V-Mart Retail Ltd

(Sambath) #81

HG,FDI and FII are two different types of investements by foreign investors.In the case of FDI,foreign investors will directly set up their shops in India like pepsi,cola,however in the case of FII they just buy the shares of publicly listed companies.For country’s growth and liquidity FDI is more preferred than FII.Reason being FIIs can buy and dump the shares within short period of time but FDI’s like pepsi cannot shut the shop overnight and leave the country.

In the case of FIIs,by default the limit is capped at 24% for the listed companies in India(except for public sector which is at 20%).After that if the sectoral cap allows,the company after getting its approval from the shareholders and board,can apply to RBI for increasing the limit.If it gets approved,it paves the way for more FII inflows into the company.

Current list of FII limit for each company is given in RBI page:


It states FII ceiling of 24% has been reached and no further purchases are allowed for V-mart.To answer your question about the secotral cap for FII in retail,it is still not clear to me what is the current limit.

Hope this helps.I will keep posted if i get additional information.

(HG) #82

Thanks for the link. The RBI info related to V-mart is dated Feb 2014 -


Now, in Oct 2014, V-mart passed a resolution to increase the limit to the sectoral limit. See item 11 in below link. So I guess the company must now be applying to the RBI for their approval.


(Naman) #83

Excellent quarter by VMart though there have been some one off gains this quarter in terms of depreciation...certainly has been on a rapid growth path and is well positioned to grow rapidly on its excellent retail platfrom of ~105 stores...Some key numbers -

INR cr
Q3FY14 % Growth
Revenues 195 240 23% - 7% Same store sales growth
- Growth driven by increase in stores from 89 to 107
- 83% sales from apparel vs 80% in Q3FY14
- Best quarter due to diwali, holidays
Gross Profit
60 76
- Reduced raw material costs
- Lower kirana contribution
- Higher shrinkage
Gross Profit margin %
Employee costs
11.5 14.8

Depreciation 3
- Change in depreciation to straight line method from WDV method..
- Abnormally low depreciation leading to higher PAT and EPS
Other Expenses
- Depreciation benefits
- Lower depreciation
- Lower finance costs
EPS 7.8

When looking at the results, one needs to adjust the benefits accrued due to change in depreciation methodology...which the management has quantified as 6 crores benefit on Net profit for the 9 months this year..which translates to ~3 rupees per share...

Q4 is a weak quarter...so on a full year basis, the company should do ~21-23 per share on an unadjusted basis, and ~18 - 20 on an adjusted basis (for depreciation benefits)...Compared to 14 Rs EPS last year...valuations on current price of 535 is ~27 - 28x FY15 EPS..

Few positives going forward

1. Holi is in March, which should see higher sales given the focus of Vmart in cities where the festival is celebrated with a lot of fanfare...Jharkhand, UP, Bihar

2. Company has shifted to single warehouse..should see less shrinkage at warehouse level..more control on inventory...and greater efficiencies

3. Hemant Agarwal is moving out from the Board..and the Company has brought in 2 professional independent Board Members...augurs well for corporate governance

4. Decrease in cotton prices and raw material prices to improve gross margins

5. Internal accruals to contribute to new store openings in FY16..expected to open 25 stores...60 stores opened in last 3 years to start contributing significantly to operating cash flows..Management is open to taking debt to expand if required as current gearing is 0.2x...have not considered diluting equity yet..

(Sambath) #84

Hi Naman,Thanks for the updates,very helpful.

Last year cash flow from operation was around Rs.11 crores.Now,for adding 25 new stores they need atleast (25* 2 crores = Rs.50 crores).They still have Rs.11 crores left from the IPO proceeds and they require another Rs.40 crores for the expansion plans.Even if the current year’s cash flow is about Rs.15 crores,they will have to take a debt of around Rs.25 crores which would take the total debt to Rs.70 crores.Still the debt to equity will be 0.5.

