V-Mart Retail Ltd

(PP) #101

I meant Financial Year quarters.

(Q1 is April, May, June … Q3 is Oct, Nov, Dec)

IF you look at their sales, there is a major sales bump in Q3, probably due to Diwali. So, I can understand the higher margins that quarter.

How do you explain very low margins in Q2? and Q4? And the better margins in Q1?

I think poor margins in Q4 are due to scrap-value sale of unsold inventory done in Dec.

(HG) #102

That’s true. Though as recently as May 31st, Lalit Agarwal said that they are on track for this year as well. They have delivered so far - I am willing to wait. Also sent an email to the CS but no reply yet.

(Naman) #103

It is certainly concerning that the Company has not opened any store. However, a target of 20 stores could be met by opening 6 stores each in the next 3 quarters, which the Company has done comfortably in most quarters in the past.

It is definitely not a cash issue as VMart turned Free cash flow positive in FY15, which is impressive given that the Company continued its growth focus on opened 20 stores. If you look at the cash flow schedule, they generated 38 crores of operating cash flow, and spent 19 crores capex on stores, so a +ve free cash flow of 19 crores. In fact, some cash was used to reduce short term debt from 43 crores to 29 crores.

In addition, the business as on March 31, 2015 had cash and MF investments (current investments) of ~20 crores. So I do not see a cash flow problem here. It is possible that there are delays in the execution of the project due to potential delays of handing over from the landlord. Another potential reason for this which would be alarming is lack of good available locations to open stores, though I do not think that should be the case as they have over 650 cities that they are targeting.

Overall if you consider this quarter, the Company should on the base of 108 stores comfortably do ~210 crores of sales (165 cr in Q1FY15, increase of ~30%)…so an EPS of 6.5 Rs, which would be 30% increase over Q1FY15 EPS of 5 Rs.

I think the growth story is intact, and the managements focus on keeping costs in control (@20% opex), and continuously increasing same store sales growth, and opening new stores should allow us to make a decent return in the long term.

(jainaj) #104

I am invested here for last one year and have read a lot about promoters. They are wise guys and practical. They just won’t open stores for the sake of fulfilling targets. But still I am not able to reach conclusion as to what may be the reason. demand shortfall, no attractive locations doesn’t seems to be the reason.
As HG pointed above through link that they are entering west bengal might be the reason for delaying due to understanding local markets. Lalit Agarwal has seen it all in last decade in terms of what happens in this business due to over leverage, mindless expansion.
Company in last one year has done a lot to improve inventory management and supply side issues which is terrific. Keep faith for now ( I have written to CS for details. Hope he replies) but keep looking for details whether good or bad.
Please remember what they are selling has huge - huge demand in India. This company can surprise us positively over 5 years but keep extracting information.

(Naman) #105

@PP1, VMart is in a seasonal business where 3rd quarter is the best. Listing below the characteristics of each quarter which probably help explain the variance in op profit margins

Q1 – Wedding season impact (which as per Hindu calendar starts 15 days after Holi festival), this is the second best quarter (SPSF =750; EBITDA margins – 10-11%)
Q2 – Sell out products which are of summer stock and get rid of the old inventory and start a fresh season, discounts etc (SPSF = 700; EBITDA margins – 5%)
Q3 –Festival season (Diwali), Holidays (around New Year), Wedding season, winter sales…so huge bump in sales (SPSF = ~1000; EBITDA margins >12-13%)
Q4 – Lean quarter, inventory rationalisation, discounting, shrinkage (SPSF = 700; EBITDA margins – 3-4%)

CEO comments on seasonality from concall – “So as far as seasonality is concerned, yes Q3 is the best quarter for every retailer and including us because we have the festival days in this quarter and also the prime winter sales in this quarter. So Q3 is followed by Q1 and then by Q2 and Q4 happens to be the worst quarter for us. Same is with the margin”

From Q3FY13 conference call, CFO comments on seasonality – “On an average actually just to give you the seasonality in terms of numbers…I 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.”

I hope this is helpful in understanding.

(PP) #106

One question I would have about this is…

In FY14, they opened 20 stores and Capex was 27 crores
In FY15, they opened 19 stores, and Capex was 19 crores

Why so much of difference in Capex per new store?

(PP) #107

If you go by what the company said, then the Capex per new store is about 1.25 crores. So, in FY15 they have spent about 24 crores on Capex.

Then, the FCF comes to about 14 crores (38 crores - 24 crores).

With 14 crores, they can add about 6 - 7 stores (and not 20 stores) - considering total investment of 2 crores per store.

