Our recent channel checks and meetings with regional value retailers corroborated the advantage V-Mart enjoys over national and regional players. The company has built a strong brand recall, a wide product assortment and efficient cost/WC position. This has translated into better footfall/ throughput and lower cost/employee churn versus peers operating at same locations. V-Mart’s EBITDA has grown only modestly and margin has contracted by 230bp over FY18-20 due to a sharp fall in same-store sales growth (SSSG).

However, we note that this is more of an industry phenomenon and V-Mart will be quick to capture opportunities once the operating environment recovers.

We upgrade V-Mart to ‘buy’ as it stands to benefit from its strong cost leadership at a time when regional players are facing pressure, tailwinds from better monsoon and agricultural output and low SSSG/margin base.

We assign 20x EV/EBITDA on FY22E EBITDA of Rs 230 crore to arrive at a target price of Rs 2,700 with implied P/E of 28x (closer to its five-year average, but at a ~30% discount to its three-year average).

V-Mart has been delivering modest SSSG in recent times. However, according to our channel checks, this is more of an industry phenomenon than company specific issue, as evident from the performances of almost all regional and national players. Most stores we visited were delivering flat-to-declining SSSG and running 10-15% below targets with stretching working capital.

V-Mart’s EBITDA increased to Rs 150 crore over FY18-20, with the margin down 230bp due to moderation in SSSG from 9% in FY18 to 3-4% in FY19/20. However, good monsoon and healthy agricultural output, along with expectations of increased government spending on rural, will likely act as catalyst for growth in FY21.