of a 40% decline. GMs were also slightly below our estimate at 28.8% for the quarter. Strong overhead cost controls helped in almost breaking even at EBITDA level which margins at 0.2%. Higher other income driven by rent concessions on lease rentals (Rs 146mn) helped deliver an in-line loss of Rs 189mn for the quarter. Cash flow situation has improved despite limited buying which has brought down payables helped by a strong focus on inventory liquidation which has led to a sharp reduction in inventory.

- Presentation highlights - No. of stores down to 264 with 2 opened and 4 closed, fashion contribution to revenue down from 92% to 91%, footfalls down 58%, conversion rate flat at 59.5%, transaction size up 19%, units per transaction up 24%, apparel ASP down 15% indicating more purchase of basic products leading to some downtrading and high sales of kidswear.

- Outlook - Strong demand outlook in the coming months given strong outlook for rural incomes and early onset of winter which can lead to bundling of festive and winterwear shopping, company has improved merchandise quality and reduced price points further which is helping drive strong sales since October.

- MD commentary - Progressive upliftment in business environment, multiple lockdowns in local administrations in key markets like UP and Bihar, rural economy and income levels are faring better led by agriculture, small business owners have been impacted, mom improvement, some retailers have faced difficulties and some have bounced back well, shifted from predictive to reactive mode by being agile to the dynamically changing environment, change in COO with Vineet Jain coming from Future Retail, accelerating the omni-channel journey.

- CFO commentary - 95% stores operational at qtr-end, 79% operational days in 2Q during the quarter from 34% in 1Q, festive calendar shifting by 20 days which impacted East sales, EOSS for extended period to liquidate inventory, continue conservative inventory provisioning, 95% vendor dues cleared to help gain their trust, less than 25% utilisation of WC limits, full restoration of salary cuts from September, rental savings of 19crs in 1H, closed 2 stores, opened 7 stores in October, strengthened omni-channel presence on both own website and outside platforms (currently at 1% revenue).

- Payables - Had already started paying vendors early to get better rates and improve vendor health before COVID, will continue the same going ahead.

- Inventory - All stores stocked up with fresh winter inventory and summer inventory was aggressively liquidated; current summer inventory at all-time low so do not expect any provisioning going forward.

- Competition - Peers who have managed inventory well doing well; some are struggling with liquidity issues and pruning down store footprint.

- Demand recovery - Still some fear of going outside for shopping but overall traction strong in near-term, Tier 3 and 4 markets faring better than Tier 1 markets; difficult to forecast if will reach full normalcy in FY21 itself.

- Operational status - Currently running at 95% operational days in 3Q, divergent trends in Durga Puja period, East and North-East did not normalize fully, but post Puja, have seen strong recovery in Hindi heartland.

- Store closure/expansion plans - Not looking at more closures in FY21, back on the path of expansion again and keep looking out for high-potential locations.

- Winter/marriage season sales - Early onset of winter has helped sales with company obtaining winter merchandise just-in-time; marriage sales would be impacted with reduced size of gatherings.

- Overhead costs - Employee costs have been normalized in September, even A&P costs will be normalized in 3Q.

- Fund raising plans - Might not need a fund raise if things normalize and there are no further setbacks; still reviewing whether fund raise is required for growth opportunities and digital investment requirements.

Shares of V-MART RETAIL LTD. was last trading in BSE at Rs.2011 as compared to the previous close of Rs. 1967.2. The total number of shares traded during the day was 1062 in over 329 trades.

The stock hit an intraday high of Rs. 2015 and intraday low of 1974.1. The net turnover during the day was Rs. 2123021.

Source : Equity Bulls

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