V-Mart rating – Buy: Prospects are bright for the company

Valuations are attractive; coverage initiated with ‘Buy’ rating and TP of Rs 3,400

V-Mart has maintained healthy operating cashflows, asset turn ratios, and Ebitda margins over the years, making it a capital-efficient business.
By Axis Securities

We initiate coverage on V-Mart Retail Limited (V-MART) with a Buy recommendation and a TP of Rs 3,400, implying a 24% upside from the current levels. V-Mart is strongly placed, backed by its strong growth prospects in value fashion retail and well-established store network in lower-tier cities. The company has ramped up its store addition over the years and has built a successful and highly profitable business model. However, in the near term, store addition will be muted and the focus would be more on preserving cash, maintaining liquidity position, and optimising working capital.

We expect the company to continue delivering healthy growth over FY20-23e at ~15%/15%/33% CAGR in Revenue/ Ebitda/PAT, respectively. This will be led by (i) Its wide distribution network with aggressive store expansion post FY21e; (ii) stable revenue generation given the increasing trend in value fashion retail; (iii) healthy balance sheet with no liquidity constraint; and (iv) asset-light business model to render high ROE and ROCE. At CMP, the stock trades at 15x FY23e earnings, which we believe is attractive given the strong revenue growth over FY20-FY23e.

Asset-light model to provide healthy return ratios: V-Mart has maintained healthy operating cashflows, asset turn ratios, and Ebitda margins over the years, making it a capital-efficient business. It undertook an average capex of ~Rs 430 crore over the past five years, largely funded through internal accruals. It has sustained an average ROE and ROCE of 16%+ and 23%, respectively, and considering its performance, return ratios are expected to maintain high levels going forward.

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