V-Mart Retail - 'V' for value; initiate with Buy - Anand Rathi

Key takeaways

Niche player in tier 2 and 3 towns. V-Mart Retail (V-Mart) has adopted the strategy of focussing in tier 2 and 3 towns where competition is minimal (no large-format stores, FDI-backed outlets), but growth potential is high. Its USP is the cluster-based strategy, with inter stores distance being < 150 kms, which facilitates excellent inventory management. Going forward, V-mart intends to focus on North and East India, which are relatively underpenetrated (as over 70% of modern trade is in South and West). Thus, its capex per sq ft could be limited to just Rs. 1,300 versus Rs. 3,000 for its peer set who usually focus on tier 1 cities.

Multiple competitive advantages. It's positioning affords the advantage of having limited focus on low RoI segments like cold chains and private labels, which are imperative for attracting footfalls but lifestyle shopping helps to drive footfalls upwards. Regional/vernacular media campaigns offer massive savings on ad-spends. It also enjoys the first-mover advantage in its cities of operation and has secured it long-term leases (9-10 years) at prime locations, thereby shielding it from rental inflation. This along with contained Staff costs (as it employs locals) has enabled an improvement in margins to 10% in FY13 from 4% in FY09. There has been a positive rub off on capital efficiency ratios also.

Modern trade a structural opportunity. In last six years, retailing in India has recorded a 14% CAGR. Modern trade accounts for ~6% of retail sales in India. An anticipated consumption growth of ~ 14% (nominal GDP growth), coupled with low per-capita consumer-product consumption augur well for modern trade. Other nuances like economies of scale, improved shopping experience, lower normal losses and optimum inventory management convey that the segment is poised for strong growth, going forward.

Our take. We initiate coverage on V-Mart with a target of Rs. 240 at PBV of 2x FY15e earnings. We expect it to report healthy earnings CAGR of 64% over FY13-15e, led by strong revenue CAGR of 46%. RoE is in range of 21-23%.

Source : Equity Bulls

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