V-Mart Retail Ltd

[nikhilmoryani]

V-Mart Retail Ltd. operates a chain of retail stores. On the last count, it has 82 retail stores in operation aggregating 650000 sq. ft. of retail space approx. (round about 8000 sq. ft. per store) and plans to open 10-12 more by the end of Fy 14. The co. raised money worth Rs. 85-87 cr. for expansion in an IPO in start of the year.

The uniqueness lies in company opening stores only in Tier-II and Tier-III towns and beyond. As a strategy, the co. opens stores only within 150-200 kms of existing stores, helps majorly in supply chain management. The stores are first of its kind retail stores in all the places it sets shop, basically places where people have newly increased purchasing power and aspire for a better shopping experience. The stores mimic retail outlets in urban places, equipped with trained staff, air-conditioning, escalators, toilets, etc. The co.'s motto is to provide modern retail at affordable prices, basically focus is on value, playing on shift from unorganized to organized retail.

The co. does sales of roughly Rs. 8000 per sq.ft from two business segments, Fashion and Kirana. Approx. 85% of sales come from Fashion Segment (~ 75% is Apparel and rest from Non-Apparel) and the rest comes from Kirana Segment. The co. has completely stopped adding Kirana segment in its new stores due to poor gross margins viz-a-viz Fashion.

Snapshot of P&L A/C (Rs. Crs.)

	Fy 11	Fy 12	Fy 13
Net Sales	214	281	383
EBIDTA	18.7	27.5	38.8
PAT	6.3	10.6	17.4
EBIDTA Margin	8.7%	9.8%	10.1%
PAT Margin	2.9%	3.8%	4.5%

The margins have been improving because of improving sales mix with share of high-margin apparels going up and low-margin kirana items going down. The margins are expected to remain on approx. same levels, slightly better due to discontinuation of kirana segment completely in new stores.

The co. enjoys higher margins as compared to its urban counterparts on account of lower rentals, localized advertising and lower employee costs. The investment required to open a new store is also low, roughly Rs. 1300 per sq. ft. for CAPEX and another Rs. 1350/1400 per sq. ft. for inventory. This also results in higher RoE as compared to urban retailers. After expansion, RoE is expected at ~ 20%.

Worth a look. Views invited.

[jk321]

Good start Nikhil.

I noticed this stock some 15 days back & numbers look promising. From DRHP-

“Our total income has grown at aCAGRof 30.21% from 980.71 million in Fiscal 2008 to 2,819.54 million inFiscal 2012). Our profit after tax has grown at aCAGRof 33.04% from 35.24 million in Fiscal 2008 to110.40 million in Fiscal 2012.”

Strategy also looks nice- To grow in Tier-II & III cities.

But has run up a lot recently. I haven’t looked deeper though. Need to do that.

[Krish123]

The strategy of V-Mart looks good i.e concentrate on Tier-II and Tier -III cities and target the aspirational consumers who would like to have shopping as an experience just like in metro and cosmopolitan cities.

Shopper’s Stop, Trent and other big retail co are concentrating on Tier-I and metro. So V-Mart is actually competing with the local stores in Tier-II and Tier-III and taking the advantage of providing modern retail experience to these cities.

The current count is 82. The debt equity before IPO was 0.73 which has come down to 0.24 as per the latest HDFC report. The inventory days improved from 104 in FY12 to 92 in FY13.

V-Mart is now concentrating on high margin apparel and non apparel where the gross margins are 33% and 37% respectively which is much more than kirana at 13%.

Going ahead we should see the debt coming down and inventory days to further improve.

Over the past years v-,mart has ensured that expansion is mainlyfrom internal accruals and not relying on debt heavily.

Management targeting 35% Growth for this year:

http://www.thehindubusinessline.com/companies/vmart-bets-last-penny-on-fashion-lifestyle/article5068523.ece

HDFC Report

http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/2997366

If they can manage the inventory and working capital effeiciently (which needs to be monitored closely), then things can improve from here further and can give good returns.

Management seems to be focussed and are taking the right steps as of now and could not find any negatives as such.(This also needs to be closely monitored)

[nikhilmoryani]

Its a no brainer that it will be a fast grower on back of both,store additions and same store sales growth. It could roughly do a sales of 525 crs. in Fy14 and 700 crs. Fy15 and at ~ 5% profit margin will earn 26.25 crs. and 35 crs. respectively considering ~ 10% of same store sales growth.

