V2 Retail. Institutional Equities. Management Meet Update

Transcription

1 Management Meet Update Institutional Equities V2 Retail 23 February 218 Reuters: VREL.BO; Bloomberg: VREL IN Plans Aggressive Expansion We had a meeting with the management of V2 Retail (VRL) recently to get an update on its business and the organised value retailing industry in Tier-2 and Tier-3 cities in northern and eastern regions of India. VRL reported flattish YoY revenue growth for 3QFY18 (see Exhibit 1) as the base was high (because of demonetisation) in the corresponding quarter last year (56% YoY growth in 3QFY17). The management attributed the 17% decline in same-store sales growth (SSG) to a very strong base quarter, Durga Puja being in 2QFY18 this year (typically contributes about 4% to revenues in 3Q), reduced marriage days, delayed and subdued winter, and heightened competitive intensity from both national and regional players entering its markets (Tier-2 & 3 cities). However, EBITDA grew 31% YoY and EBITDA margin expanded 36bps on YoY basis on the back of: (1) Increased cash payment to vendors which helped it to cut purchase costs by ~2%-3%. (2) Input tax credit. (3) Higher margin on imported goods. (4) Opportunistic buying of stock from its vendors at much lower prices. (5) Higher software-related costs in the base quarter which have not been repeated. VRL indicated its highly aggressive plan of profitable expansion. While we have no rating on VRL currently, we believe it is a vehicle to play the consumption theme of a large expanding Middle India whose purchasing power and aspirations are on the rise. It is focused on physical store driven expansion by CAGR of 4% over the next four to five years. Future revenue growth: VRL expects sales to post a CAGR of 4%-5% over the next five years with sustainable operating margin of 1%-11%. The management stated that future revenue growth is largely going to come through new store addition. It expects SSG to be ~5% and largely realisation-led over the medium term. Part of the margin growth will be from increased private labels in the revenue mix to 5%-6% in the medium term from 15% currently. Inventory: The management stated that it is looking forward to change the inventory mix (not inventory size) by increasing the share of premium products (high-priced). It indicated that, currently, the share of economy class products (low-priced) is ~7% of overall inventory, while it may be ~55%-6% for its nearest listed competitor V-Mart. VRL has been able to bring its inventory days down to 73 days from 89 days at the end of FY17. Future expansion: VRL currently operates 43 stores (37 at the end of FY17) spread across 14 states with a total retail area of ~.51mn sqft. It plans to add another 55 stores by March 219. New store addition requires capital allocation of Rs25mn/store (Rs1mn for capex and Rs15mn for inventory) resulting in overall capex of ~Rs1.4bn in the next 12 months. VRL stated that it plans to fund the expansion through money raised recently from Lighthouse (Rs76mn in October 217) and internal accruals. As regards revenue expectations from new stores, the management stated that, initially, new stores garner revenues of ~Rs8/sqft/month which on maturity (i.e. after ~ two years) can garner revenues of Rs1,25-Rs1,3/sqft/month. As regards areas of expansion, it stated that VRL plans to expand in states such as Madhya Pradesh, Andhra Pradesh, Jammu & Kashmir, Himachal Pradesh, Goa and Rajasthan. Advertising expenses: The management stated that it is planning to: (1) Take on board a celebrity brand endorser which will increase advertisement expenses by ~Rs2mn-Rs3mn. (2) Increase the days of advertisements for its newly opened stores from 15 days to two to three months to increase the stickiness for its stores. While the above plans will result in additional advertising expenses, VRL aims to negate this increase by reducing gifts and sales promotion schemes. Competition: In terms of competition from big national players, the management stated that big national players like Reliance Trends, FBB, Aditya Birla etc. cater to a different market and are not in direct competition to it as the ASP (average selling price) of these national players is ~2.5x-3.x average costs, whereas it is 1.5x-1.7x for VRL. It, however, indicated that big players are now trying to enter this space with a national player, Max, coming up with its value proposition Easy Buy which has its price range only slightly higher than that of VRL. As regards competition from other smaller players, the management indicated that VRL has ~15 local competitors like Citystyle, Citylife, Baazar Kolkata, One India, etc. which have a similar target market. Focused on building internal capabilities and bringing in cost efficiency: VRL stated that it is preparing for the long haul by focusing on building a product design team and investing in technology it has implemented SAP Hana, started investing in people, etc. to manage its inventory efficiently. On the cost-cutting front, it has identified a set of high volume (selling) products and is outsourcing them to distant vendors who can manufacture these products at a lower cost. Lower cost of production will help it to keep the selling price of these products at a level which will attract customers. NOT RATED Sector: Retail CMP: Rs346 Girish Pai Head of Research girish.pai@nirmalbang.com Devanshu Bansal Research Associate devanshu.bansal@nirmalbang.com Key Data Current Shares O/S (mn) 33.9 Mkt Cap (Rsbn/US$mn) 11.7/ Wk H / L (Rs) 556/179 Daily Vol. (3M NSE Avg.) 239,623 One -Year Indexed Stock Performance Feb-17 May-17 Aug-17 Nov-17 Feb-18 Price Performance (%) 1 M 6 M 1 Yr V2 Retail (22.8) (.3) 87.5 Nifty Index (5.3) Source: Bloomberg V2 RETAIL LTD Nifty 5

