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MOSL: V-MART RETAIL (Neutral)-Strong profit growth despite weak macro conditions

V-MART RETAIL: Strong profit growth despite weak macro conditions

(VMART IN, Mkt Cap USD0.6b, CMP INR2370, TP INR2650, 12% Upside, Neutral)

 

• V-Mart recorded a strong sales/PAT growth of 21%/58% YoY (7% beat) in 3QFY20 amidst weak 2% SSSG due to the poor macro outlook, subdued festive season and muted pre-winter sales.
• However, we raise our FY20/FY21 EBITDA estimate by 14%/11%, on the back of its steady pace of store additions and strong cost optimization initiatives driving margin improvement. We raise our EPS estimate by 23%/16% for FY20/FY21. However, given the weak economic outlook and the stock’s recent sharp rally, we maintain neutral. 

Improving margins drive revenue and EBITDA beat

• V-Mart’s revenues for 3QFY20 were up 21% YoY to INR5.6b (7% above est.), despite a weak economic environment and slowing consumer spending. Gross margin improved by 80bp YoY to 36.3%, led by supplier consolidation and efficient merchandise sourcing. Pre Ind-AS116, EBITDA was up 29% YoY to INR944m (16% beat), led by EBITDA margin improvement of 16.8% (up 100bp YoY).
• The company has adopted a new tax regime and its effective tax rate for 3QFY20 stood at ~22% on account of INR17m DTA credit. PAT at INR661m was up 58% YoY (22% beat), driven by higher sales and improving margins.