To do 20 stores, they need 40 - 45 crores cash per year. Where can it come from? Two possibilities
(1) FCF = 14 crores
(2) IPO proceeds = has dwindled down to 5 crores as on Mar '15
Total = 19 crores

This 19 crores + previous cash balances is showing up in the BS as current + non-current investments (MF holdings, cash, etc) = 21 crores as on Mar '15

So, they just have enough cash to expand by 8 - 9 stores in FY 16… Yes, they do have a cash crunch (they didn’t have it earlier due to the IPO money being there)…

To have sustainable growth of 20 stores per year, they need to generate FCF of 45 crores, which is highly unlikely in the next 2 - 3 years… So, only way forward is raise more equity or raise more debt… Or free up cash through working capital reduction… Or reduce growth rates…

(Naman) #108

Cash and Cash equivalents = 21 crore (31-mar-2015)

Current debt equity = 0.2x

Estimated Operating cash generation in Q1FY16

Sales – 200 crore

EBITDA margin – 10%

EBITDA – 20 crore

Change in Working capital (20% of sales) – 20% of change in sales
= 8 crores = (20%*(200 – 160 crore))

Tax – 5 crores

OCF = 6-8crore

Estimated Cash at the end of Q1FY16 – 25 – 28 crores (assuming no additional stores)

So end of year operating cash could be in the range of 40 – 50 crores (Given Q3 generates significant cash flow)

That should be sufficient to open 20 odd stores…

Given current debt equity is low at 0.15 – 0.2x, the management is comfortable taking additional debt, with maximum debt equity ratio of 0.75x (so given their net worth is 200 crore, they can leverage upto 150 odd crores)…this certainly is not the preferred route…

And I think for a fast growing company, it is okay for the business to raise additional equity which should happen sometime in FY16 (potential issue here could be FII limit cap of 24%, and current FII holding of ~23%). Dilution at what valuation is to be tracked.

I agree that there is a cash requirement for the business to maintain its rapid growth and open 20 - 25 stores per annum, but there are internal accruals + debt + equity raising option available
to the management. And for a high growth business, raising equity is a good option. Look at companies like Astral, Mayur, La Opala, Can Fin Homes, Shilpa Medicare who have raised significant equity in the last year for growth

(PP) #109

Sounds fair.

So, they do need to raise cash latest in a year or so… either debt of equity… internal accruals is clearly not enough…

Question is - how soon can the business reach a state where it can grow purely through internal accruals? And what does the management need to do for that? And is the management indeed doing that?

I think the obvious way is to increase same store sales growth (as increases sales without any extra investments / hardly any need for extra cash needed) from the current 10% to 15% or so… This will generate a lot of extra cash profits… But then that is easier said that done…

Other way is to increase gross margins - however this is also constant @30% for FY12, FY13, FY14 despite more than doubling of sales… Aren’t they able to purchase cheaper when purchasing in bulk, and thus increase gross margins? Arent they able to optimize their supply chain costs? Isn’t scale helping with margins?

Their is only so much that can be done to reduce operating expenses, considering it is already one of the lowest in industry in terms of operating expenses…

So, what is the game? Keep raising fresh capital to fund growth, keeping the business dynamics (margins, same store sales growth) unchanged? Until a point where all the new stores along with existing stores generate enough cash internally to fund growth?

I would have liked to see the management working on improving business dynamics (gross margins and/or same store sales growth) by taking advantage of scale/learning curve… Then the management can be considered a great management, and not just a good management…

The risk in the current way of thinking is - what if gross margins fall by a couple of percentage? Or if same store sales growth reduces? Then there is lesser profits to distribute among more shareholders/debtholders.

(JatinK) #110

Some answers-

  • Gross Margins haven’t expanded because they don’t want to expand them. They just pass it on to customers.
    Recently, their raw mat. prices fell as cotton prices fell, they just passed on all the benefit to the customers.
    Mgt believes in giving products at best value to customers.

  • A new store requires 1-1.25 cr of fixed asset & same money for inventory. So for opening 25 stores every year, then will need 50-60 cr of money.
    As long as CFO will be less than this amount, they will need to fund this through debt or new equity.
    As per my info, they have no plans of equity. Debt will be used… Max D/E ratio is 0.75 as per their targets. So, there is room to grow via debt for next 2-3 years… & in 2-3 years, CFO will be able be take care of capex + WC needs.

(PP) #111

It makes sense to pass on lower input costs to customers if it leads to increase in sales/volumes. However, that is not happening. Same store sales growth is at 10% which is more or less correction for inflation. In fact same store sales growth fell down to 6.5% in FY15

They are present in cities which have no other organized apparel retail. So, if they have a competitive moat due to being a kind of a monopoly, they should have pricing power. If they have pricing power - then they should have decided to increase their margins - for example, 2% increase in net margins would have lead to 15 crores more of cash in their kitty in FY15.

