V-Mart Retail Ltd


(HG) #61

My investment thesis for V-mart is essentially what Peter Lynch says in Beating the Street - As long as same store sales are increasing, the company is not crippled by excessive debt and it is following its expansion plans, it pays to stick with the stock.

Obviously, if the numbers are cooked, nothing else matters. Varadrajan - other than what seshukumar has pointed out, do you see other discrepancies? I’m not much of a balance sheet guy but its something to learn.

disc: invested


(seshukumar) #62

Dear HG,

As you correctly pointed out, same store sale growth is the key. As per the latest quarterly results , same store sales have grown only by 4% in volume . They do not have a significant pricing power as indicated in the thread also to increase prices like an FMCG brand and grow the sales.


(HG) #63

Hi Seshu,

In the Q1 conference call mgmt gave some reasons why the Q1 nos were weak and why they expect Q2 numbers to be better. Lets see how things turn out. Btw, thanks for your inputs. What other red flags do you see?

)- HG


(Augustine Jos) #64

Hi Seshu and HG,in past con call management had mentioned that v mart is taking efforts to reduce its focus on FMCG products which are high volume & low value items and put more focus on apparels and other high value items which means lowervolume growth but better realisation n margins.


(Naman) #65

The only way a retailer can earn a wide economic moat is by doing something that keep customers shopping at its stores rather than at competitors. It can do this by offering unique products or low prices. Offer unique products is tough to do on a large scale because unique products rarely remain unique forever. Its rare to find a retailer that maintains any kind of economic moat for more than a few years. The way to build a moat is to be the low cost leader, and this is exactly what V-Mart has accomplished. IMHO, prohibitive real estate rentals in India are the single biggest recipe for failure for retail (foods, apparel, etc) in metro cities, and hence has led to failures of brands such as Lilliput, Spykar, Vishal Megamart (besides ambitious management trying to expand too fast too quickly).

If we consider globally, the few retailers who have established wide economic moats include Home Depot and Loweâs in home improvement, Walgreenâs for prescription drugs and convenience items, and Walmart for just about everything. These firms developed distinct store prototypes with low cost models that set them apart from their competitors, and they now enjoy vast economies of scale that make it tough for competitors to earn consistent profits.

This is exactly what V-Mart has been doing since inception â offering fashion to aspiring middle class consumers in the untapped Tier 2 and Tier 3 cities, where virtually no organized competition exists and the store economics are favourable to the retailer. This early mover advantage is allowing V-Mart to build economies of scale, and in a sense build a brand where no competition exists.

V-Mart is right at the centre of the consumer boom that is expected in India due to the growing middle class, increasing per capita income, migration to urban areas amongst others. Consumer spending is expected to quadruple in the next 10 years, and a significant part of that will be from the smaller cities and towns.

Consider the cities they operate in - Dumka, Jhansi, Aarah (Bihar), Bhagalpur, Chhapra, Sasaram, Sivam, Mehsana, Chas, Deoghar, Shivpuri, Moga, Barabanki, Gonda, Mau, Sitapur - half of these are cities that I have not even heard ofâ.and look at the aspirations of consumers thereâthe Company is managing to do ~ 700+ rs per square feet..which is the average sales done by Shoppers Stop and Future Lifestyle Fashion in metros.

This consumer boom in Tier 2 and Tier 3 cities is clearly visible if you consider the sales growth of V-Mart vis--vis some of its competitors (Albeit on a lower base). I have taken the following retailers as competitors though they are not directly comparable. Trent consists of Westside, Side Bazaar, Landmark, Sisley and Zara; Shoppers Stop consists of Shoppers Stop, Hypercity and Crossword; Titan has World of Titan, Tanishq, Helios, Titan Eye+, and GoldPlus. However, the representative set gives an idea of the consistency of growth in sales and margins for V-Mart vis--vis competition which has found it extremely difficult in the last 5 years.

INR cr

Sales FY09

Sales FY14

Sales CAGR

EBITDA margin FY09

EBITDA margin FY14

V-Mart

142

574

32%

6%

9%

Trent

850

2370

23%

0%

0%

Shoppers Stop

1,365

3,358

23%

12%

3%

Titan

3,882

10,113

23%

9%

10%

The reason that V-Mart has been able to sustain its margins compared to competition is due to the low operating cost structure it operates with.