2 Exhibit 1: Quarterly Results (Rsmn) FY17 FY18 Particulars 1Q 2Q 3Q 4Q 1Q 2Q 3Q Total Revenue 1,82 1,32 1,528 1,72 1,423 1,375 1,524 EXPENDITURE: Purchases of stock in trade ,89 1, Change in inventories 82 (24 ) 19 (89 ) (111 ) (122 ) 233 Gross Profit Employee expense Other expenses Total Expenditure ,355 1,45 1,269 1,276 1,297 EBITDA Depreciation EBIT Other Income Interest expense Extraordinary items PBT Total tax expense PAT (18 ) Growth (%) Revenue (.3) EBITDA PAT (2.3) (29.3) (59.) Margins (%) Gross EBITDA EBIT PBT PAT (1.6) Rich shopping experience at lower prices: VRL is one of the fastest-growing retail companies in India targeting the middle-class and neo-middle class (monthly household income of Rs1,-Rs5,) in Tier II and Tier III cities. All the stores are air-conditioned, have trial rooms and a modern shopping environment, with the average store size being 1,sqft-12,sqft, and parking space of 3,sqft-4,sqft. VRL stores provide a wide assortment of apparel and have more than 1, stock-keeping units or SKUs. VRL has onestop family shops which provide a range of products that suit the target customer s budget. This is because the company is able to provide a rich experience at prices lower than that of its competitors following lower mark-up margins and stringent cost control. ASP differential between VRL and its larger peers such as Reliance Trends is ~3%-5%. Cluster-based approach: Similar to V-Mart Retail and D-Mart, VRL also follows a cluster-based approach when expanding its store base. It has 43 stores operating currently with a major presence in Bihar and Uttar Pradesh (UP) from six stores in 212. VRL also stated that it will stick to the cluster-based approach and expand in markets where it has established itself well. Clustering helps tailor inventory as per customer needs of that particular cluster and thus allows the retail chain to serve its customers in an effective manner. Lean balance sheet: As of FY16-end, VRL had debt of Rs984mn which declined to Rs35mn by the end of 2QFY18 by using the proceeds of preferential share issue, sale of Kolkata property and internal accruals. Strong IT infrastructure, systems and processes: VRL uses comprehensive ERP software (SAP) and has a strong management information system (MIS), both of which help in planning and analysing past patterns, inventory management, bar coding, computerised billing, managing pilferage, enhancing the security system and also providing a single point of data capture. 2 V2 Retail