Why not exploit this pricing power (if they have it) - to avoid taking more debt to fund their expansion?

If they don’t have pricing power - then their margins / cash-flows are not so certain. And then debt-taking becomes even more risky…

Disc: Not invested.

(JatinK) #112

You are looking at a retail business, my friend.
Pricing power is zero to negligible in this business.

They face competition both from local players i.e unorganized retail as well as organized players.
In fact, out of 108 stores, 55 stores have atleast one of Reliance trend, Shoppers stop, Spencer or Big Bazaar in town.

Please realize- Bet here is neither margin expansion nor pricing power.

Bet is on 25-30% cagr over next few years as organized retail grows in India & Vmart is the best name to capture that growth in Tier-2 & 3 cities.
Management expects 30% growth to come from- 10% from SSSG, 12-15% from stores opened in previous year & rest from new stores.

Recent SSSG has been slightly disappointing, but I expect that to an aberration than the norm.

Having seen the failure of Vishal retail closely, these guys hate debt & I don’t expect them to go fast on expansion via debt.

(PP) #113

In retail, pricing power doesn’t necessarily have to be zero. E.g. What do you think of Titan Company?

If V-mart has no pricing power - then it is just another retailer…

Any retailer can expand by taking debt… Not difficult for a retailer to achieve SSG of 10% either… Afterall, inflation in India is roughly 10%… So, on an average, the prices of goods increase by 10% every year…

Why then be invested in just another retailer?

Anyways, thanks for a good discussion @jk321 @jainaj @Naman @ravimba31 @HG_6470

(JatinK) #114

Pricing power isn’t zero… but is negligible Imho… & whatever little pricing power there is, that won’t be used to increase selling price but to pass it on to the customers in the hope of increasing SSSG.

Last year SSSG was poor on account bad situation in smaller cities due to Poor monsoon. Hence, look at long term SSSG rather than last year’s.

Retail is a tough business with low possibility of success. Moat, narrow moat, comes from being the lowest cost supplier. Which VMart is.
To succeed you also need a great management, which VMart has.

I wouldn’t dare to compare this to Titan even after a decade, but with Walmart (hopefully after a decade).

(PP) #115

Titan is a different game, because they have created their own brands and retail their own brands… So margins are much higher…

Walmart is a different game, because they have created huge scale, and optimized costs in the backend (sourcing, logistics, inventory, merchandising) to an extent that is difficult to beat… So, they can give the lowest prices and still make good margins (because of backend cost optimization)…

V-mart has done nothing special, except go to places others haven’t gone to…

Question is can you go to these untested places and generate great returns on your invested capital… However, that doesn’t seem to be the case… They have proved that you can’t make great returns by retailing in Tier-3/4 cities… Because the buying power simply isn’t there yet in these places…

(JatinK) #116

Was Walmart build in a day??

Do you mind sharing data of Walmart’s Gross Margins, OPM, Net Margin, Asset Turnover, Debt/Equity ratio, ROE, ROIC, growth rate of sales, op, pat etc (either 20-30 years ago or now, if past data not available) and compare those with Vmart for us to meaningfully draw any conclusions?

(PP) #117

All info about Walmart is publicly available.

Friend, good luck with this investment. I too will be happy if V-mart becomes Wal-mart. I guess, we just differ on the probabilities of that happening.

I was debating on this topic - only because I was trying to make up my mind on whether to invest in this stock. Yesterday, I decided not to - mainly because I tend to invest only where I feel good confidence of a 10 year story playing out successfully. I am not too interested in the short-term / medium-term story.

I might rethink this decision after 6 months - but that is then…

(HG) #118

@PP1 - you might not be convinced with the V Mart story but dismissive statements like V-Mart is just another retailer don’t make sense to me.

@jk321 That would an interesting comparison wouldn’t it. Peter Lynch says Walmart gave people a chance to buy it for almost a decade in its early days yet there were people who were not convinced.

(PP) #119


V-mart is indeed just another retailer, that is expanding with IPO money / debt…

To be a great retailer, you need to be doing something different… something that generates higher returns…

The only ‘special’ thing it does is go to tier-3/4 cities… nobody else goes there, because people there don’t have buying power… if people there develop buying power, then other retailers will also come to these places…

Forget UP/Bihar where V-mart operates… Take a place like Kerala…people in tier-3/4 cities are quite well off and have buying power… Having a 8K apparel shop in a tier-3/4 city in Kerala is not a big deal - in each of these places you will find not one, but half a dozen…

So, tomorrow if UP/Bihar are as well off as Kerala - then V-mart will have competition for all its stores…

I am sorry that is how the ground realities stack up…

(JatinK) #120

If you are so sure that Vmart is just another retailer and that you look for 10 year bets and not short/ medium term bets, what will change in 6 months?