Stock Pick From The Department Stores

Here’s Why

• The company caters to a niche market segment.
• Improved net profit margin due to reducing interest cost.
• Available at attractive valuation compared to its bigger peers.

V MART RETAIL: FOCUSSED BUSINESS TO LEAD GROWTH

India being the second-largest populous country in the world, its consumption-based story has always been quite vibrant. Further, as the spending power of Indians is growing day by day, the retail industry has a bright future in the country. Though now a level of maturity has been attained in terms of attraction for the malls in metros and Tier 1 cities, a great amount of enthusiasm still persists in Tier 2 and 3 cities. As such, we are recommending a company which has a major retail presence in these cities. 

V-Mart Retail (VMRL) operates in three business divisions viz. apparels, general merchandise and ‘kirana’ goods that cater to the needs of a typical Indian family. It offers fashion garments at down-to-earth prices and over a period of time has emerged as a destination of choice for bargain hunters and the fashionable alike by maintaining high standards in quality and design. VMRL operates in Tier 2and 3 cities with a chain of ‘value retail’ departmental stores. The company’s promoter, Lalit Agarwal, owns 12.40 per cent stake in the company. He has more than 16 years of rich experience in the retail industry. With a vision to establish the concept of value retailing in certain untapped regions of India, he started this retail venture in the year 2003.

VMRL now has 108 stores across 91 cities over 12 states with a total retail area of 8.63 lakh square feet. The company’s stores are located in northern states such as Bihar, Chandigarh, Gujarat, Haryana, Jammu & Kashmir, Madhya Pradesh, New Delhi, Punjab, Rajasthan, Uttarakhand and Uttar Pradesh. While targeting niche market areas, the company is also a pioneer in setting up modern ambience stores across various small cities and towns, including Sultanpur, Ujjain, Motihari, and more. As part of its expansion plans, VMRL will be opening 25 new stores over a carpet area of over 2 lakh square feet in FY16.

On the financial front, the net sales of VMRL increased by 22.92 per cent and stood at Rs 171 crore in Q4 FY15 on a yearly basis. The company earned revenue of Rs 967 per square foot in FY15. Its EBITDA increased by 10.34 per cent to Rs 6.72 crore. However, the EBITDA margin of the company was reduced by 45 basis points to 3.94 per cent in Q4 FY15 on a yearly basis. Interestingly, the company’s net profit increased by 46.79 per cent to Rs 1.6 crore in Q4 FY15 on a yearly basis as the interest cost reduced by 47.62 per cent to Rs 0.77 crore during the quarter. The net profit margin increased by 15 basis points to 0.94 per cent in Q4 FY15 on a yearly basis.

On the valuation front, VMRL’s stock is trading at a price to earnings multiple of 25.21x times its trailing 12-month earnings per share of Rs 20.73. The current valuation of the company is cheaper than its competitor Shopper’s Stop and Future Retail which are trading at PE ratio of 78.77x and 62.02x of the current EPS. Further, the company has a clear focused business that caters to smaller cities and towns and holds tremendous scope for growth because of the increasing middle-class segment in India. Hence, we recommend buying this stock.