(Naman) #85

Sambath - new store openings require around 1.2 crore capex (for 8000 sq feet * 1400 rupees psf), and 1.2 crore of working capital which is captured in the cash flow from operations of 11 crore mentioned above…So for 25 store openings, they would need ~30 crores of capex till the end of March 2016…which is possible once all the new stores opened this year become cash generating along with the older stores providing cash…

The Company may certainly need to take some additional debt to manage the expansion…I think they will plan to dilute towards end of FY16 or in FY17 to expand further…Would be wary of financing a large part of growth going forward through debt…

(Nitin) #86

Can any one highlight why the cash flow from operations are significantly lower than PAT+Depreciation?

(JatinK) #87

A couple of management interviews over the last two days-

Targeting to open 200 stores over next 5 years, have been opening 20-25 stores every year so far. So, looks a bit more aggressive target-

FY16 growth guidance of around 30%-

Disclosure- Invested

(saurabh shankar) #88

actually the next 2-3 qtrs are really interesting. that will tell how do they want to do expansion. If they go the debt way…well then equation really changes on this one.

(JatinK) #89

Debt has actually reduced as per latest balance sheet. So, that’s a positive sign.

A new store roughly requires 1 cr of capex & 1 cr of working capital.
So, clearly current yearly Profits are not enough to fund both Capex & WC needs, if they open 25 stores every year. This will stay as a FCF negative business for atleast a few years.

Having said that, management maximum target of debt- equity ratio is 0.75 & they are quite below that mark right now. So, they have lot of room to increase debt levels.

I see growth to be funded by a mix of internal profits & debt.

(Ravi) #90

Hi Folks, It took a while to completely read through this thread.

I might have some inputs which could be valuable to folks who have invested/tracking this.

  1. My family is into apparel retailing business for the last 32 years in a Tier III town in Tamil Nadu. Initially we started working with wholesalers only from the south and now we have strong networks with many wholesale sellers in Delhi, Calcutta, Surat & Mumbai. Apart from my family experience in retail stores, I have worked part-time in a major retail store in Chennai (to fund my engineering  ) and during my MBA my team did a project on inventory management for a major retail store. (This is just to give a back-ground).

  2. Customer’s wow factor towards large mall style stores (similar to 8k squareft V-Mart stores): The wow factor is definitely there and whenever a large format apparel store is opened a lot of sales move from un-organized to organized stores. It is like the customer has a different experience when he/she walks in, and at-least to experience the buying experience. -> This is partly the reason why you see V-Mart’s sales with every new store goes up significantly.

  3. Repeat customers is very very important for an apparel store. Why? If customer derives value, in tier III towns a lot of publicity is word of mouth. Trust plays a key factor here. A new store will have a lot of first time customers, where as same store sales growth will give you some insights on repeat customers. It is easy to buy sales by opening a new store, but it is very difficult to retain and grow the sales because.

  4. Inventory Management: Any retail store that manages inventory well will do amazingly well in business. Why? Assume a retailer typically purchases for Rs. 100. Lets say he marks up the goods by 30%(the actual mark-up is actually way higher in kids segment). Typically he will be able to sell 75%(not a guess, it is by experience) of the goods without any problem. With this 75%, he typically pays off the wholesaler and the remaining inventory is his profit.
    a. One must go deep to understand how V-Mart manages inventory. If it is a family managed business, the owner will know how to carefully ensure the older ones get out of the shop. Are the employees trained to such a detailed level? We have had good interactions where our employees go and work for these large retail format stores, and they say typically there is no such emphasis on that.
    b. In a new store, most of the goods are new and usually the conversion from footfall to sales will be easy. But the older the store becomes, quite possibly you will have a lot of unsold inventory, the conversion becomes difficult. Same store sales growth will give you some hints on this.

  5. Employee Cost: The typical employee cost in an unorganized family owned store(in my town) is 4.5k. In a large format store it is around Rs. 6000 for a tier III town. I have read somewhere that a very popular store in T Nagar in Chennai pays around 8k for its employees. So the number of 10k/month for an employee could be a higher estimate.

