EUR 120.00 For Business Accounts Only

MOSL: V-MART RETAIL (Neutral)-Margin weakness reflective of intense competition

V-MART RETAIL: Margin weakness reflective of intense competition; remains aggressive on footprint expansion though

(VMART IN, Mkt Cap USD0.5b, CMP INR1800, TP INR2000, 11% Upside, Neutral)

 

• Healthy revenue growth but margins shrink in a weak market: Revenue grew 25% YoY to INR4.5b (8% beat), led by rapid store addition (+13 to 227) and high SSSG of 5.2% YoY (our estimate: +4.5%). That said, we note that the market environment was not very conducive, with higher RM cost (+31% YoY due to intense competition), contained product pricing and various promotional offers impacting the gross margin by 300bp. On a pre-Ind-AS 116 basis, EBITDA declined 9% YoY to INR393m (at INR578m on a post Ind-As 116 basis), with the margin contracting sharply by 330bp YoY to 8.7%. Reported PAT was down 30% YoY to INR176m (22% impact from adoption of Ind-AS 116).
• Concall highlights: (1) V-Mart targets to expand its store base at a rate of 25% (~55 stores addition this year). (2) Margins are likely to remain stressed for the year as a result of the subdued market. (3) It plans to maintain revenue growth at ~22% in the coming years, with 5-8% SSSG in the long run. (4) Inventory days were down from 81 to 71 as a result of significant rationalization of inventory with increasing sales.
• Expect aggressive footprint expansion: We expect VMART to add 45 new stores and deliver 6% SSSG in FY20/21 in view of management's continual efforts to execute on its stated strategy. However, the rising threat from competitors and new players entering the tier-2/3 markets is likely to keep margins under pressure. We, thus, cut our FY20-21 PAT estimates by 21-25% on a post Ind-AS 116 basis, but largely maintain them on a pre-Ind-AS 116 basis as our assumptions already factor in the weak market scenario. We build a 15% PAT CAGR over FY19-21.
• Valuation and view: Given the likely deceleration in earnings growth, valuations are likely to remain under pressure. Subsequently, we cut our TP to INR2,000 (prior: INR2,450), ascribing 15x FY21E EV/EBITDA. Maintain Neutral.