Moneycontrol
Nov 14, 2017 02:55 PM IST | Source: Moneycontrol.com

V-Mart: This 'value for money' retailer commands a price for a good reason

V-Mart, undoubtedly, remains a fundamentally sound pick owing to its ability to consistently deliver good margins and healthy return ratios over a period of time. However, a sharp run-up in the stock’s price over the past year leaves little room for a valuation upside in the near future.

Krishna Karwa @krishnakarwa152

After a stellar show in Q1FY18, V-Mart Retail, one of India’s largest value retailers, proved its mettle yet again with a marked improvement in the quarter gone by. However, from a sequential (quarter on quarter) perspective, there was not much to write home about.

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A healthy footfall growth of 24 percent amid 8 new store openings fuelled V-Mart’s top-line growth in Q2. Private labels constituted nearly 54 percent of the quarterly turnover. Sales per square foot amounted to Rs 678, whereas the average bill size rose by approximately 5 percent. Good traction was observed in the kirana, kids wear and home furnishing segments.

The uptick in operating margins was attributable to sourcing efficiencies, expense control measures, and a decline in shrinkage (to 1.2 percent).

With Q3 (historically the best quarter for V-Mart) now underway, what can investors look forward to going forward?

Private labels

V-Mart aims to increase the share of its margin-accretive in-house brands (Flick, Twist, Desi Mix, Charcoal, J White) to 80 percent by offering new variants. Increased emphasis on wedding apparel and winter wear for all age groups could augur well for the company’s revenues, too.

Cluster approach

V-Mart’s expansion footprint that, until now was largely focused on tier 2 and 3 cities of India, is likely to gain traction in tier 4 regions in order to bridge the wide gap between aspirational consumers and presence of organised retail. Effective automation, warehousing, packaging, and assortments will be the other priority areas.

Store additions

V-Mart plans to add 25-30 stores every year (the company’s outlet count stood at 141/163 at the end of FY17/H1FY18, respectively) with a targeted area addition of 12 percent (as on September 30, 2017, the company’s total retail area was roughly 13.27 lakh square feet). The process of identifying new locations at the tehsil (county) level is under consideration.

Volume-driven growth

To capture the new customer base in price-sensitive tier 4 zones, V-Mart is unlikely to increase the average selling price of its products, which is typically in the range of Rs 280-290 per unit, roughly 60-65 percent lower than most of its organised counterparts.

Technological integration

V-Mart’s long-term strategy is to foray into the online space by spending 2 percent of its operating income every year. Though e-commerce could be potentially disruptive, the impact of the same may not be very significant (at least not in the initial stages) since customers in smaller territories still prefer brick and mortar outlets.

What’s in store for Q3?

GST-induced slowdown led to a subdued sentiment in the trader community, consequently leading to a slowdown in V-Mart’s Diwali sales. High competitive intensity in some regions by virtue of entry of bigger players (Pantaloon, FBB, Reliance Retail) in the affordable retail space, a delay in the onset of winter, and multiple rounds of ‘end of season sale’ discounts will be some of the other key variables worth watching out for.

Valuation

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V-Mart, undoubtedly, remains a fundamentally sound pick owing to its ability to consistently deliver good margins and healthy return ratios over a period of time. Nonetheless, a sharp run-up in the stock’s price over the past year (valuing the company at 29x FY19 estimated earnings) leaves little room for a valuation upside in the near future. Any corrections could be a good starting point to look at the retail major.

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