3 Tackling competition: Price differential between VRL and big organised retailers moving to Tier II & Tier III cities is what drives the semi-urban population to VRL as compared to other players like Reliance Trends. The price differential is because of the difference in ASP. While VRL s ASP is in the range of Rs275-Rs3, that of its competitors is Rs45-Rs5. This is because VRL works on a mark-up margin of 5%-6% versus its competitors who operate at 15%-2%. Cost of retailing for VRL stands at ~Rs2-Rs21/sqft whereas for others it is Rs275-Rs3/sqft. As regards local competition, the company maintained that there is enough room for multiple players to co-exist. VRL has an edge over local mom-and-pop stores as it enhances the overall shopping experience apart from offering a range of products at different price points. The company will have to continue maintaining stringent control over costs to tackle competition, as it has given guidance of achieving operating margin of 1%-11% going forward. Cost structure: All the stores of VRL are on lease. Leasing costs for the company are in the range of Rs5 per sqft per month. The lease agreements are for a period of 12 years with 15% escalation clause every three years. Per sqft power costs are in the range of Rs2-Rs25. On the advertisement front, the company pays Rs1/sqft and it expects this number to grow to Rs25-Rs3/sqft for new stores, provided it sees appropriate growth levers. Sourcing of most of products is done in Delhi and outward logistic costs for the same are ~1.5% of sales. The company employs ~5 people per store and the average employee cost is ~Rs75/sqft per month. From a Profit & Loss or P&L account perspective, on per sqft basis, sales worth Rs1, earn the company a gross profit of Rs3. Operating costs are ~Rs21 which leads to EBITDA of Rs9. Depreciation charges are Rs15, resulting in PBT of Rs75. PAT stands at Rs5/Rs6 per sqft. E-commerce threat is there, but not felt yet: VRL has strategically placed itself in smaller towns and cities of India where it is unviable for e-commerce penetration to take place over the next three to four years on account of lack of awareness on the part of the people and poor internet connectivity. The company has also stepped into the e-commerce field to test the waters, but full-fledged operations will take some time. Business segmentation: VRL derives 44% of its sales from men s wear, 27% from women s wear, 26% from kids wear and 3% from lifestyle products like deodorants, wallets, sunglasses, purses etc. Ethnic wear accounts for 8%-1% of total sales of the company. Private labels contribute ~15% and the company intends to take this number to 3%-35% in the next 12 months. Key metrics: VRL has structured itself to cater to the needs of the entire family by offering a wide range of products at different price points. ASP of the products is in the range of Rs275-Rs3, while the average bill size is Rs6-Rs65. Average sales/sqft of VRL is ~Rs1, - matured stores sales at Rs1,2-Rs1,25/sqft and in case of new stores ~Rs7-Rs8/sqft. The company has 1, stock-keeping units and ~5 vendors. Tax rate expected to climb: The management stated that VRL was getting MAT credit as a set-off against the previous years losses and stated that these credits have now been utilised. Henceforth i.e. starting FY19, the management believes that VRL will start paying tax at the rate of 33%. Strategic front: (1) On the product development front, the management stated that it has developed a team of 1 designers which includes a fabric researcher, accessories researcher, separate heads for men, women and kids sections and stated that this will help it to design the products as per the requirement of its target customers. (2) On the cost-cutting front, the management stated that it has identified a set of high volume (selling) products and aims to outsource them to far-off vendors who can manufacture these products at a lower cost. Lower cost of production will help it to keep the selling price of these products at a level which will attract customers. (3) It is also keen on developing products in line with international trends (like that of Zara, H&M etc.) at lower costs. Advertising expenses: The management stated that it is planning to: (1) Take on board a celebrity brand endorser which will increase its advertisement expenses by ~Rs2mn-Rs3mn. (2) Increase the days of advertisements for its newly opened stores from 15 days to two to three months to increase the stickiness for its stores. While the above plans will result in additional advertisement expenses, it aims to negate this increase by reducing the gifts and its bill-buster schemes for sales promotion. Road map for store expansion: The management stated that it has already signed Memorandum of Understandings or MoUs for 1 new properties and has booked another 28 properties for which are negotiations are on in respect of lock-in period/lease period/legal matters etc. 3 V2 Retail

4 Exhibit 2: Pan-India presence State FY17-end 3QFY18-end Bihar Himachal Pradesh 1 1 Jharkhand 1 3 Karnataka 1 1 NCR 3 3 North East 4 5 Odisha 2 3 Uttar Pradesh 8 9 Uttarakhand 2 2 West Bengal 1 2 Madhya Pradesh - 1 Total Exhibit 3: Key verticals 3% 26% 44% 27% Men's Wear Ladies Wear Kids Wear Lifestyle Products Exhibit 4: Revenues Exhibit 5: PBT & PBT margin (Rsmn) 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 4,714 3,199 2,868 2,289 1,57 42 (Rsmn) (%) (2.2) (5.6) 3 2 (1) 1 (2) (3) (1) (2) (47.9) (4) (3) PBT PBT Margin (%) (5) 4 V2 Retail