% of sales

Operating costs (% of sales)

Rent (% of sales)

V-Mart

20%

4.3%

Trent

37%

12%

Shoppers Stop

32%

9%

Titan

17%

4-5%

Growth strategy

The company has identified 652 districts, of which it has mapped out half of them where they can open a new store. It also plans to use its supply chain to setup stores in Nepal, Bangladesh and other neighbouring countries.

Simplistic calculations show that if the business sustains its current sales per square feet (with 5% growth), and opens only 30 outlets per annum â and manages to keep EBITDA margins at 10% per annum, it could manage most of the expansion through internal accruals. I have assumed here that the store capex is 2800 Rs per square foot (1400 for capex and 1400 Rs for initial working capital). However, if the performance is not as estimated above, there is likelihood the company may have to dilute slightly or raise some debt, which would not be ideal.

Years

FY14

FY15

FY16

Fy17

FY18

Number of stores

90

120

150

180

210

Total Square feet area

7,20,000

9,60,000

12,00,000

14,40,000

16,80,000

Sales per square feet (INR per month)

665

732

768

806

847

Sales per square feet (per annum)

7,980

8,778

9,217

9,678

10,162

Sales forecast (INR cr)

575

843

1,106

1,394

1,707

EBITDA (%)

10%

10%

10%

10%

10%

PAT (%)

4%

5%

5%

5%

5%


(Naman) #66

Risk factors that need to be considered and regularly monitored

There are some key factors that need to be looked into and reviewed regularly â

1. Same store sales growth

2. New store openings (Both 1 & 2 critical for growth)

3. Inventory build up (and cash conversion cycle) â Company has been able to bring it down to 90 days of sales from 110 earlier

4. Debt increase or equity dilution to open new stores

5. Shrinkage â This is a concern as currently they are covering only 30 outlets, and as this increases the shrinkage could possibly increase, impacting margins.

Valuation â has run up quite a bit ahead on the expectations of fast growthâbut there could be a quarter where the company releases less than expected sales numbers for some reason. Many investors over-react to one monthâs worth of same store sales results, and the reason might be bad weather or an overly difficult comparison to the prior year period. If we can focus on the fundamentals of the business and keep an eye on the key metrics highlighted above, the stock may be available at a reasonable price.

Doubts/ Concerns raised regarding the financials

IMHO the management team has been extremely transparent with regard to the financials and fundamental performance. I have personally not seen such high levels of disclosure in a retail business, having done significant work in this space. Management has completely âWalked the talkâ in terms of growth in number of stores and growth trajectory, and have been cautious with regard to store openings. Proof of this has been the fact that they have shut down only 3 stores in FY11, 1 in FY12, 1 in FY13, 3 in FY14.

I would like to highlight below some key parameters that show the business performance over quarters. It needs to be remembered here that during this phase we were undergoing a slowdown in economy and other players were barely making profits. There is some seasonality as exhibited in the numbers below, with skewed performance in Q3 due to the festival season (Diwali, Christmas, New Years and marriages) â

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Number of outlets

60

62

69

76

82

90

89

93

Total area

4.9

5.06

5.58

6.12

6.66

7.29

7.26

7.49

Average area per outlet

8,167

8,161

8,087

8,053

8,122

8,100

8,157

8,054

Same store sales growth

18%

14%

23%

8%

13%

12%

8%

9%

Sales per square feet

621

850

647

735

708

980

695

795

Footfalls (lakhs)

26

31

32.06

32.75

37

44.76

36.93

42.15

Conversion rate

69%

67%

72%

69%

67%

66%

62%

65%

Transaction size

447

597

412

527

489

667

602

601

Average selling price

101

104

126

135

128

193

167

160

Fashion contribution

77%

80%

80%

83%

85%

90%

88%

90%

Kirana Contribution

23%

20%

20%

17%

15%

10%

12%

10%

Inventory (105 days in Dec 11)

95

92

94

82

90

90

88

86

Shrinkage

1.7%

0.4%

2.1%

1.0%

0.8%

0.8%

4.1%

1.5%

Regarding manpower costs, it is to be noted that the manpower costs are a function of store openings and cannot be taken as the total number of stores multiplied by number of employees per store and salary. If this information is broken down into quarters, we get the following which is consistent with the annual report â

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Number of outlets

58

60

62

69

76

82

90

89

93

Manpower (30 employees per store)

1740

1800

1860

2070

2280

2460

2700

2670

2790

Per head Costs (INR 10000 per month)

1.2

1.2

1.2

1.2

1.2

1.2

1.2

1.2

1.2

Total manpower costs

522

540

558

621

684

738

810

801

837

Total costs (in cr)

5

5

6

6

7

7

8

8

8

Annual manpower costs (as calculated, excluding head office employee costs)

22

30

Employee costs in Annual report (inc head office employee costs)

25

38

Here I would give the management benefit of the doubt, given the disclosure standards they follow. Even the above calculated numbers are not correct because some stores may just be operational for a couple of days in a quarter. So I would not be too worried about numbers not being accurate but as mentioned would focus on the same store sales growth, inventory and debt levels.

