Neutral V-MART; target of Rs 1800: Motilal Oswal

Motilal Oswal's research report on V-MART

V-MART (VMART) has reported a weak earnings trajectory over the last few years, primarily due to factors such as weakness in the core business, sluggish performance/ recovery in the Unlimited format, and losses within Limeroad. However, we believe there are signs of gradual reversal in trend, with noticeable changes in the business. These changes are being driven by strong actions taken by the management, which may bring about a significant transformation. The key trends of visible changes are outlined below: Improvement in the core business is expected from 3QFY24 onwards, driven by healthy same-store sales growth (SSSG) due to increased demand during festive periods. Although it is expected to be below the normalized level, this trend is now seen to have bottomed out. Unlimited, which is operating with suboptimal profitability (3-4% pre IND-AS 116 EBITDA margin) due to weak revenue productivity, is likely to close more than 15 stores in 4QF24. These stores have low productivity and high rental costs. This should help in recovering margins to reach levels of 6-7% from FY25 onwards. The newer stores opened with smaller footprints, better locations, and lower rentals are already experiencing higher productivity. Management is now looking to reduce investments in Limeroad, revisit the previous strategy of higher spending to expand the business and achieve operating leverage. This should help in curbing losses from INR600m to breakeven in FY25 (we estimate FY24 losses at INR900m).

Outlook

With the onset of the festive period and the company’s decision to lower ASPs to revive volume growth, it is expected that the company will experience a revenue recovery in 2HFY24. However, prolonged weakness in the macro environment and a delayed winter would remain the key monitorables. We are not modeling any recovery in numbers yet. We value the stock at 11x EV/EBITDA on FY26E basis with a TP of INR1,800. Maintain Neutral.