GIven the current market cap. of Rs. 350 crs. its trading at 10x Fy15,which is quite reasonable to pay for a fast grower. Plus,valuations look cheap when compared to its established and urban counterparts like Shoppers Stop,Pantaloons and Trent.

V-Mart to command multiples anywhere nearby those commanded by established players will have to prove itself first. I think market is testing the execution of the cos. expansion plans. So far,its right on track with store openings,keen to see how it reflects in the numbers.

As rightly pointed out by Krishna Kumar, management of inventory/working capital,execution of expansion plan and same store sales growth would be key aspects to be monitored going forward.

Disclosure: Do not hold as of now,looking to initiate a position.

[dkirand]

Outstanding numbers from V-Mart in Q2 -http://www.bseindia.com/corporates/anndet_new.aspx?newsid=fe0e3651-fb8a-4a57-b262-89d7facf4f70

Disc: Invested

Few more details which were not covered earlier:

a) Number of stores in FY13 was 69. By end of FY14, mgmt has indicated they would take it to 94. And by end of FY15 to 120. This expansion would be done with no debt and no dilution of equity. (They are following it so far and still have 44 cr left from IPO funds for store expansion)

b) Key monitorables remain: Gross margins (currently around 30-32%, will help us check on massive discounts), Same store sales growth (has been around 10%, and going forward, mgmt has guided for around 10-15%), Sales per sq. ft (Rs.735 now), Working capital/Sales (currently at 82 days), average billing rate (currently Rs.400-Rs.500), shrinkage ratio (around 1%) and debt (long term+short term - there will be seasonality in short term debt due to nature of the business though)

c)Have 2000 suppliers, and each supplier not exceeding 1% of sales. No plans to get into manufacturing (backward integration as Vishal Retail called it, before that bombed).

d)Requires about Rs.2500-2600 per sq. ft capex to set up a store for the first time (Rs.1300 for the store, and Rs.1300 for inventory). So, 50 new stores for the next 2 years, on average of 8000 sq ft should come to Rs.100 cr (similar to what they have raised in IPO). Mgmt has guided that all further growth in stores will come from internal accruals only.

e)It secures long term leases (9-10 yrs) with all the rental locations, and the termination would be at the discretion of V-mart. Biggest surprise is the rent per sq. ft over the past 5 years has hovered around Rs.28/-. That is, almost no inflation for 5 years in rent. This is combination of aggressively moving into tier 3 cities + mgmt’s negotiations

f) From concall Q3 FY13 - “On same store sales growth - If you look at it for the age of 1-3 years, the Y-to-D same store sales growth is 19%; for the 3-5 years category it is 15% and > 5 years it is 8%. And this gives an overall aggregate of about 14%”

Since most of the stores right now are in the 1-3 year category, we can expect good same store sales growth for the next 2-3 years.

g) Current business mix -86% from fashion (apparel 75%, non-apparel 11%) and 14% from Kirana. No more kirana store addition. By logic, the % of kirana business should go down since more number of new fashion stores will be added (which should improve net margins)

h) On average, they employ about 33 people per store

i) From the AR (which is one of the best ARs I have ever read) -“At V-Mart, we expect that our business model will generate a 35-40% revenue growth and project to add about 25 stores in 2013-14, with a higher percentage growth in our post-tax bottomline, enhancing value in the hands of the shareholders”

j) From the AR again (and similar sentences repeated in concalls) - “At V-Mart, we would rather grow 30% compounded across ten years supported by revenue growth in every single year as opposed to 50% compounded with three down years in ten.”

k) Q4 FY13 concall, CFO - “On an average actually just to give you the seasonality in terms of numbersaI am talking basically about the bottom line. The bottom line in the first quarter is about 25%; in the fourth quarter at about 17% and the balance is accommodated between the second quarter and third quarter; the third quarter taking about 45% to 60% anywhere between that depending upon how the second quarter goes.”

Based on my study and the direction given by the management (along with the stellar Q2 results), I am conservatively expecting an EPS of Rs.14-Rs.16 in FY14, if not more. Let’s see how it goes.

Disc.: Invested

[dkirand]

Results press release from the management:

http://www.bseindia.com/xml-data/corpfiling/AttachLive/V-Mart_Retail_Ltd_231013_Rst1.pdf

They sound upbeat.

[Krish123]

18% same Store sales growth is excellent!!!

[Krish123]

18% same Store sales growth is excellent!!!

[Krish123]

It seems they are aggressively targeting this festive season with the inventory build up!!!