  6. Shrinkage : The shrinkage numbers reported by the company is a very normal problem. In tier III towns there is usually a lot of theft by employees, or some rogue customers. It will be a very difficult problem to control. One should factor in a minimum of 50 to 100 bps for this.

  7. Family run business is a Cost leader: In many posts there were comments about V-Mart having a cost advantage. But a family owned store has zero debt, mostly own stores(so no rental), relationships with suppliers for a very long term, Low employee cost( he himself is an employee  & 100% devotion to one store which you can’t expect from a store manager). So the differentiator here is shopping experience.

In apparel retail industry, there are a lot of un-controllables. That is the reason many large format retail stores are finding it difficult. I have just tried to list out a few below:

  1. Constantly changing designs – If not managed, inventory piles up, lower sales, it would lead to vicious cycle.
  2. Shrinkage – This is a major problem
  3. Employee attrition (common problem)

There is a lot more I could add, in terms of how the whole value chain works. I was just trying to point out the challenges that V-Mart could face. A long term investor should understand V-Mart’s approach to each one of these problems. India is a complex market. It will not be apt to compare Walmart and V-Mart IMHO.

Please get back to me in case you have any questions.

Ravi S
Disc: No investment in this.


Nice exposition of the opportunities and challenges. Thanks

(saurabh shankar) #92

then the valuations become really interesting question. Do we want to pay 25x for -FCF business for probably 4-5 yeards

(saurabh shankar) #93

thanks ravi. nicely put and points to ponder

(BeingGraham) #94

Thanks Ravi for an owner’s perspective of apparel retail business.

I would like to understand about how do stores measure repeat customers? Is it just a manager’s estimate by his observation or is there some procedure?

Regarding inventory, shouldn’t the chain stores, like V-Mart, have a benefit as they can rotate the unsold inventory between the stores. Due to rotation, each store would have new designs for returning customers in each season, even though it might not be a new purchase.

Why is employee attrition high even when a branded store pays 10k vs 6k average and 8k at a very popular store in Chennai?

(JatinK) #95

That’s a dicey question to answer- How much to pay? :smile:

A business which grows faster than ROE, will need debt to grow. No?
Some of our beloved business of today like Cera, PI were FCF negative about 2 years ago.

Though I am not saying Vmart is of same quality as those as Vmart’s ROE will stay below 20% but opportunity size is big & if they can manage themselves well in a tough industry, stock can do very well.

Personally speaking, would love it to come to 15-20 PE range.

(Ravi) #96

@BeingGraham: Been busy with office work and couldn’t get back on time:

1. I would like to understand about how do stores measure repeat customers? Is it just a manager’s estimate by his observation or is there some procedure?
Companies have loyalty cards(very similar to reward points that you get on your credit cards) and the more the customer buys from a shop, the more reward points he gets. But from the store’s perspective - they have twin benefits here 1. Apart from making the customer to buy from the store again using reward points 2. They completely know when the customer repeats his purchase. (you should be able to logically decipher more with this info - stores can know a lot about the customer if they have sophisticated IT systems)

2. Regarding inventory, shouldn’t the chain stores, like V-Mart, have a benefit as they can rotate the unsold inventory between the stores. Due to rotation, each store would have new designs for returning customers in each season, even though it might not be a new purchase.
I did not opine that V-Mart wasn’t doing this. One should speak to the management and understand how they are handling inventory management. It is a key aspect in an apparel store.

3. Why is employee attrition high even when a branded store pays 10k vs 6k average and 8k at a very popular store in Chennai?
It is a global problem. Right from a large IT company (TCS, Infy attrition rate ~ >10%) to a garment manufacturer (Kitex attrition rate - much much higher). Socially it is a healthy problem to have. Wouldn’t you be happy to have more opportunities? :slight_smile: I really do not know the answer.

