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You are here : IndiaNotes >> Research & Analysis >> Companies >> V Mart Retail Ltd. >> Research

V-Mart Retail: 56% upside potential, maintain buy

Nirmal Bang | 10 Dec, 2014  | Follow Author | Add to my Favourites 
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Efficient control over costs including lease rentals: VRL is one of the most efficient players in Indian retail Industry with a lean cost structure. As most of VRL’s stores are located in Tier-II and Tier-III cities, its lease rentals are lower at Rs28/sqft/month. VRL’s lease rentals, at 4.3% of sales, are much lower compared to 8.3%/9.4%/15.1% of TL/SSL/PFRL, respectively, on a standalone basis. Similarly, its employee costs at 6.7% are lower compared to 7.5%/8.3%/9.0% and other expenses at 7.0% compared to 12.7%/25.2%/12.3% of SSL/TL/PFRL, respectively. Despite the focus on small cities, its revenue/sqft is higher at Rs8,878 compared to Rs8,668/Rs8,306 in case of SSL/PFRL, respectively. On account of its low-cost structure, VRL enjoys highest operating margin of 9.4% compared to 5.7%/2.1%/2.3%/2.8% of SSL/TL/PFRL/Arvind’s Megamart, respectively.


Healthy operating cash flow, lean D/E ratio to support growth and return ratios:
VRL is focusing on improving inventory turnover and supply chain. We expect VRL to improve its inventory days from 150 to 145 and reduce its working capital cycle from 18.1% to 17.0% over FY14-FY17E. Because of high working capital requirement, operating cash flow was negative for two out of six years, with cumulative operating cash flow of only Rs157mn over FY08-FY14. However, with a lean working capital requirement coupled with healthy revenue growth, VRL would have cumulative operating cash flow of Rs926mn, which may meet entire capex need of Rs900mn to set up 75 stores over FY14-FY17E. This will maintain net D/E ratio flat at 0.04x and improve RoCE 685bps from 14.7% to 21.5% over FY14-FY17E.


Ready to leap frog with the right business model:
VRL is among the very few retail companies which have a right business model, best product mix, appropriate location/store size and control over costs. With strong execution capability, VRL is expected to set up 25 stores every year compared to the past three years’ average of 17. We expect VRL to grow its retail business at a 20.0% CAGR at 1.25mn sqft by setting up 75 stores on a base of 89 over FY14-FY17E. This is likely to result in strong 29.2%/34.4% revenue/net profit CAGR over FY14-FY17E at Rs12,389mn/Rs612mn, respectively.


Valuation: Strong revenue/net profit CAGR of 29.2%/34.4% coupled with a flat net D/E ratio of 0.04x and a 685bps improvement in RoCE at 21.5% likely over FY14-FY17E are expected to result in a strong re-rating of VRL. We have assigned Buy rating to VRL with a target price of Rs790 based on 27.0x/14.4x FY16EFY17E average P/E and EV/EBITDA, respectively.


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About Nirmal Bang

Founded in 1986 by Nirmal Bang, the Nirmal Bang is recognized as one of the largest retail broking houses in India, providing an array of financial products and services. Their retail and institutional clients have access to products such as equities, derivatives, commodities, currency derivatives, mutual funds, IPOs, insurance, depository services and PMS. The Group is headed by Mr. Dilip Bang and Mr. Kishore Bang.


For more information please write in to [email protected]


Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.




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