[ankitgupta]

Even I was looking at the numbers of the company today and was pretty impressed with it. I think what went wrong with other Retail companies like Pantaloons, Vishal etc was huge debt. Given its low gearing and small market size, this looks like a decent bet.

[dkirand]

Q2 presentation. Excellent stuff.

http://www.vmartretail.com/pdf/Review%20Q2’Mar’14.pdf

Improvement on every parameter you can think of (the ones I listed in point no. 2 above) - on a quarterly y-o-y and half yearly y-o-y.

The inventory vs cash still has to be ascertained in the concall tomorrow. Anybody has the numbers (dial-in/toll free etc.) for the concall at 4PM tomorrow?

[nikhilmoryani]

Toll Free : 18004254245

Dial-In : 022 33254200

[Vivek_6954]

1800 425 4245 n 022 33254200

[jk321]

last year’s Q2 was terrible… So, improving that isn’t too tough.

What remains to be seen is how they improve last Q3-- which made 10crs profit i.e more than 50% of full year’s profit.

[dkirand]

Attended the concall. Overall a good feel. Some analyst wanted to know about FMP maturity of V-mart’s money. There…anything to fill in excel sheets I guess!

Anyway, here are the updates (am sure we’ll have a neat pdf version in a day or two by V-mart itself) -

a) Global first: ‘Customer is God, Sales staff is the Pujari’. We are expanding into new territories. ‘Sourcing is the name of the game’ and Hemant (Lalit’s brother) is leading improving the sourcing initiative as much as possible.

b) Deepak read out almost all numbers from the ppt (http://www.vmartretail.com/pdf/Review%20Q2’Mar’14.pdf)

c) They ensure 24x7 power in all stores and they do this through diesel power backups. They have increased advertising to improve brand recall and investing quite a bit in employee training, contact programs for store managers etc. Due to these reasons, SG&A as a % of Sales has increased by a bit over last year.

d) The management is targeting Tier 3 the most, as they see the growth rates from Tier 3 have been the highest (bang for the buck also).

e) They are very clear that they would expand in district headquarters and want to encash any and every possible upswing in spending power - whether it be due to monsoon, elections, NREGA etc.

f) The like-to-like growth (not sure what that means) in tier 2 and tier 3 was 10% and tier 1 was 8% (not sure if it was revenues/profits)

g) They want to maintain EBITDA margins of 10% and above. In fact, Lalit did say that they want to ‘live and let live’ the ecosystem and he would be happy to be at 10%. If anything comes over and above that, he’ll take it.

h) They are highly optimistic about a positive cash flow by end of the year

i) **Important point:**There has been a -ve 38 cr in the cashflow statement due to working capital. Deepak explained that this was because of 3 reasons i) They planned their winter purchases better (they bought earlier than last year) and this accounts for 22-25 cr and ii) they were stocking inventory for new store openings (8-10 cr) and iii) They usually have 15-20% more inventory than Q1 in anticipation of the festive season

j) Sales breakup typically is Q3 -> 30-35%, Q2 -> 20-25%, Q1 and Q2 about 25% each depending on how Q3 goes. (Profit breakup was given in Q3 concall, please see my post previously)

k) The ideal sales per square feet per store is around Rs.800/-. They are around Rs.708/- for the half year.

l) There was some impact due to UP riots, although can’t quantify. There was 10-15 days of disturbance. And then there were floods etc. Can’t quantify impact.

m) Currently the breakup of product mix is 86:14 in apparel:kirana. They are planning to take it to 90:10 in about 2 years. Two reasons will contribute to this: i) All new stores will be fashion stores only ii) They have introduced a ‘space policy’ whereby they expect kirana space to reduce to incentives related to space policy.

n) They are not looking at specific store addition count (although they are on track for 25 stores for this FY14 - which will take the number of stores to 94 by March 2014). What they look for is - ‘Can we grow the P&L by 30% CAGR’ and that defines their store addition. No aggressive plans as such. They look for best return on capital employed.

That was my summary notes. If I have missed out on any point, please do include. We also had a list of questions prepared, but unfortunately couldn’t ask. I have dropped an email to the management with our questions. Will paste their response here if it comes by.

Kiran

[dkirand]

We had posted a few questions to the V-Mart management which we weren’t able to ask on the concall. Thankfully, V-Mart management responded promptly. Here is the Q&A -

1. The average sales per sq ft increased from Rs.507 in 2011 to Rs.685 last year and this year we should be Rs.700-710 levels. Apart from the product mix changes (lesser kirana, more fashion which seemed to have contributed to most of the increase in avg. sales per sq ft over the past 2-3 years) what are the major 2-3 levers that you have that can drive up the avg. sales per sq ft. in the next 2-3 years?

