In the last one-year, the Apparel retail sector has been one of the worst hit and is still operating below pre-COVID levels, raising concerns of a permanent business impairment risk to retailers.
In the last 5-7 years, VMART has consistently delivered growth with an efficient capital management.
In the last one-year, the Apparel retail sector has been one of the worst hit and is still operating below pre-COVID levels, raising concerns of a permanent business impairment risk to retailers. Yet what we like about VMART is, with a focus on smaller towns and largely on high streets, VMART has seen a better recovery than other Apparel retailers. Footfalls are expected to normalise in the coming 1-2 quarters.
Value retail has a long runway for growth, with a large lower tier market and a compelling value proposition. VMART’s disciplined and strong execution capability is reflected in its healthy store economics, efficient working capital, and largely internally funded growth. Its low-cost structure allows it to remain competitive in the market. The liquidity constraints caused by COVID-19 are expected to lower competition. VMART is currently valued ~18x FY23E EV-to-EBITDA against its long term sustainable EBITDA growth potential of 20-25%, implying an EV to-EBITDA to EBITDA growth ratio of 0.7-0.9x. This makes it an attractive bet given the long runway of growth. VMART has the potential to grow its store count by 2-3x from 274 stores at present.
In the last 5-7 years, VMART has consistently delivered growth with an efficient capital management. This is reflected in its, very healthy store economics which is driven by best-in-class cost structure, revenue throughput, and among the lowest capex across peers (refer Exhibit 17 and 24). The management has ensured that despite steady growth in the number of stores, payable and inventory days remain in a narrow range.
We estimate FY22E EBITDA 10% higher than FY20 levels (~25% store additions on a marginal decline in SSSG) and 26% EBITDA growth in FY23E. The stock trades at FY23E EV-to-EBITDA ratio of 18x. Compared to its long term sustainable EBITDA growth of 20%-25%, the stock remains attractive at 0.7-0.9x EV-to-EBITDA to EBITDA growth. We value the stock at FY23E EV-to-EBITDA ratio of 23x, and are increasing our target price to Rs 3,500. Retain ‘buy’.