27 July 2020

V-Mart Stock Analysis

V-Mart is a retail store chain operating in the fashion and kirana segment. The company is present in the Northen states of India. The company's caters to the lower-middle class segment (termed aspiring class and the middle class). The company opened its first store in 2003 in Ahmedabad. The company is led by Lalit Agarwal, the promoter and the promoters own a 51.99% stake in the company.

Industry

The Indian retail industry is touted to be worth $710 Billion of which 67% is food and grocery. The unorganised sector has a 89% market share (vs. ~ 20% average in developed markets). The organised fashion market in India is estimated to be worth $56 Billion and is expected to grow at a 7% CAGR over the next decade. Men's wear contributes 42% of the apparel market of India while women's and kid's wear contributes 37% and 21% of the apparel market.

The fashion apparel industry in India is grew at ~ 11% CAGR till 2019 while the online fashion industry grew at ~ 32% CAGR. Myntra and Flipkart control ~ 70% of the online mass fashion market. The post COVID-19 world looks better for the online fashion market to grow at the cost of the brick and mortar stores.


V-Mart Business Analysis

V-Mart is focused on the tier 2-3 and smaller towns. The average selling price is just Rs 320 and the average billing size is around 756. At this ticket size, the online sellers will have to add delivery charges and also face a lot of returns which adds up to their cost. The delivery time to the smaller cities is 4-5 working days which might deter shoppers. Post COVID, the brick and mortar stores will face immense competition from the online fashion companies. The unbranded players in the local market will face maximum damage while companies like V-Mart might manage to grab market share from the unbranded players.

V-Mart derives 93% of its revenues from the fashion segment and 7% from the kirana segment. The population in tier 2 & 3 towns might like to purchase fashion apparels after seeing the look and feel and not wait 4-5 days to get their clothes delivered. V-Mart is creating a presence in the online space but it's impact is not much on the topline yet. The winter months are important for the company as it sells most of the high margin winter clothing in these months.


Financials

V-Mart Stock Analysis
V-Mart Financials
  • The company's revenues have compounded at ~ 18% p.a. over the last 3 and 5 years
  • The growth has slowed down in FY19 and FY20 (17.3% and 15.9%)
  • The operating margins have been stable around the 9.5% mark
  • In FY20, the EBITDA was overstated while the PAT was understated because of the IND-AS effect of accounting for leases. So, the figures need to be adjusted before comparing
  • The company's inventory days have been reducing. In FY14, the inventory days were 106 while in FY20 it stood at around 86 days
  • The company has delivered an ROCE of > 20% in 9 out of the last 10 years
V-Mart's same store growth has been declining

The worrying trend for V-Mart since FY18 has been a fall in the same store growth rate. The entire revenue growth over the last 2 FYs has been driven on the growth in number of stores. So basically, the individual stores are not able to sell more than the previous year. A stagnation in rural India's earnings over the last 2-3 years is one of the reasons for the slowdown in SSG.

For most of the companies apparel the GST rate is 5% (slab for goods below Rs 1,000). However, there is a risk of hike in GST rates from 5% which can negatively impact the growth for V-Mart.

Valuations

Market Cap: 3,278 Crores
FV: 10
Stock Price: 1,804

V-Mart has no direct competition in the listed space. Trent Ltd. runs westside and zodiac which cater to middle class and upper segments, DMart is focused on FMCG and Kirana goods. The market cap to sales ratio for some of the companies is given below:
  • V-Mart: 1.97
  • Avenue Supermart: 5.74
  • Trent: 5.89
V-Mart trades at a PE of 66x but there are few points to be noted here. The PAT for FY20 is not comparable to the PAT of 2019 because of changes in the accounting method. Even if we take the FY19 PE, the PE ratio would be around 54-55.

V-Mart is one of the few profitable companies in the retail space that has a strong balance sheet and has delivered good business growth over the last decade. The public holding in the stock is just ~ 9%. FIIs own a ~ 23% stake while DIIs own a 15.11% stake.


Investment Opportunity

At the current M.Cap to Sales of ~ 1.97x, the stock is fairly priced. The company might come back to it's previous business levels only in FY22. V-Mart is a quality business with sound fundamentals but there are business challenges for the next 3-5 years in terms of post COVID-19 recovery. The threat from online players and the spending in the lower income brackets are some of the major foreseeable challenges. V-Mart will be a direct beneficiary of the per capita GDP of the rural areas and smaller towns going up. If you get the entry point and valuation cheap, the returns can be exponential. We believe that a ~ 1.5x sales would be a good entry point in the stock.

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