V-Mart Retail Ltd.: Short term pain, Long term gain - Accumulate
CMP (Rs) 530, 12-mts Target (Rs) 577, Upside 9%
V-Mart Retail Ltd. (VRL) reported subdued performance in Q1FY17, where revenue grew only by 11% to Rs2,271mn due to less festival and wedding days(compared to Q1FY16), lower consumption levels, negative SSG (same stores sales growth), reduced conversion rates, and intensifying regional competition. In volume terms, VRL reported SSG of (5%) in Q1FY17 as against 12.7% in Q1FY16, while in value terms, VRL reported (4%) in Q1FY17 as against 8.7% in Q1FY16. Despite a flat gross margin at 30.3% in Q1FY17, EBITDA margin declined by 245bps to 7.9% owing to lower sales, high employee cost and increase in other expenses (mainly high advertisement expenses to combat rising regional competition). On YoY basis, VRL reported subdued performance in key parameters like 1.7% decrease in sales/sqft to Rs806, 2.3% decline in average footfalls/store and 110bps increase in shrinkage to 2.3% in Q1FY17. With 100bps increase in fashion segment to 93% in total revenue contribution, transaction size increased by 2.8% to Rs663 due to higher ticket size. During Q1FY17, the company opened 5 new stores and closed 1 store in Bhavnagar (Gujarat), taking the total store count to 127. As on 5th Sept 2016, the store count stands at 130. As per management, the SSG will gradually pickup from H2FY17 (due to higher number of festival and wedding days). The management has maintained its guidance of setting up 20 new stores each for the next two years.
With better monsoon and increased rural spending by government, rural and semi-rural demand is expected to pickup in H2FY17. In addition, the urban consumption is also likely to revive on the back of OROP and 7th pay commission. We foresee a slow-paced revival in H2FY17 but expect a faster recovery in FY18E. We expect VRL to report marginal uptick in margin to 8% in FY17E as the company will continue with higher discounts and various other schemes to compete effectively against regional competitors. We expect VRL to witness a revenue/net profit CAGR of 16.3%/28%, respectively, coupled with a zero net D/E ratio in FY18E, operating/free cash flow of Rs970mn/Rs270mn, and a 393bps improvement in RoCE to 15.6% over FY16-FY18E. We have assigned an Accumulate rating with a TP of Rs577 based on 23x/11x, FY18E P/E and EV/EBITDA, respectively.
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