V-Mart Retail Ltd March 13, 2018 Dalal and Broacha Research is available on Bloomberg DBVS <GO> Page 1 Analyst:Kunal Bhatia (022) 67141442 Initiating [email protected] Dalal and BroachaBUYCurrent Price 1901 52 Week Range Rs 707/1960 Target Price Rs 2230 Upside 17% Investment Argument V-Mart an Organized Retail play in non-metro, low penetrated and aspiring Indian Markets: V-Mart is one of the fastest growing Retail companies with a CAGR growth of 24% over last 2 years in store additions in tier3 & 4 segments. As of 9MFY18 the company has 104 of 167 stores in the tier3 (87 stores) and tier4 segment (17 stores). With quality product offered at attractive prices (through right souring) V-Mart has been successful in smaller towns. Expansion Opportunity: 770 districts in India (with 41% covered with organized Retail) presents a huge opportunity for a value based retail company. Even in V-Marts key markets i.e. UP and Bihar (with 113 districts) the company has not fully penetrated. Each thesil and Taluka level average market size is ~Rs 5bn and V-Mart single store is not even 3% of the same. Supportive Cost-Structure: With rental costs at 4.5% of Revenues V-Mart has one of lowest rental costs in the Retail industry (based on leased model); the company achieves break-even in 1styear of store operation and payback in 3 years. First Mover Advantage in states which have 31% of India’s population: 70% of stores are concentrated in highly populated states i.e. UP, Bihar, Jharkhand which together constitute 31% of India’s population. Out of 171 stores 71 (41%) are in UP, 36 (21%) in Bihar and 14(8%) in Jharkhand. We believe this is one of the biggest USP the company has achieve by getting a brand recognition in these states. Plans to increase store area in the range of 15-17% YoY; funded through internal accruals: V-Mart would be increasing total area, i.e. 14.3lacs currently to ~20lacs sq.ft by FY20 most of which would be in small and untapped towns on a cluster based approach. Total Capex of ~1bn required for new store openings (till FY20) would be met via internal accruals. Strong Presence with 171 stores YTD spread across 14.3 lakh sqft growing at CAGR of 21% over last 6 years: spread across 145 cities in 14 states with 37 composite stores and 134 fashion stores. Valuation: V-Mart is expected to record a CAGR of 20% topline supported by 15-17% store expansion in-terms of total sqft area, all through internal accruals. Bottom-line growth is expected to be at 37% due to improvement in margins and lower interest expenses on account of debt clearance in FY18. The company is Net Debt free and expected to improve ROE and ROCE from 14.6% and 19.8% in FY17 to 20% and 29.5% in FY20. At CMP of Rs 1901 VMart is trading at 42x its FY19e EPS of Rs 45.2 and 33.6x its FY20e EPS of Rs 56.6. Based on our weighted average target price we recommend investors to BUY the stock with target price of Rs 2230 i.e. upside of 17%.