FY18 AR highlights management’s strong execution and focus on being ahead of the curve. More expansion in Tier-4 cities, investment in datacentre and analytics, improvement in RoE and a 4th consecutive year of FCF generation highlight same. VMART, with 62% of its stores in Tier 3 & 4 cities, is a key beneficiary of rural recovery and recent MSP hikes with likely another normal monsoon should be positive for it. Maintain Hold with revised price target of Rs 2,580.
8.9% SSSG in FY18 (base of 13% y-o-y) was helped by improved price value equation (SSSG in volume terms at 24%) and increased assortment (15% increase in SKUs). Lower GST rate on products of less than Rs 1,000 MRP helped the price/value equation as 85% of revenue consists of below-Rs 1,000 MRP products. Management targets further improvement in price/value equation and top-line growth (up 22% in FY18).
Gross/Ebitda margin improved 223bp/ 240bp y-o-y, respectively. Margins were helped by improved mix (80bp increase in fashion), private label mix (improved from 20% of sales in FY17 to 49% in FY18) and reduced shrinkage. ASP for the company increased at 10% CAGR over FY13-18, higher than inflation, highlighting uptrading. Management aims maintaining margin.
Store expansion picked up in FY18 with additions of 31 new stores (total of 171 stores) from 20 stores in FY17. Expansion increased in Tier 4 cities, which accounted for 10.5% of stores in FY18, increasing from 2% in FY17. With entry into Tier 4 cities, VMART is again the first mover, similar to how it started by expanding in Tier 3 cities. The conversion ratio, at 57%, continues to fall (down 260bp y-o-y), affected by declining share of kirana and also due to increasing competition.
Core working capital days improved to 55 days in FY18 from 57 days in FY17 largely led by improvement in payable days from 66 days to 72 days, a result of vendor consolidation measures taken by company. Inventory days (on COGS) were up to 127 days from 123 days.
Cash flow and return ratio
OCF fell 6% y-o-y to Rs 6.4 bn as absolute working capital rose y-o-y (core WC to sales increased to 11.5% from 10.9%). FCF stood at Rs 1.76 bn in FY18 as capex rose y-o-y. VMART remains cash positive, with net cash of Rs 4.7 bn (Rs 2.9 bn in FY17). RoCE and RoE improved 990bp and 760bp y-o-y, respectively.
Change in estimates
We raise our top-line and Ebitda estimates by 2% and 4%, respectively, on strong execution and better than expected retail traction in Q1FY19.
Business environment and industry
Organised retail accounts for about 7% of the Indian retail sector. Management believes that tax rates and laws will become more favourable to the organised retail sector, which should help narrow the pricing advantage of the unorganised sector. In India, out of 5,000 towns (with population of more than 0.2 mn), only about 500 have organised retail.