V Mart Retail Limited - Tapping the thriving middle class - Initiating Coverage - Antique

Investment Highlights

Early mover advantage in Tier II and Tier III cities provides an edge

V Mart' s strong presence in Tier II and Tier III cities (80% of its total revenues) provides it an early mover advantage in these high potential markets which are witnessing a rapid shift towards branded products. V Mart has set the base for long term growth by successfully tapping the aspiring youth population in these markets by providing them affordable fashion in a luxurious shopping environment. Additionally, the competitive environment in V Mart' s target markets remains low as majority of the organised retailers like Pantaloon Retail, Shoppers Stop and Trent, primarily focus on Metros and Tier I cities.

Rising share of Apparels to aid margins

V Mart key objective is profitable growth with major focus on the non-kirana business (apparel and non-apparels, including footwear, purses, jewellery etc). Gross margins in apparels and non-apparels are at 33% and 37% respectively, 2-3x the gross margins of Kirana at 13%. We expect V Mart' s contribution from non-kirana sales to increase by 649bps to 87.5% of net sales during FY13-FY15 leading to a 127bps improvement in gross margins to 31.0%. This in turn is expected to support overall profitability in a period of substantial ramp up in operations.

Low cost operations to drive outperformance

V Marts presence in Tier II and III cities has provided it, with one of the most competitive low cost models amongst Indian organised retailers. The company' s key cost component rental is one of the lowest in the industry at 4.5% of net sales against the Industry average of 6-7% of net sales. Additionally, V Mart' s staff cost is competitive at 6.5% of net sales against Shoppers stop' s 7.6% and Trent' s 8.2% of net sales.

Net Sales to grow by 38% CAGR led by 30% CAGR in retail expansion, PAT to grow by 55% CAGR

Backed by a 30% CAGR in retailing space, we estimate V Mart to record a net sales growth of 37% CAGR during FY13-FY15 to INR7.17bn. PAT during the period is expected to grow at 49% CAGR to INR397m. This will transpire in to an EPS of INR15.6 and INR22.1 respectively during FY14e and FY15e.

Outlook and Valuation

At the CMP of INR117, the stock is trading at a PE of 7.5x FY14e and at 5.3x FY15e and at an EV/EBITDA of 3.7x FY14e and 2.9x FY15e. These valuations are at a significant discount to the peer-set in view of the strong growth in earnings, lower debt levels and better return ratios. We therefore value the company at an EV/EBITDA of 5x to arrive at a target price of INR203 (providing a 73% upside from the current levels).

Source : Equity Bulls

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