V-Mart rating | Buy — Company is poised for growth

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Published: September 9, 2019 1:58:07 AM

The V-Mart stock has slipped ~30% over the past four months. This we attribute to the company’s soft performance over the past two quarters amidst the general slowdown in the economy and weak equity markets (low liquidity).

Likely to bounce back in Q4; valuations offer a good entry point; ‘Buy’ retainedLikely to bounce back in Q4; valuations offer a good entry point; ‘Buy’ retained

The V-Mart stock has slipped ~30% over the past four months. This we attribute to the company’s soft performance over the past two quarters amidst the general slowdown in the economy and weak equity markets (low liquidity). However, we envisage the company bouncing back from Q4FY20 riding good monsoon recovery and the government’s policy push to boost liquidity & the economy. Moreover, with the 3x revenue jump goal post over FY19-24 (implying ~25% CAGR), V-Mart has started investing presciently in capabilities across functions, which we believe will start bearing fruit.

We perceive the recent stock correction as a good entry point into a structurally sound and well-managed company at an attractive valuation—19.1x FY21e EV/Ebitda versus peak of ~41x a year ago and ~32x four months ago.

Drivers for growth ahead: To achieve 3x jump in revenue, management has: (i) divided the business into four geographical zones; (ii) appointed dedicated managers for various functions; (iii) invested in building IT infrastructure; (iv) accelerated store expansion pace (opened 43 stores in FY19 and has guided for 60 in FY20); (v) bolstered supply chain; etc. Though implementation of these will entail upfront cost, we believe successful execution will propel it into the league of big retail players.

Outlook: Compelling story– V-Mart’s strategy of increasing clusters coupled with healthy store additions is likely to drive growth. Key risks to our call are rise in competitive intensity and prolonged slowdown. We retain 25x EV/Ebitda (12-months’ forward; ex-Ind AS 116) to arrive at TP of Rs 2,366. Maintain ‘BUY/SP’.

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