Some comforting factors for me include â

1. Grant Thornton is the auditor

2. E&Y has been appointed internal auditor

3. Westbridge Capital (one of the most respected and best track record PE investors) has invested in the business

4. Excellent disclosure standards regarding the financial performance

5. Management âWalk the talkâ over the last 10 quarters

Regarding stock audits, the Company has increased its coverage from 12 stores to 30 stores, and in my view we will see more store coverage in this quarter and going forward. The Company has been focusing on best practices, and plugging loopholes in its systems and processes. It does not seem to me that the Company has been trying to manage margins by underreporting shrinkages, but this is something that needs to be tracked going forward.

Previous quarters have seen the Company adopt best management audit practices of rent equalisation, depreciation as per New Companies Act, amongst others which has resulted in lower margins. So the Company seems proactive in terms of adopting these methods and not focusing on short term results.

Overall, I would be cautious about the valuations at the current levels, but this seems like a Lynch-like "growth stock", which due to the execution capability the management could provide disproportionate returns in the future.

Disclosure : I am invested in the Company from lower levels, and am bullish on growth prospects


(HG) #67

Awesome, Naman - you really have put some work into this stock. Really appreciate the sharing of your views. This is one of my bigger allocations and the discussion about cooked numbers made me restless (my extent of balance sheet analysis is usually the ‘One up on Wall Street’ types).


(seshukumar) #68
[quote="Naman, post:66, topic:455244240"] factors that need to be considered and regularly There are some key factors that need to be looked into and reviewed regularly Same store sales growth New store openings (Both 1 & 2 critical for growth) Inventory build up (and cash conversion cycle) Company has been able to bring it down to 90 days of sales from 110 earlier Debt increase or equity dilution to open new stores This is a concern as currently they are covering only 30 outlets, and as this increases the shrinkage could possibly increase, impacting margins. has run up quite a bit ahead on the expectations of fast there could be a quarter where the company releases less than expected sales numbers for some reason. Many investors over-react to one worth of same store sales results, and the reason might be bad weather or an overly difficult comparison to the prior year period. If we can focus on the fundamentals of the business and keep an eye on the key metrics highlighted above, the stock may be available at a reasonable price. Concerns raised regarding the IMHO the management team has been extremely transparent with regard to the financials and fundamental performance. I have personally not seen such high levels of disclosure in a retail business, having done significant work in this space. Management has completely in terms of growth in number of stores and growth trajectory, and have been cautious with regard to store openings. Proof of this has been the fact that they have shut down only 3 stores in FY11, 1 in FY12, 1 in FY13, 3 in FY14. I would like to highlight below some key parameters that show the business performance over quarters. It needs to be remembered here that during this phase we were undergoing a slowdown in economy and other players were barely making profits. There is some seasonality as exhibited in the numbers below, with skewed performance in Q3 due to the festival season (Diwali, Christmas, New Years and marriages) Number of outlets | 93 Total area | 7.49 Average area per outlet | | | | | | | | | Same store sales growth | | | | | | | | | Sales per square feet | 42.15 Conversion rate | 65% Transaction size | 601 Average selling price | 90% Kirana Contribution | | | | | | | | | Inventory (105 days in Dec 11) | 1.5% Regarding manpower costs, it is to be noted that the manpower costs are a function of store openings and cannot be taken as the total number of stores multiplied by number of employees per store and salary. If this information is broken down into quarters, we get the following which is consistent with the annual report Manpower (30 employees per store) | 2790 Per head Costs (INR 10000 per month) | 1.2 Total manpower costs | 837 Total costs (in cr) | 8 Annual manpower costs (as calculated, excluding head office employee costs) costs in Annual report (inc head office employee | Here I would give the management benefit of the doubt, given the disclosure standards they follow. Even the above calculated numbers are not correct because some stores may just be operational for a couple of days in a quarter. So I would not be too worried about numbers not being accurate but as mentioned would focus on the same store sales growth, inventory and debt levels. Some comforting factors for me include Grant Thornton is the auditor E&Y has been appointed internal auditor Westbridge Capital (one of the most respected and best track record PE investors) has invested in the business Excellent disclosure standards regarding the financial performance over the last 10 quarters Regarding stock audits, the Company has increased its coverage from 12 stores to 30 stores, and in my view we will see more store coverage in this quarter and going forward. The Company has been focusing on best practices, and plugging loopholes in its systems and processes. It does not seem to me that the Company has been trying to manage margins by underreporting shrinkages, but this is something that needs to be tracked going forward. Previous quarters have seen the Company adopt best management audit practices of rent equalisation, depreciation as per New Companies Act, amongst others which has resulted in lower margins. So the Company seems proactive in terms of adopting these methods and not focusing on short term results. Overall, I would be cautious about the valuations at the current levels, but this seems like a Lynch-like "growth stock", which due to the execution capability the management could provide disproportionate returns in the future. Disclosure : I am invested in the Company from lower levels, and am bullish on growth prospects [/quote]

