V-Mart - Shop For Your Portfolio

The issue of equity by V-Mart Retail (VRL) will finally open today (1st February) and close on the 5th of February. On offer are 44.96 lakh equity shares consisting of 27.61 lakh fresh equity shares to be issued by the company and 17.35 equity shares offered for sale by existing shareholder Naman Finance And Investment Private Ltd. The issue will constitute 25.04% of the fully diluted post-issue paid up capital of the company.

VRL is a pioneer in setting up retail departmental stores across Tier-II and Tier-III cities in the northern, western and eastern parts of India. The company offers apparels, general merchandise and grocery for sale at its departmental stores. With the first “V-Mart” store in Ahmedabad, having begun operations in October, 2003, VRL currently operates 62 stores spread across 53 cities. The company has expanded the number of its stores from 14 to 55 in the last five fiscal with a CAGR 31.48%. Furthermore, VRL has expanded through its internal accruals and investment by Naman Finance and Investment Pvt. Ltd., an Aditya Birla Group company. Hence, the company has negligible long term debt (Rs 2 crore) on its books.  However, the company has Rs 38 crore as short term borrowings for the purpose of working capital as of 30th November 2012. The overall debt equity ratio for VRL is just 0.6:1 as of 30th November 2012. 

VRL has a total retail space of 505834 square feet. across all its stores. Interestingly, 34 of VRL's stores are located in Tier III cities, 16 are in Tier II cities and only 14 are in metros & Tier I cities. The stores in Tier III cities contribute to almost 53.5% of VRL's revenue compared to 28.43% by Tier II and 18.07% by those located in the metros and Tier I cities. Same store sales for VRL have risen to Rs 0.89 crore in current year from Rs 0.82 crore in FY2012. This 8.5% growth is reasonable, considering  the slowdown in the economy and weaker consumer spending sentiments that have been around. The company earns 64% of its revenue from sale of Apparels which is a high margin business with gross margins of 34% for VRL. Only 19% of revenues are earned for sale of Kirana which is a low margin business with a gross margin of just 13% for VRL.

The company proposes to utilise the IPO funds to open 60 new stores, expand its distribution centres and fund its working capital requirements. Further, the company's management is experienced in the retail business as VRL's promoter Lalit Agarwal, is a cousin of Ram Chandra Agarwal of Vishal Retail and both have worked together till 2002.

VRL’s revenue grew by 23.5% to Rs 281 crore in FY2012 from Rs 97.93 crore during the year ago period. Further, the company's net profit has gone up by 25.7% to Rs 11.04 crore in FY2012 from Rs 3.53 crore in FY2008. Recently, VRL finished its pre-IPO placement of 12.5 lakh equity shares of the face value of Rs 10 each at a price of Rs 210 per equity share, and managed to raise Rs 26.25 crore through this pre-IPO placement. On valuation front, VRL has decided a price band of Rs 195 to Rs 215 a share of the face value of Rs 10 each which is very close to per-placement issue price. At upper band price, offer price is 19.68x times of VRL's FY2013E annualised EPS of Rs 10.93 and at lower band price, offer price is 17.85x times of its FY2013E annualised EPS. This is considerable lower compared to its listed peers where share of Shoppers Stop is trading at 191.08x times its TTM EPS, Pantaloons Retail trading at 32.73x times its TTM EPS and Trent is trading at 57.43x times its TTM EPS.

The unique quality of the company is that VRL has maximum exposure in Tier II and Tier III cities which is majorly untapped by the major retail players in India. Going ahead, there could be a possibility that VRL will benefit during consolidation phase of retail industry when major retail players will start entering into these markets. We believe, there will considerable retail growth due rise in disposable income in these cities in coming years. Considering Government’s recent nod for FDI in multibrand retail, the domestic retail industry has eyed retail and institutional investors for past few months. This has resulted in spurt in major retail stocks like Shoppers Stop, Pantaloons Retail and Trent. Further, VRL has shown a decent growth in recent past in terms of both number of stores and the bottomeline. We suggest our readers to subscribe at upper band to this IPO to benefit from retail growth in untapped markets.