We have been very aggressive on our store expansion. We have added almost 45 stores in this particular year till now. We have plans to open up some more stores. We are very aggressive and that is why we have seen a small dip in inventories. Our expenses have gone up also. We are focussing on new store openings which are increasing our cost a little bit, but we will build a capability to increase it going forward.
We are not targeting only quarter on quarter growth, but we are targeting for next 3-4 years. That is why we are putting a little more pressure on our expenses. Our profitability has been impacted a little bit but for the larger benefit, we are making a lot of investments on those lines. We are also investing in developing the omni channel.
A large part of those expenses will bleed away some profitability, but will also stabilise and make our profitability consistent for years to come.
Blunt and honest interview by management on potential GST hike, FY20 growth, competition, etc.
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A steep correction in valuations makes this value retailer worth a second look
I think itās highly overpriced at this valuation. The fair value of the stock may be price range of 1000 to 1200. I think it will correct after the result
Could you please guide us with reasons for your thinking.
Thanks
Hello. After reading the AR 2019 the company have 214 store revenue of 1440 cr and PAT is 62 cr, Mcap is 3600crā¦ So 1 store revenue is 6.72 cr PAT of 1 store is 28 l. And we pay for it around 17 cr for one single store. in very competitive industryā¦
Very right analysis.
It still has 2.5 times market capitalization of sales while Walmart has always traded far cheaper.
Check out following link -
There were few one offs last year before reaching this PAT numbers . Have you gone through and considered that ? I think it would be prudent to identify those n have a normalized profitability no on per store basis . Do let us know your views post that
Hello sir
I read only 2019 AR. Iāll read read the latest quarter number then calculate itā¦ thanks
Decent set of results aided by addition of new stores, much improved EBIDTA margin and corporate tax cut.
Q3 Rev 21% up YoY
Q3 EBITDA 59% up YoY
Q3 PAT 40% up YoY
SSSG at 1% appears to be a concern. Although management had warned about the same in Nov-Dec interviews and the civil unrest in UP also had a part to play on the same.
Interesting update from press release:
āFor the upcoming Spring-Summer 2020 collection, the company is planning to launch two new themes - trendy streetwear for the youth, and a āknowledgeā themed collection for kids with exciting graphic prints inspired by animal faces, fruits, alphabets, and toys.ā
Kids category can be a high growth category if marketed and executed well.
Wouldnāt want to extrapolate too much into the future, but if company can maintain Rs. 30+ quarterly EPS run-rate - trades less than 17-18 times annual earnings.
Disc: Invested
PE is many times more misleading. My reading if i can recall once we get rid of one offs like IL&FS write offs n some expenses which were yet to give results, stock was at 32-33 trailing PE. Growth had become stagnant due to rural slowdown , however company still has presence in around 200 towns where as as per concall there r 600+ towns if i remember which fall in there bucket . So still 33% penetration plus SSGR plus possibikity to ve multiple stores . Still i think ecommerce model how it plays out need to be seen n bigger threat. Lot of competition has come from physical retail but considering they ve a relatively stronger model with better key KPIs to withstand pressure , e commerce is major risk to monitor . Now, with growth , this normalized 33 PE should come down. Disc : Invested in last 3 months
As we already know, there is a lot of seasonality in business of Vmart. So while the company has managed to do very well in terms of revenue growth and margin expansion in its strongest quarter, it remains to be seen how the company does in a lean quarter such as Q4,especially in light of a consistently weak SSSG rate.
This is where the recent fast expansion of stores and the accompanying challenge with regard to operating leverage might weigh in on the overall numbers being weak in an economy that is yet to pick up.
Whatās your take on Vmart now with the whole virus situation?
Conference call takeaways
ļ· Extended store closures in Bihar and UP in Sep impacted footfalls. Currently, the company is
seeing good recovery in the core catchment area. Demand is higher in tier-3/4 stores compared
to the tier-1 market. The recovery in the north and west is slower compared to stores in east
India; however, VMart didnāt see complete recovery during the Durga Puja festival season.
ļ· Retailers with low liquidity are under pressure, while most of V-Mart competitors are doing well.
ļ· Winter has come a bit early this year and the company has already stocked winter merchandise in
its stores, which has resulted in good offtake. Pending marriages from summer are expected to
take place in the winter, which could increase sales, even if the number of customers attending
these would be significantly lower than in pre-pandemic times.
ļ· While VMart closed two stores in Q2FY21, it hasnāt planned store closures ahead. It opened 7 new
stores in October and plans to open more stores.
ļ· Gross margins were depressed due to higher provisions, and extended end-of-season sale in
September for liquidating inventory.
ļ· Inventory has reduced by Rs 1.1bn in the last six months as VMart liquidated old stock. It also
started buying winter inventory. It has lowest levels of summer inventory; a large portion of
current inventory is winter and core products. Trade payable reduced by Rs 1.1bn as vendor
payments due till August 2020 was cleared. VMart continues to support vendors in order to gain
preferential status.
ļ· Online revenues are less than 1% currently. VMart continues to focus on digitisation, as customer
adaption increases.
ļ· The company has taken an enabling resolution to raise Rs 5bn. Depending on the business
recovery and external opportunities, management will consider raising funds in the future.
ļ· Employee salary cuts have been rolled back from September; the company will spend aggressively
on advertising for increasing customer traction in the festive season.