Dear Naman,

It was a very detailed analysis and I am quite impressed.

The manpower cost analysis is perfect taking into account the quarter wise sales. I had this Doubt while doing the calculation , but I didn't have the quarter wise store opening numbers at that point of time . Though there are some elements of costs such as supervisory manpower at the store and the staff welfare - both together might add to another 15% to costs. But still the numbers are ok.

I still have concern on the basic moat of the business I.e lowest cost retailer in that location. How are they the lowest cost retailer in each location? They are located in the centre of the town ( not outside like a Walmart ) and hence have a higher cost of rent than the local retailer ( in view of long term agreement, rent payments in white , better location , larger size etc.), higher costs of manpower since local retailer will have informal staffing of family members , elations etc, higher costs of power , security and communication as compared to a local retailer. Yes, They have lower cost as compared to a Trent or big bazaar , but they are not competing against Trent or big bazaar .

Now with respect to bargaining power in products that they sell which can lead to lower purchase costs - 100 stores is not large enough a scale as compared to wholesale markets from which a local retailer buys.

For example, local retailer in Allahabad or Meerut or Bahraich or any other tier 3/ tier 4 town in UP would buy either from the aminabad market in Lucknow or laxminagar or Karolbagh Market in Delhi which are large wholesale markets. Now Merchants in these markets have far higher bargaining power as compared to V Mart with a manufacturer. For example, a wholesale shop in Laxminagar or Karolbagh market in Delhi caters to at least a few hundred retailers from all parts of the country on a daily basis. From my understanding , v mart also do partial buying from whole sale markets.

Conversely, v-mart get lots of private label manufacturing done. In this case, risk of unsold stock is that of v-mart since they will have to purchase equivalent stocks of a production batch size as compared to buying only on the basis of demand in wholesale markets.

The point that I am making is that the supply chain in India is far more cost effective and the scale needed for an organised retailers to effectively compete against a local store in not in multiples of 100 stores , but in multiples of 1000 stores. That is the reason why you find that organised retailers like big bazaar and Trent are still not consistently providing high ROCE like Market leaders in other industries.

Coming back to V mart ,if their cost of buying is lesser than that of local competition and they are pricing the products as per the market , then their margins should be significantly higher than the current 30% . In case , their prices are lower than the market and hence there is excessive demand, same store growth should be much higher than 8% growth they are currently getting. 8% same store growth is ok but not a great growth indicating a strong moat.

One discomfort I have is that the v- marts do not get the kind of footfalls which big bazaar stores used to get when they started in mid 2000's . From a customer perspective , you don't see the wow factor . They have similar merchandise with similar prices as that of local market, better locations , larger size and air conditioned stores. Is this enough of a moat in retail business ? I am not convinced .

Now comparing v-mart to Walmart - Walmart had differentiated themselves through lower price, larger assortment , out of the town locations and low cost ingrained in the organisational culture Making them the lowest cost player , better people practices leading to better customer service etc. When they started 70 years back in USA.( Refer " Made in America " by Sam Walton )

Once they became a brand , some of those differentiators got diluted but the low cost remained since they continued out of the town locations and added global sourcing from cheapest cost centres around the world . What are the differentiators in v-mart which will make them another Walmart in making ?

I would love to be proved wrong so that I can invest in this stock.

Risk monitored

â1.

2.

3. â

4.