5 Exhibit 6: EBITDA & EBITDA margin (Rsmn) (%) (5) (1) 1 (15) (2) (25) (1) (3.5) (3) (2) EBITDA EBITDA Margin (%) (35) Exhibit 7: PAT & PAT margin (Rsmn) (%) (5.) (2.) 3 2 (2) 1 (4) (1) (6) (2) (86.6) (8) (3) (4) PAT PAT Margin (%) (1) Exhibit 8: Sales/sqft Exhibit 9: Rent/sqft (Rs/month) 1,4 1,2 1, ,8 1,24 1,255 1,117 (Rs/month) Exhibit 1: Store addition at 44% CAGR (mn sqft) Store Count Retail Space (mn sqft) FY13 FY14 FY15 FY16 FY17 Exhibit 11: Inventory days FY13 FY14 FY15 FY16 FY17 5 V2 Retail

6 Exhibit 12: FY17 key data FY17 key operational data VRL V-Mart Stores Area (mn sqft) No. of states Major presence Bihar(13), UP(9) UP(68), Bihar(35) Sales/sqft/month (Rs) 1, 851 Transaction size (Rs) Average selling price (Rs) Total, 323-Apparel FY17 financial data (Rsmn) VRL V-Mart Sales 4,714 1,17 Revenue CAGR (%) EBITDA EBITDA margin (%) EBITDA CAGR (%) PAT PAT CAGR (%) V2 Retail

7 Financials Exhibit 13: Income statement Y/E March (Rsmn) FY13 FY14 FY15 FY16 FY17 Net Sales 1,57 2,289 2,868 3,199 4,714 Growth (%) Raw Materials 79 1,722 2,54 2,244 3,333 Gross Profit ,381 Gross Margin (%) Employee expenses Other expenses Total expenditure 1,49 2,247 2,59 2,885 4,324 EBITDA Growth (%) EBITDA margin (%) Other income Interest costs Depreciation Extraordinary items before tax PBT (6) (51) Tax (19) (8) Effective tax rate (%) PAT (41) (43) Growth (%) PAT Margin (%) (5.) (2.) EPS (Rs) (1.6) (1.3) Exhibit 15: Balance sheet Y/E March (Rsmn) FY13 FY14 FY15 FY16 FY17 Equity Reserves 2,469 2,398 2,55 2,626 3,445 Capital reserves on consolidation of JV Money received against share warrants Net worth 2,695 2,624 2,747 2,96 3,773 Short-term Borrowings Long-term Borrowings Total Debt Other non-current liabilities Total Liabilities 3,18 3,54 2,973 3,487 3,982 Gross Block Accumulated depreciation Net Block Capital WIP Long-term investments Net deferred tax assets 2,79 2,711 2,624 2,544 2,427 Other non-current assets Current Investments Inventories ,89 1,146 Cash & Bank Trade receivables Other current assets Total current Assets ,29 1,284 Creditors Other current liabilities/provisions Total current liabilities ,74 1,3 693 Net current assets (158) (18) (23) Total Assets 3,18 3,54 2,973 3,487 3,982 Exhibit 14: Cash flow Y/E March (Rsmn) FY13 FY14 FY15 FY16 FY17 Profit before tax & exceptional items but after prior period items (72) (53) (Inc.)/Dec in working capital (134) (468) (428) Cash flow from operations (26) (1) 24 (35) (172) Other income (1) (1) (1) (1) (1) Other expenses Depreciation Tax paid Net cash from operations (119) (151) (4) Capital expenditure (46) (72) (63) (171) (297) Net cash after capex (165) (322) (3) Other investing activites Cash from financial activities 79 (43) (34) Opening cash Closing cash Change in cash (84) 3 (1) Exhibit 16: Key ratios Y/E March FY13 FY14 FY15 FY16 FY17 Per share (Rs) FDEPS (1.6) (1.3) Book value Valuation (x) P/E (222) (26) P/sales P/BV EV/EBITDA EV/sales Return ratios (%) RoE (1.9) (1.7) RoCE (.5) RoIC (3.1) (.4) Margins (%) Gross margin EBITDA margin EBIT margin (1.4) PBT margin (5.6) (2.2) PAT margin (5.) (2.) Turnover ratio Asset turnover ratio (x) Avg inventory days Avg payable days Avg working capital days (49) (16) Solvency ratios (x) Debt-equity Growth (%) Sales EBITDA PAT V2 Retail

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