Maintain BUY on V-MART - Top-line disappoints; Margins surprise positively! - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities.

V-MART (Q4FY20 Results Review): Top-line disappoints; Margins surprise positively! Maintain BUY

V-MART remains one of the most nimble retailers in our universe. Its strong value proposition, leaner balance sheet and better inventory fungibility vs peers, should help V-MART navigate the COVID-19 crisis better than peers. A fragmented landlord base could further help V-MART lower its fixed costs base, ergo, help restrict the COVID19-led damage to its P&L and balance sheet. We maintain our BUY RECO on the stock with a DCF-based TP of Rs. 1,800/sh implying 22x FY22 EV/EBITDA (FY22 EBITDA cut is 21%).

Top line disappoints: Revenue grew -3.4% YoY to Rs. 3.3bn (HSIE: Rs.3.48bn) in 4Q. (SSSG: -18%). Pre-COVID19 performance remained robust underpinned by the late onset of winter. (Revenue up 29% YoY, SSSG: 8%, EBITDA up 60% until 15th Mar-2020, COVID19-led revenue loss: Rs. 0.75bn). In FY20, Revenue grew 16% YoY to Rs. 16.6 bn. (SSSG at -2.3%). Pre-COVID19 revenue growth/SSSG came in at 21%/3.2% resp. Plans to introduce wellness products like fashion masks and Essentials in more stores may partially cushion the expected revenue decline in FY21.

Margins remain healthy: While GM at 28.5% (in-line) were down 45bp YoY courtesy ad-hoc inventory loss provision of Rs 90 mn, Adj. EBITDA margins declined 334bp YoY to 1.8% (HSIE: -0.5%) in 4Q as COVID19-induced store closures impacted profitability and fixed costs remained under-absorbed. The beat on EBITDAM was primarily led by lower-than expected cost of retailing. Adj. Cost of Retailing inched up 281bp YoY to 26.6% (HSIE: 29%) in 4Q. Losses at Rs. 84mn in 4Q were lower than expected given the EBITDA beat and lower tax-outgo (HSIE: Rs. 191mn). In FY20 GM/EBITDAM remained flat/declined 130bp resp to 32.3/8% resp. (normalized GM: 32.7%).

Crawling back to normalcy: V-MART added 52/9 stores (net) in FY20/4QFY20, nearly all stores were shut during the lockdown. However, since May, ~140/185 permitted stores are now operational (witnessing ~40% of Pre-COVID19 footfalls during operational hours).

Core Cash Conversion deteriorates: Core CC Cycle deteriorated to 60 days in FY20 (vs 49 days in FY19) as the company couldn't off-load Mar-20 inventory given the lockdown (Inventory days jumped to 105 days in FY20 vs 84 days in FY19). Note: Pre-COVID Inventory days improved to 80 days.

Bank Sanction increased: V-MART increased its Bank Sanction limits (Very Few retailers have managed to do this) to Rs. 2.3bn (vs Rs. 0.8bn in Feb-20) and only 15% of this limit is utilized. Assuming a 25% reduction in Fixed cost run-rate to Rs. 180-190mn, V-MART has >6 months of Fixed Cost cover.

Shares of V-MART RETAIL LTD. was last trading in BSE at Rs.1644.4 as compared to the previous close of Rs. 1639.8. The total number of shares traded during the day was 765 in over 219 trades.

The stock hit an intraday high of Rs. 1695.05 and intraday low of 1628.55. The net turnover during the day was Rs. 1269991.

Source : Equity Bulls

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