Downgrade to REDUCE on V-MART Retail - Recovery disappoints, profitability intact - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

V-MART's recovery remains better than most, although it fell short of expectations (5.8% vs HSIE: 12%). Recovery was led by pent-up demand for summer collection and improving footfalls. Better inventory relevance/control (translating into lower discounting) led to gross margin expansion. GM/EBITDAM expanded 127/117bp to 29.8/9.5% (HSIE: 28.6/8.4%). Working capital (WC) remains elevated due to stock-up of fresh assortment (to play the recovery). Note: VMART recently raised INR 3.75bn (for furthering growth aspirations). We cut our FY22/23 EBITDA estimates by 40% (to account for the second wave impact) and 5% respectively and revise our DCF-based TP to INR 2,500/sh (implying 24x FY23 EV/EBITDA). Downgrade to REDUCE.

4QFY21 highlights: Revenue grew 5.8% YoY to INR 3.5bn (HSIE: INR 3.7bn). Recovery was led by pent-up demand for summer collection and improving footfalls. FY21 LTL decline stood at -39.9% YoY. Note: footfall recovery (88%) continues to lag topline recovery (+5.8% growth). Average bill size/conversion rates remain elevated (+8/61% respectively) as customers continue to prefer purposeful shopping. GM expanded 127bp to 29.8% (HSIE: 28.4%). EBITDAM expanded 117bp to 9.5% (HSIE: 8.4%). Working capital remains elevated due to stock-up of fresh assortment (to play the recovery). 4Q losses stood at -INR 15mn. VMART added 6 stores (net) in 4Q (Store count: 279) and intends to continue adding at a reasonable clip in FY22 (40+ stores). FY21 Capex stood at INR 0.4bn. Capex earmarked for the new warehouse is INR 1bn (to be operationalised by end-FY22).

Outlook: VMART's FY21 performance gives a glimpse of how an efficient retailer operates during a crisis. However, the recent run-up in stock performance leaves little margin of safety for investors, especially within the context of the uncertainty of the second wave of lockdowns. We revise our DCF-based TP downwards to INR 2,500/sh (implying 24x FY23 EV/EBITDA) to account for (1) -40/5% EBITDA cut in FY22 (second wave-led)/FY23 respectively and (2) QIP-led equity dilution (8.5%). Downgrade to REDUCE.

Shares of V-MART RETAIL LTD. was last trading in BSE at Rs.2792.55 as compared to the previous close of Rs. 2774.05. The total number of shares traded during the day was 340 in over 97 trades.

The stock hit an intraday high of Rs. 2798.2 and intraday low of 2753.15. The net turnover during the day was Rs. 941720.

Source : Equity Bulls

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