5. Shrinkage â

Valuation â growthâbut monthâs

Doubts/ financials

âWalked the talkâ â

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

60

62

69

76

82

90

89

4.9

5.06

5.58

6.12

6.66

7.29

7.26

8,167

8,161

8,087

8,053

8,122

8,100

8,157

8,054

18%

14%

23%

8%

13%

12%

8%

9%

621

850

647

735

708

980

695

795

Footfalls (lakhs)

26

31

32.06

32.75

37

44.76

36.93

69%

67%

72%

69%

67%

66%

62%

447

597

412

527

489

667

602

101

104

126

135

128

193

167

160

Fashion contribution

77%

80%

80%

83%

85%

90%

88%

23%

20%

20%

17%

15%

10%

12%

10%

95

92

94

82

90

90

88

86

Shrinkage

1.7%

0.4%

2.1%

1.0%

0.8%

0.8%

4.1%

â

Employee

costs)

â1.

2.

3.

4.

5. Management âWalk the talkâ

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Number of outlets

58

60

62

69

76

82

90

89

93

1740

1800

1860

2070

2280

2460

2700

2670

1.2

1.2

1.2

1.2

1.2

1.2

1.2

1.2

522

540

558

621

684

738

810

801

5

5

6

6

7

7

8

8

22

30

25

38


(HG) #69

I still have concern on the basic moat of the business I.e lowest cost retailer in that >location.

Hi Seshkumar - is there a reason why you think v-mart is aspiring to be the lowest cost retailer? In fact, I think it is trying to position itself as a cut above the existing retailers in the locations where it has/will have stores - trying to give a branded store experience in the small towns. The AR itself states -

The Companyâs motto of âPrice-less Fashionâ promises contemporary products and services at reasonable prices to upwardly mobile Indians in non-metro Indian locations.

I would hazard a guess that its products are slightly more expensive with the perception of ‘better quality’ than whats being sold at existing retailers.


(bomi karkaria) #70

Hmmm, interesting points raised by Naman and Seshukumar.

Let me add a perspective of Gurgaon where I was based for 11 years from 1998-2009. From 2004-05 onward malls started springing up all over Gurgaon, like mushrooms. And within 3-4 years, several shops of well known brands within the malls started folding up and the malls started resembling ghost-towns. A shop keeper I met, nailed the logic perfectly: people come to malls to see the goods in air-conditioned comfort. Then they go to Lajpat nagar or Karol Bagh, or Sarojini Market and purchase the short-listed goods at lower prices from there.

This is typical Indian value-seeker behavior.

Why is the population of towns where V Mart has its stores, not behaving in a similar fashion? Can V Mart undercut the local shops? Can V Mart offer fashion garments, the local shops can’t?

I would like to here views about this. Thanks in advance.


(Naman) #71

The key point to consider here is what V-Mart is providing a service to customers that allures them to continue buying from them. Consider a small town, say Bhagalpur (where I was born), where people do not have much source of entertainment and shopping experience is limited. These smaller towns have anywhere between 5 lakh a 20 lakh people (kids, men, women, elder), and each of them have aspirations and desires for a better life. They look towards the bigger cities where there are brands like Benetton, Nike, Adidas, Zara etc (none of which want to come to smaller towns due to the economics).

And then a 8000 square feet V-Mart store opens up in their neighbourhood, which delights everyone and they can go there anytime to shop for every special occasion and regular purchases of apparel. As long as they are offered a good experience with good quality clothes at a reasonable price, they will continue to shop there (of course till another competitor steps in reallocating the profit pool). This afeel gooda experience cannot be offered by local retailers, where the nature of shopping is largely transactional.

I think people in cities also want to get this experience of buying good quality clothes at a reasonable price, with a feel good experience of visiting a mall. We go to the malls very often to get this experience when we could get the same clothes at factory outlets or even local retailers.

The fact that people love this experience is exhibited from the sales numbers that we are seeing from V-Mart stores. Sales per square feet of 800 Rs per square feet per month from these smaller cities is something that retailers in bigger cities would be delighted to have. Shoppers Stop has sales of ~650 a 700 psf, Future Lifestyle of ~511 psf and Future Retail of 745 psf. This clearly demonstrates that the shopper is not only visiting for the air conditioner and the ambience, which certainly happens.

Another interesting fact is that they have conversions of 65% - 70% of the shoppers, which clearly means that the aspiring minds of consumers gets them to buy the apparel, even if they have come for wandering in the retail area. With an increasing footfall, rising average sales price that would result in higher sales going forward.

