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Motilal Oswal has upgraded this multi-brand retail chain and sees 26% upside; should you buy?

Motilal Oswal sees the company's lower-tier locations and operational efficiencies as its core strength.

March 05, 2020 / 02:11 PM IST
 
 
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At a time when consumer spending is weak and an already slowing economy has been dealt the coronavirus blow, domestic brokerage firm Motilal Oswal Financial Services has upgraded V-mart Retail to a “buy”.

The brokerage has fixed the target price of Rs 2,700 on the stock, a 26 percent upside from the closing price of March 4.

Shares of V-mart Retail climbed over 3 percent in the morning trade on BSE on March 5.

Motilal Oswal sees the company's lower-tier locations and operational efficiencies as its core strength, underpinning its growth.

"Focus on lower-tier locations with early mover advantage, better product profile at attractive price points and operational efficiencies appear to be working in the company’s favour, even as consumer spending remains weak," Motilal Oswal said in a report on March 4.

Value retailer

It has a strong presence in the cities of Uttar Pradesh, Bihar and West Bengal and faces a limited threat from large national players because its customer profile, product variety and price range is different.

"Average selling price (ASP) and bill size at large national players are almost double, which limits the risk of customer uptrading, particularly as V-Mart operates in lower-tier cities, where customers prefer brands that offer value products at a low price," Motilal Oswal said.

As agriculture belts are its largest consumer base, a good monsoon and healthy farm output, along with the government's focus on augmenting rural income and spending, will likely act as a catalyst for growth in FY21.

Growth to continue

Motilal Oswal says that the company has maintained tight working capital and a well-capitalised balance sheet. Over the last five years, it has funded store expansion through its internal accruals and thus remained well capitalised even in a bad market.

It has allowed the company to gain market share and further negotiate payments with its landlords and other vendors to contain costs. It plans to continue adding stores, at 20 percent annually, again funded via its internal accruals.

Motilal Oswal is factoring in a 6 percent SSSG (same-store sales growth) in FY21 and FY22 and 65-70 annual store additions by V-Mart to arrive at revenue and PAT CAGR estimate of 24 percent and 21 percent, respectively, over FY20-22.

The stock bounced back recently on the back of healthy earnings growth in 3QFY20.

The multi-brand retail chain, on February 5, reported a nearly 40 percent year-on-year jump in net profit at Rs 58.22 crore for the quarter ended on December 31, 2019.

After the results, brokerage firm Antique Stock Broking upgraded the stock to “buy” from a “hold” with a target price of Rs 2,692 and said the company's Q3 performance was better than its expectations, primarily on the profitability front.

Antique had added that there was a probability of positive surprise in Q4FY20 due to a spillover of winter sales, wedding season and emergence of positive rural sentiment at the end of the quarter.

Another brokerage firm JM Financial, too, upgraded the stock to “buy” from “hold” after the Q3 results and said it was bullish on V-Mart’s aggressive expansion strategy backed by its low-cost business model and best-in-class execution capability.

The stock has corrected nearly 32 percent from its peak in August 2018 due to the deceleration of PAT growth (9 percent CAGR) over FY18-20.

"The improving prospects (PAT CAGR of nearly 23 percent over FY20-22E) will help garner better valuation. We assign 20 times EV/EBITDA on FY22E EBITDA of Rs 230 crore to arrive at a target price of Rs 2,700 with implied P/E of 28 times (closer to its five-year average, but at a nearly 30 percent discount to its three-year average)," said Motilal Oswal.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.

Nishant Kumar
first published: Mar 5, 2020 02:11 pm

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