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Reply: We are increasing the average sales per square feet by meeting the aspirations of people by proving quality fashion at affordable prices. This will come by having a enhanced understanding of customer taste and preferences. Further, we have rationalized our Store Display Policy, giving good promotional schemes to our customers and better incentive plans for our employees to increase sales per square feet per month.____

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2)Did we close any stores this year? We had closed 6 stores in 2010, 3 in 2011 and 1 each in the last 2 years. Any plans of closing down any stores this year. If you could give us an indication of what are the criteria to close down stores and how many stores might be meeting this criteria in the near future?__

Reply: We evaluate financial performance of every store on Store EBIDTA parameter.We have not closed any of our store in FY14____

3. What is the store breakup in terms of vintage in1-3 yrs, 3-5 yrs > 5 yrs categories for end of Q2?____

Reply:Stores break up in terms of vintage as on 30 Sep 2013 is as follows:____

Stores age No of Stores____

Less than one 24____

1-3 years 18____

3-5 years 24____

More than 5 years 16____

4)We have about 44-45 cr left from the IPO proceeds. Given that we require about 2-2.5 cr per store (capex + working capital), we are looking at about 20 more stores. Beyond 20 stores, how are we planning to open more stores? Will further growth post 20 stores come only from internal accruals? Or are we looking at other forms of funding?____

Reply: From internal accruals only____

5)Can we get an idea of what % of sales grew because Ramzan fell during Q2 this year?____

Reply: It is very difficult to identify and quantify. It will effect several stores and percentage effect on sales is different for different stores.

[nikhilmoryani]

Hi Kiran and Members,

I have two questions pertaining to retail businesses.

1.For a company in retail industry,can we cross-check the Same Store Sales growth no. in any way,assuming that the co. is adding stores every year?? I think the co. can make up any no. and present to shareholders,there’s no way to ascertain it,the growth in newly launched stores can make up for low growth/no growth/de-growth in more than 1 year old stores and vice-versa is also quite possible. Can it be right??

All I can say confidently is if sales/sq ft. is growing even after considering the store additions,the co. is doing good. If sales/sq ft. is same even after store additions,it’s a lame business requiring additional capital to grow additional even a bit.

2). How does one come to know about dead stock?? Shrinkage only covers loss of inventory,what about stock that doesn’t get sold. All the retailers say that their profit margins on every unit sold is in the range of 50-100% but that doesn’t reflect on overall basis since all the units don’t get sold. How does one come to know about it??

Took some position in V-Mart after initial write-up,trying to know retail in depth.

[dkirand]

Hi Nikhil,

a) There is no good way to track/cross-check the same store sales growth - it’s totally upto to the point whether you trust the management or not. It’s almost like, if Tata Steel says they have sold x tons of steel, there is no good way to verify whether it was x tons or x - 10000 tons.

Eventually, it should get reflected in the cashflow statement. Sales per sq ft can only go up by so much - right now it’s around Rs.700/- and the mgmt indicated that the ideal is Rs.800/- per sq ft (unless, they start moving into higher price point apparel). So, tracking only this to determine a good/lame business may not be very prudent.

b) The only good way to track is inventory turnover/days. If the inventory days are deteriorating (and you can compare V-mart’s trend to a Pantaloon/Shoppers stop) over the last 3-4 years, then there is a lot of dead stock left over. Usually, dead stock is churned by good managements through prudent markdowns (heavy/light). Right now, inventory days is about 82. If it deteriorates to say 100-110, then you have a lot of dead stock. If it reduces (as is the case with the V-mart over the last 3-4 years), then there is little dead stock. I don’t know if there is any other good way to quantify dead stock other than tracking inventory turnover (or you have access to their SAP system ).

[dkirand]

Between, does this wonderful video remind you of anything? -

http://projects.flowingdata.com/walmart/

[nikhilmoryani]

Hey Kiran,quite agree to your answers. Trust,I guess,will only become strong as more and more quarters pass by.

And yes,that video reminds me of V-Mart’s strategy to open stores close by. Its a good strategic choice as it need not invest in warehouses a lot viz-a-viz if it had chosen to have a scattered presence.

Two more factors going strong for the co.,in my opinion are:

1). High tendency to adopt latest trends and fashion among Tier 2,Tier 3 and beyond.

2). Social Proof. No one wants to be left behind in trying out that big and new department store in town,more so,not in bragging about shopping from it.