High spsf along with lower rentals of 30 rs psf makes V-Mart extremely efficient on operating costs. Shoppers Stop pays 50 a 55 Rs psf, Future retail 40 Rs psf, and Future Lifestyle pays 55 Rs psf, Pantaloons = 15% of sales is rent, Trent = 12% of sales (largely due to high rentals in metros and Tier 1 cities). This has allowed V-Mart to increase margins from 6% to 9% when other retailers have been squeezed off their margins (see post above)

However, I do agree that local retailers will continue to co-exist along with stores like V-Mart (just like kirana outlets continue to thrive even with Easyday, More, Big Bazaar, Reliance Fresh taking large retail spaces), but there are significant advantages that V-Mart has compared to local retailers and organized retailers, which I am summarizing below a

  1. Experience a Covered in detail above.

a. This is of significant importance in small towns, and more importantly because no organized retailer has been able to setup their infrastructure in Tier 2/ Tier 3 cities, nor have I heard of any focus of these players on Tier 2/ Tier 3 cities (Biyani being too busy with Food Park & Big Bazaar; Aditya Birla getting Pantaloon and More in order; Reliance focusing on large formats Fresh, Digital, international brands, Tata expanding Westside, Tesco, Zara etc)

b. It is not that companies have not tried setting up such infrastructure in smaller cities in the past. An example is Tata owned Trent had tried retailing fashion apparel in Tier 3 cities through stores called- Fashion Yatra - started in 2008, but failed and closed the business in 2012 (10000 square feet stores with prices between 150 - 750 similar to V-Mart)

  1. Focus on Fashion a Realizing quickly that kirana does not offer good margins and is a drag on the business, the management has brought down the % of kirana to 10%. This gives immense confidence in management being able to quickly take decisions for the business. In contrast, large businesses find it extremely tough to make such big decisions and continue to fund losses a this is evident from Shoppers Stop funding Hypercity (even after consistent losses), Trent funding Side Bazaar etc etc

**3). **Lowest cost operator

a. Compared to Walmart, V-Mart has similar costs. In fact V-Mart gross margins are higher at 29% compared to 25% for Walmart. If you consider the operating costs, both Companies have limited their costs to 20% of sales, which is quite incredible considering that other retail players in India operate at 30%+ operating costs (See my post above)

b. Compared to local retailers, there would be a significant cost advantage with regard to sourcing and as you said, the sourcing advantages would become bigger as V-Mart scales, though they are already operating at 29% gross margins. I have looked at various franchise agreements for apparel brands, and they give only 20 a 35% margins to the local franchisee partner. The franchise partner will then have to manage the cost of rent, employees, power, security, advertising, promotions/ discounts etc in that cost.

c. This cost management would ensure that V-Mart would be able to sustain competition in different parts of the country it plans to expand to

  1. Planned and cautious expansion a V-Mart has chosen to expand based on a cluster based strategy, whereby each store is 150 km apart from each other to manage supply chain efficiently.

a. This is incredible as the management has learnt from mistakes made by Pantaloon, Subhiksha, Vishal Megamart who in their quest for topline growth opened stores in all parts of the countryawith warehouses and hence loosing complete control over costsaresulting in high inventory a higher debts and subsequently shutting down of business.

b. Take a look here http://www.vmart.co.in/store%20map.html

c. Now see this…does this remind you of something J http://projects.flowingdata.com/walmart/ (Sourced from Kiranas post above)aAnd NO I am not suggesting V-Mart is the next Walmart J

d. Also as discussed above, store closures have been limited in the last 4 years. Compare that to 50 stores shut by Aditya Birla More, 50 stores by Reliance Retail and Biyani selling Pantaloon to Aditya Birla a showing management credibility in being able to better manage the business compared to the big players

**5). ****Sourcing & Procurement a **This is a key aspect of their business which helps them provide the latest fashion at affordable prices. It is important to highlight here how the sourcing works

**a. **Company has tied up with over 2000 registered vendors across the country where each product is sourced for the best economic value and quality. They get the woolen from Ludhiana, denims from Delhi region, plastics from Daman, kidswear from Kolkata and hosiery from Tiruppur.

