Q4FY23 Review: V-Mart Retail: Weak performance

19 May 2023 , 11:02 AM

V-Mart‘s Q4FY23 results were significantly below IIFL Capital Services’ estimates, driven primarily by losses in the Digital marketplace segment (LimeRoad). Even adjusted for these losses, results were on the weaker side. With initial signs of demand recovery in the lowincome consumer cohort, management is targeting a mid-to-high single-digit SSS growth in FY24. Analysts of IIFL Capital Services forecast a recovery in Ebitda margin (pre IND AS) from 3.7% in FY23 to 7.5% in FY26 — contingent on multiple events playing out in a timely manner.

Large miss in Q4FY23:

V-Mart reported a weak Q4FY23 performance with Ebitda decline of 54% (significantly below analysts’ of IIFL Capital Services estimates), driven primarily by losses pertaining to the recently acquired Digital marketplace business (LimeRoad). Even adjusted for these losses, performance was weak driven by gross margin contraction of 300bps YoY, as the company took pricing actions to attract footfalls. SSS growth came in at 10% in Q4FY23 (23% in FY23); V-Mart added 9 stores (net) during the quarter to take the store count to 423.

Targeting mid-to-high single-digit SSS growth in FY24: 

Low-income consumption is gradually coming back, which will bode well for V-Mart’s SSS growth in FY24. Unlimited stores in tier-3 towns of South India are performing well; the company would focus on more store additions in these geographies in the medium term. Overall, the company is targeting a midto-high single-digit SSS growth and ~60 store additions in FY24. While the Lime Road segment would be in investment mode, losses in the segment would be capped to Rs500-600mn for next 2 years.

Marginal downgrade in Ebitda estimates: 

Analysts of IIFL Capital Services slightly lower their store additions and SSS growth estimates in FY24, which results in a marginal adj. Ebitda downgrade of 2% in FY24. They forecast sharp increase in Ebitda margin from 3.7% in FY23 to 7.5% in FY26 which is contingent on 3 events playing out in a timely manner – recovery in SSS growth, turnaround in legacy Unlimited stores and moderation of LimeRoad losses. While valuation is reasonable at 18x EV/adj Ebitda (FY25), there are downside risks to their estimates. Maintain REDUCE rating with a target price of Rs2,050.