Krishna Karwa Moneycontrol Research
In a quarter marred by GST, while most consumer-facing businesses struggled, a few stood out, and V-Mart Retail (V-Mart), one of India’s most renowned apparel and merchandise retailers, was one of them. The company is executing its ‘value’ model well, and the relative advantage of organised players post GST will be an added feather to its cap. While markets have adequately rewarded the stock, evident from the multiple re-rating, value investors may have to wait for a while.
The impressive top-line run during Q1FY18 was attributed to a low same-store sales base, an extended marriage season, festivities like Eid, pre-GST stock clearances, post-demonetisation demand pickup, and a good monsoon (leading to a sentiment boost, particularly in rural areas).
The company reported appreciable growth in EBITDA and expanded margins at the operating and net profit level.
Sale volumes, private label brands to drive growth
V-Mart’s key strength lies in gaining market share through adoption of a penetrative pricing strategy. During the quarter ended June 2017, the company decreased its average selling price of apparel by roughly 3 percent from Rs 277 to Rs 269 per piece. Consequently, the transaction size witnessed an increase of 5.5 percent from Rs 663 to Rs 699. The move has worked well for the company and no price increase is on the cards.
The company endeavors to achieve volume-driven growth by pushing its own brands (that currently contribute around 35 percent to the total revenue) to around 70 percent of the company’s annual operating income over the next one to two years. This growth strategy is anticipated to protect margins through a higher degree of operating leverage.
Expansion through store additions
V-Mart spent Rs 12 crore on adding 8 new stores in the April-June 2017 quarter. In an attempt to enhance brand visibility and expand customer reach, the company's store addition budget of Rs 32 crore will be allocated towards opening 25 apparel-only outlets in FY18. The focus will be on tier 4 cities and towns of India. The stores, set up through a cluster-based approach, will be located in a radius of 100-150 kms from each other, targeting the aspirational buyers seeking an organised retail experience.
Well-run house
V-Mart reduced its inventory cycle in the first three months of the ongoing fiscal owing to investments in warehousing technologies and data analytics. Further improvement is expected on this front. Thanks to its healthy cash flows, capex, going forward, will be largely funded through internal accruals without resorting to debt.
The GST advantages
Apparel sales, the core of V-Mart’s business, constitute 80-90 percent of the yearly revenues on an average. Most of the garments sold by the company are priced below Rs 1,000 per unit to cater to demands of price-sensitive buyers in tier 2/3/4 regions of India.
Post GST rollout, unorganised players (widely prevalent in the low price range product category) will eventually lose their pricing edge. Moreover, the GST rate on clothes costing less than Rs 1,000 is only 5 percent vis-à-vis the erstwhile tax rate of nearly 8 percent, or the 12 percent rate on variants priced above Rs 1,000.
Benefits from the new tax regime, apart from cost savings on account of efficient sourcing gains, are likely to be passed on to the consumers without any negative impact on margins.
The path ahead
Though V-Mart is poised to grow from the boom in India’s retail space, the competitive intensity from large format stores and online portals remains high. So far, the company has negotiated these headwinds well. While near-term performance may get impacted by issues like floods and swamping in some of its key markets, strategically, the company seems to be in a sweet spot.
However, the sharp rally post Q1FY18 earnings has left little room for a valuation upside at this point. At 50.3x trailing twelve months earnings, price corrections could provide the right opportunities to consider building positions in this stock.
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