**b. **It is impossible for a local retailer to setup this level of sourcing, or for that matter a new organized player will take significant time and investment to setup such a supply chain

c. Given the Companyas localisation strategy this helps them significantly

d. As they scale this sourcing capability can be used to their advantage by dictating favourable terms and pricing to the vendors

Growth a IMHO, if a retail business can provide 8% same store sales growth it is doing extremely well, especially in the consumer markets we have witnessed in the last couple of years. This 8% SSSG, along with opening 25 a 30 stores would yield growth of atleast 30% to the topline, which could imply atleast a 30 a 40% growth in EPS (assuming all other things remaining constant, and economies of scale spreading the central costs over a larger number of stores).

It may not be an apples to apples comparison between Big Bazaar in its early days with V-Mart because of the following

  • Big Bazaar outlets were 25000 square feet in size compared to V-Mart size of 8000 square feet (At the time of Big Bazaar IPO in 2005 they had 21 outlets, with average area of 45000 square feet)

  • Big Bazaar offered kirana vis–vis fashion apparel for V-Mart

  • Big Bazaar operated in big cities (with first stores in Kolkata, Bangalore and Hyderabad), vs V-Mart in Tier 2 & Tier 3 cities

  • Today Big Bazaar has sales per square feet of INR 750 Rs as compared to INR 795 for V-Mart (even though Big Bazaaras most stores are in Tier 1 cities)

**Return on Capital Employed a **This consistent growth along with an 18% - 20% ROCE that the Company has been able to achieve speaks highly of the management being able to manage the business well over the tough economic period when other businesses were struggling.

The above provides a reasonably good idea of how V-Mart has positioned itself as being a cautious fast growing business, with excellent (and difficult/ time taking to replicate) supply chain and procurement strategy, low cost operator with a distinctive positioning for the consumers (providing fashion apparel at a reasonable price to aspiring middle class Tier 2 & Tier 3 customers).

Happy to answer any further questions you may have.


(HG) #72

Hi Naman,

In terms of business model, target market, and value proposition, do you consider V2 retail comparable to V-mart? Have you compared these two companies?

thanks

HG


(Naman) #73

Hi HG,

V2 Retail has a similar business but has significant legacy issues (coming out of erstwhile Vishal Retail - which overexpanded and kept building on debt till things got completely out of control)…Till the time it does not sort out the some of the issues, it is a pretty risky proposition.

Some of the issues include -

1). Contingent liability of 170 crores…currently disputed but if this claim stands valid, the Company will not survive

2). Significant Promoter holding is pledged (Almost 97%)

3). Carry forward losses of 540 crores

4). Overdue interest and principal repayment as reported by auditor in Q1 results

The key challenge for the business will be in raising fresh equity, which currently Mr Ram Agarwal and his family is funding…In case fresh equity is not available to expand further, the business will again need to depend on debt…

The business has recently made a profit in the first quarter with increasing sales and new stores, but I am not sure it can sustain without external capital, so that needs to be monitored…


(HG) #74

Hi Naman - yes, it does seem like a Hail Mary type of stock. Thanks for sharing your insights.

)- HG


(Sambath) #75

Thanks Naman and other members for their in-depth analysis.This thread has covered the complete aspects of retail industry in various angles.

The only moat for a retailer is low cost producer,since they are not making any unique products on their own.So,they need to squeeze their suppliers,cut costs in rental,employees, other costs and pass on some of these cost benefits to their customers to make money for themselves.

Some of the members have raised their concerns about competing with local players who pay no tax and family run shops with their own labour force etc.This is indeed true,it is difficult to compete with them.But we have to understand one more thing.The current generation middle class is ready to spend extra bucks if they are provided premium shopping experience with wide variety of clothing collections.Not just that,retailers like V-mart offers complete family shopping experience wherein you buy everything in one place for all your family members.

Most of the local shops do not have trail rooms,does not have full family collections,very congested and crammed to say the least,never a pleasant experience to shop.These days people just don’t look at cost alone when they do their shopping.

Let me give you some more examples:

I am from a small town in TN even smaller than tier -III.There are so many local apparel shops in our town for the shopping needs.But I have seen many people drive to the nearest town where we have big retail shops to enjoy their shopping experience.Here we need to consider 2 things:1.Clothes are expensive in these big shops than our local shops and still people are ready to spend the extra money to have a better shopping experience.2.Disposable incomes of current generation have made them to spend on things that look trendy which includes shopping in malls,latest fashion in clothes.

One more example I want to mention here,3 weddings happened in my family in the last 2 years and for each wedding we drove to 100 KMS one way to finish the shopping.This just tell us the mental shift happened in the tier-2,tier-3 places for shopping.