Any idea why the promoters have been reducing their stake? Also there is a small promoter pledge? Wonder what is that for? thanks
This has been an informative thread on VMART. Spent sometime on this business and sharing my two cents below. Feedback and further insights welcome.
First principles:
- Clear focus on value retailing (primarily private label apparel) in tier 2-4 towns. Giving aspirational India a branded and organised retailing exp.
- Focus is on keeping costs low and keep on passing incremental savings to customers. Similar to DMARTās thinking. Clearly mention donāt want to expand margins but will drive volumes. (Sam Waltonās book)
- First generation guy, still ambitious and comes from a traditional retailing family (father had a few small shops). Does not seem to be doing anything else but this; still in his late 40s.
- All expansion has happened without debt; mgmt clear wont leverage for the sake of expanding. Will follow DMART like cluster based expansion strategy to leverage on regional economies of scale.
- Low advertising costs and depend more on word of mouth and regional advertising (newspaper)
- Growth has been primarily financed through internal accruals leading to a low dividend pay-out as expected.
- Average SSSG can trend at 6-7% with 15% store addition over the medium term. Business can thus on an average clock high teems CAGR in topline and a similar earnings growth.
- Runway for growth remains very long due to low organised retail penetration in India. Have an established profitable and scalable business model in place.
- One key area where they differ from DMART is store expansion; they enter 9-12 year leases on standalone high street properties and donāt buy and build their own stores.
- This has made their model very asset light with DMART like retailing economics (high throughput and turns with lower margins but accretive ROCEs)
- Store closures have been very few every year and have been contained suggesting new store addition is well thought out.
Valuations and key risks:
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FY22 valuations at the time of entry are about 45x versus 80-10x for DMART which are fair owing to the below points.
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VMART (like DMART) is a rare clean profitable play on Indian organised retailing with a proven business model (India has <20% organised retailing share versus 80% in developed markets)
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Premium valuations are due to a higher growth profile and the longer runway. This is among the few businesses where high ROCE is almost entirely re-invested to generate more EVA
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The discount versus DMART is warranted as apparel retailing is relatively more penetrated than F&G retailing and has more competition (F&G has only RIL; most others have failed or are loss making)
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The quality of the mgmt. and the franchise while good is probably not in the same league as DMART (basis various qualitative factors)
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The key risk in this business as in any other retailing business is that the only main source of moat here is having a low cost structure, driving economies of scale and executing a very tight ship
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This is something which is hard and both DMART and VMART are proven exceptions.
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This is also a low margin business which means earnings from a year to year basis will be volatile (2-3% drop in GM can lead to 25-30% PAT change). This is not a concern for a medium term investor.
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Traditionally, bulk of their stores have been in the small towns where few large competition was present. That is not changing with RIL and others penetrating smaller towns.
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Mgmt. has also highlighted this as a risk and is now entering more tier 4 towns. According to me this risk is exaggerated simply because the opportunity is just too large.
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Too many small unpenetrated towns with very low penetration even in existing towns. Infact, VMART knows the small town game well (local tastes and assortment is the key) with strong brand equity in their key towns.
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Competing with them will be hard for the larger chains and moreover, the larger chains operate at higher price points. VMARTās ASP is Rs200 and average basket is Rs800, much lower than the larger chains.
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Lalit Agarwal is the CMD is the key man and this gives this stock a key man risk.
Initiating Coverage by ICICI Direct
Key Conference Call highlights
The company witnessed strong pent up demand in key markets of UP, Bihar, West Bengal, Odissa and Jharkhand which led to overall improvement in performance.
Resurgence of Covid2.0 impacted the performance in Gujarat, Rajasthan, Madhya Pradesh and Jammu due to the local restrictions imposed from Mid - March onwards.
The company witnessed a strong Holi demand. The company witnessed a LTL growth first 15 days of March.
The company introduced casual wear and leisure wear at more economical price points in 4QFY21 due to the shift in demand towards these categories. This led to decline in ASP of 8% during the quarter. However, ASP in FY21 was higher by 3% due to the stronger product mix in 3QFY21.
Lean healthy fresh inventory and customer focus price points also helped for lower promotions during the quarter.
Considering the ongoing second wave, the company has taken conservative measures and have aggressively provided for any possible mark downs in inventory over and above existing policy.
The company is comfortable at the existing inventory position and the existing working capital cycle.
As the operations normalized in 2HFY21, the expenses normalized in line with it. However, the overall costs reduced by 31% YoY in FY21.
V-Mart is concentrating on quicker mind-to-market strategies as far as fashionable apparels are concerned. The company is focusing on range of streetwear, sweatshirts, hoodies, and top-of-the-line ladiesā dresses to meet the rising aspirations of the youth.
The company is focusing on private label which currently accounts for 65% of total sales.
The company undertaken digital transformation very aggressively. The company has been working on improving the website and mobile app interface for a better customer experience. VMart intends to have 5-6% of revenue contribution from the e-com business in next 2-3 years.
The company also increased digital marketing during the quarter.
Capex for FY21 stood at INR 400mn towards new store additions, refurbishment of existing stores, tech investment and commitment towards new warehousing facility. The company has guided capex of INR 1bn towards warehousing facility in FY22. This is in addition to capex for new store additions.
Management indicated that 1QFY22 is significantly impacted and they are expected a better recovery in FY22 in comparison to FY21. Management expects a good recovery from 2QFY22 onwards.
The company will continue to add 20-25% of new stores every year. They intend to add 40+ stores in FY22.