V-Mart Q2 Results Review - Corrective Measures Underway But Challenging Journey Ahead: Systematix

Systematix Research Report

V-Mart Retail Ltd.’s Q2 FY24 results were in-line with our muted expectations, with margins under significant pressure given losses in LimeRoad exacerbated by higher discounting and price cuts in core business.

Revenue witnessed growth at 8.5% (same-store sales growth -6%; like-to-like sales volume grew 6%) given the shift in festive season. V-Mart’s core business grew 6% YoY (77% contribution to sales) whereas Unlimited revenue growth remained flat (19% contribution to sales).

LimeRoad business grew 26% QoQ contributing 4% to revenue. Average selling prices contracted on an overall level (- 12%YoY) and apparel (-13%YoY) due to focus on lower price points and are expected to remain around current levels going forward with the company targeting to attract value-conscious customers; while footfalls grew 13% YoY, with a conversion rate of 55% during the quarter.

Gross margin declined 169 basis points YoY to 34.6% due to lower Unlimited sales and higher discounting while Ebitda margin contracted sharply to 0.1% (-1,045 bps YoY) due to LimeRoad losses and 687 bps increase in other expenses.

V-Mart added eight new stores and closed two stores in Q2 FY24, taking the total store count to 437 (V-Mart: 353, Unlimited: 84). Total retail area grew 6% YoY to 3.8 million square feet (including Unlimited).

Management maintained a positive outlook on demand going ahead with a good start to the festive season and consumer confidence inching back, but we remain wary of their ability to tackle competition.

They do not intend to slow down on footprint expansion or online investments as of now, which in our view would keep the financials depressed for the forthcoming quarters.

We build in 16%/11% revenue/Ebitda compound annual growth rate over FY23-25E despite the low base. Our cautious outlook stems from-

1. Sales per sq ft remaining well below pre-Covid levels given soft demand,

2. margin and return ratio impact of investments in LimeRoad and warehousing and

3. increasing competitive intensity.

Despite our negative stance, we maintain our 'Hold' rating given the sharp 26% correction in last three months with a target price of Rs 1,750 (earlier Rs 2,270) based on an EV/Ebitda multiple of 15 times FY25E.

We would revisit our view once we see an improvement in demand conditions/revenue throughput and tangible benefits of the recent investments made V-Mart driving a recovery in return ratios.

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