Another risk mentioned in one of the discussions is e-retail;Mostly people buy their electronic gadgets and other items online.Never seen people buying bulk of their clothes over online.May be a couple ot T-shirts,jeans but nothing more than that.So,this is not a threat in the near future.How many Amazons have toppled Walmart and Macys?

When all the Mckinsey reports and CRSIL reports talk about organized retail being less than 10% in India,where does the future spending of Indians go to? Are companies like VMart not positioned themselves to gain the share from unorganized?When people start spending more on the organized retails shops,the ratio should inch up higher.If not,will our organized retail share remain under 10% forever in India?

Having said all these,I do one some small concerns with V Mart:

Cash flow of around Rs.10 crores only for the last 2 years.Until they have IPO proceeds left out,they are fine for new store additions.After that,with Rs.10 crores,it barely meets the CAPEX for 5 stores.If management gets aggressive to add new stores in the future,this will be a big risk.

Planning to initiate a small position.


(Sambath) #76

Q3 Results for Vmart declared.

Wonderful set of numbers.Since Q3 is the always the best quarter due to its seasonality in its sales for diwali,christmas,dussera it makes sense to compare current Q3 vs last year Q3.

1.Sales growth at 23% (Rs.240.29 crores vs Rs.195.6 crores)

2.EBITDA growth at 33% (Rs.34.69 crores vs Rs.26.05 crores)

2.Profit growth at 70% (Rs.24 crores vs Rs.14.1 crores)

Expenses:

1.Purchase of stock-in trade as a % of sales (60% vs 69%)

2.Employee expenses as a % of sales (6.15% vs 5.84%)

3.Other expenses as a % of sales (11.30% vs 11.84%)

If anyone attends the concall,please update:

1.Sales per sq.ft

2.No of stores to be open in Q4

3.Same store sales growth

4.How many stores they are covering for shrinkage costs?

5.Inventory days

And any other info if you could collect.

As of now the story looks good,This year total EPS is around Rs.21 and at current price of Rs.536,its PE comes around 26.

I am accumulating this from the current level for next 2-3 years.


(Aravind Sankeerth) #77

hows the story now? fully factored in the price of any more than 2x-3x to go


(HG) #78

Link to Q3 investor presentation -

http://www.vmart.co.in/InvestorPresentation_Q3results14_15.html


(Sambath) #79


Thanks HG.Here are the numbers:

14-Dec

13-Dec

Number of outlets

107

90

Total area

8.73

7.29

Average area per outlet

8,158

8,100

Same store sales growth

7.60%

12%

Sales per square feet

1005

980

Footfalls (lakhs)

51

44.76

Conversion rate

65%

66%

Transaction size

725

667

Average selling price

232

193

Fashion contribution

91%

90%

Kirana Contribution

9%

10%

Inventory

86

90

Shrinkage

1.08%

0.80%

Except same store sales growth,good set of numbers.

Company is close to report Rs.670-700 crores for the full year.Total sales in 2012 was Rs.281 crores,this year in Q3 alone it has achieved Rs.240 crores.

Again like it was discussed before, new store additions are the major contributor to the sales.That is why we need to watch out for same store sales growth and new store additions.My only concern is after they run out of IPO funds,how the internal accruals alone will be sufficient to fund the new store additions.That is another puzzle in its journey.

If the company keeps doing whatever it is currently doing for the next few years in a sustainable way without too much aggressiveness in its growth,it will do some wonder to our portfolios.

Retail companies do not have any Intellectual property or brand to command superior premium in the markets.All they do is master the concept of low cost producer.That is why even in this bull market, the market cap to sales for the listed players are just under 2 except for trent.

Company

EVEBIT

PE

Market cap/Sales

Trent

52.49

38.91

3.75

Shoppers Stop

36.21

94.69

1.37

V-mart

15.77

25.35

1.4

Store One Retail

3.63

3.63

0.9

Future Retail

14.19

None

0.29

When V-mart is compared with its peers on the basis of market cap/sales,it is fully valued.More over,the FII limit for this stock has reached its maximum of 24%,so the price movements going forward will be in the hands of retails investorsâs demand and supply.

Disclosure: Invested and adding on dips.


(HG) #80

Thanks, Sambath for your comments. Btw, what is the sectoral cap for FDI in retail? A few months back, V-mart passed a resolution to increase FII limit to the sectoral limit. I may be wrong but I thought they passed the resolution when the prior approved FII limit for V-mart was already at 24%.