Ravi S
Disc: No holdings

(Naman) #97

An interesting article on the background of Lalit Agarwal, a first generation entrepreneur who founded V-Mart Retail and how he has built the business - http://www.mindyourbusiness.in/blog/40767/how-lalit-agarwal-built-v-mart-retail

Am listing below a few points from the article -

  • Retail runs in my blood. My father was a first generation entrepreneur who started his own garments store in 1975 in Kolkata. But when work for the metro started right in front of the store, it affected the business. My father was not one of those people who called it quits easily. He gave the shop to his elder brother and moved to Cuttack, Odisha in 1979. He was familiar with the town and knew there were business opportunities there. Here he opened a tailoring shop and also sold cloth pieces and ready-made garments. Back then, it was a bold step that he took and I believe it’s something that I have learnt from him: Never to give up.

  • Childhood was a nursery of learning. My parents were clear that education was important. I would go to the school in the morning and after returning, spend time at my father’s shop. I enjoyed being part of the activities there. At times when my father had to leave the shop for few hours, I would be given the task to attend to the customers. I thoroughly enjoyed it. As a 12-year-old, I felt grown up. It made me feel important. I would happily do the odd jobs in the shop as I found them more exciting than studies. Little did I realise then that whatever I was learning at my father’s shop would help me in the future. I didn’t know then though that I was going to be an entrepreneur too

  • By the time my studies finished, the business bug had bitten me. I returned to Kolkata after my courses were done, and along with my cousin R.C. Agarwal started Vishal Mega Mart in 1999. It was the first-of-its kind retail store in Kolkata. Since I had my roots in the city, I felt I owed it something. Plus, it was also my comfort zone. I was only 28 years old then and had big dreams of becoming successful. A year after starting Vishal Mega Mart, we opened Aquatica in Kolkata—the first of its kind water park in not just the city but the entire eastern region. The idea for this came when I visited a water park in Mumbai.

  • The smooth sailing didn’t continue for very long. Initially, both the businesses did well but labour problems plagued Vishal Mega Mart in Kolkata. We had to shut our store and shift out of Kolkata. We incurred huge losses. Meanwhile, misunderstandings between my cousin and me started affecting the business. It reached a point where we decided to go our separate ways. I moved out of Vishal Mega Mart and Aquatica in 2002.

  • It was time to strike it out alone. While travelling in Gujarat I realised how the lower middle class didn’t have access to good quality goods. They would need to travel for miles even for everyday items. This got me thinking that there was an opportunity for a value retail store which would cater to the growing middle class in smaller cities by bringing them good quality products sold in a mall-like ambience. In 2003, I launched the first V-Mart store in Ahmedabad, Gujarat. I conceived of it as a chain of value retail stores which sold apparels, accessories, footwear, luggage, toys and home stuff. I started with 50 people and invested Rs75 lakhs. I put in all my effort and hard work into making this a success. Within five years, by 2008, we had opened 32 stores in Tier II and Tier III cities across the country.

  • Weekly catch-ups with employees has helped the business to grow. Without good employees it is difficult to sustain a business. I strongly believe that it’s important to have patience, the ability to listen, to create an environment where ideas and creativity flow. Only then can one expect employees to give their hundred per cent. For the past year, I have devised a system by which I meet a junior employee for 20 minutes every day. He or she can come to my room and speak on anything they wish to. The idea is to make them feel special. These informal interactions have been a revelation. People have talked about things they may not share even with their friends or family.

(jainaj) #98

They have opened only one store in past six months whereas they are giving guidance of 20+ stores in every concall for the year. Any idea whats going on.

(PP) #99

Quite worrying. Is it some sort of cash crunch?

Another things which I don’t understand is the variation is operating margins across quarters.

    Quarter           Sales        Op.Profit           Op.profit.margin
     Q1-FY15          165           18.67                   11.3%
       Q2             144            5.47                   3.8%
       Q3             240            34.67                 14.4%
       Q4             170            6.73                   3.95%

This pattern can be seen for previous years as well… Any idea why this is so?

(Ravi) #100

@PP1 - This can be explained - Q1 - (Jan, Feb & March) & Q3(July, Aug & Sep) quarters are when you have a lot festival shopping happening. So sales is good in these 2 qtrs, whereas the other 2 are generally lean quarters.

Ravi S