V-Mart Retail Ltd Q4 FY2022 Concall Summary

Key Takeaways

• Demand recovery underway but uneven: Q4 rebounded quickly after a brief Omicron disruption in January, with Holi and Eid celebrated well for the first time in two years, yet inflation is squeezing the core lower-income customer base.
• Gross margin surged to ~34.9%: A 490 bps YoY jump was driven by lower discounting, a one-time shrinkage provision reversal, and a higher-margin South India mix, but management explicitly calls this level unsustainable in the long-term.
• Inflation is the dominant headwind: Cumulative price increases of 15-17% over two years, passed through to protect margins, are now reducing quantities purchased by customers earning below ₹25,000/month, who face a 10-15% dent to disposable income.
• Unlimited acquisition is tracking ahead of plan: The South India chain achieved positive EBITDA this quarter, with mall stores showing strong traction, and the company is now stocking ~85% V-Mart-sourced inventory in those stores.
• What to watch next quarter: Whether harvest income in June translates into actual spending, the pace of gross margin normalization back toward the 32-33% target, and any sign that tier-2/3 footfall recovers as old lower-priced inventory is now exhausted.

Demand & Consumer Health

• Omicron disruption was short-lived: A slight resurgence impacted Karnataka, Tamil Nadu, Jharkhand, Bihar and isolated areas from late January to mid-February, but recovery was fast and the crucial Holi period in March was spared.
• Inflation is creating a K-shaped recovery: Richer consumers and tier-1/metro cities are consuming well, while lower-income households feel psychological and financial pressure; mall stores and Unlimited stores in South India are outperforming.
• Core customer is under acute stress: Households earning below ₹25,000/month face an additional ₹2,000-₹3,000 monthly dent, consuming 10-15% of earnings that would otherwise go to savings or discretionary spend, and some customers below a certain economic strata have stopped coming to markets entirely.
• Footfall has declined: Lower footfall is observed, with management noting that customers below a certain economic strata are not seen coming in at all, indicating a direct hit to household income levels.
• Quantity is declining marginally: While ASP rose ~26% YoY on price increases and mix shift, the actual number of units sold has seen a marginal decrease as products became slightly more expensive for the customer.
• Job market churn is bifurcated: People earning above ₹40,000-50,000 are seeing 20-30% additional earnings from job changes, driving that customer base, but the core V-Mart customer base in the ₹15,000-35,000 range is seeing pressure. [16-17]
• Near-term liquidity pressure expected: Management anticipates some liquidity pressure on families for the next three to six months due to inflationary pressure on kitchen and home expenses, plus EMI burdens for laptops and mobile phones bought for children's education.
• Harvest income offers a potential catalyst: Some spending from harvest income is expected in June as the crop season ends and realization money starts coming in, though customers will likely retain some portion due to inflationary pressure and inconsistent trust over weather patterns.

Lalit Agarwal: "We are only worried about that because the inflation is throwing big numbers and people are a little worried about that so that is a big worry which is speaking about how will the customer buy and because they just have not gone up their incomes really have not gone up... we do not know when is this cycle going correct and that is the biggest worry that we have right now."

Margin Structure & Sustainability

• Q4 gross margin of ~34.9% is not repeatable: The expansion was driven by three factors: a shrinkage provision reversal because inventory quality was healthy with no significant old stock, lower discounting and promotions because the market did not require them, and a mix benefit from South India stores where gross margin structure is 3-5% higher.
• Price increases have protected margins so far: The company passed on the full raw material cost increase to customers, particularly from cotton yarn, with negligible margin impact, and pricing has risen 15-17% cumulatively over two years.
• Management is done raising prices: The company will not take another price rise and considers itself at the end of the price rise story; the focus now shifts to working on the back end to reduce cost and improve efficiency.
• Gross margin will normalize toward 32-33%: Management wants to remain in that range and will pass gains back to customers by offsetting inflationary cost pressures or reducing prices in future; if expense pressure arises, the response will be higher volumes and customers rather than increasing percentage margin.
• South India margin premium will persist temporarily: The 3-5% higher gross margin in South stores, supported by differentiated product offerings to offset higher operating cost structures, is expected to last for at least some quarters or at least for a couple of years before normalizing.
• Shrinkage and discounting benefits will reverse: The one-time shrinkage provision write-back and the period of lower discounting will normalize in coming months, pulling gross margin back down.
• Expense inflation is broad-based: Almost all costs faced significant inflationary pressures; rentals are higher due to South India rental structures and the end of all core rental concessions, and expenses include marginal opex investments toward online business expansion.

Anand Agarwal: "We are a honest price business and we would want to give back to the customer to attract in with the best possible pricing and not really earn more for increasing our margins so we would want to remain in the 32%-33% gross margin range... we want to give back as much as possible to the customer so that we maintain or increase our rupee margin rather than percentage margin."

Unlimited Acquisition & South India Strategy

• Unlimited is performing better than projected: The business achieved positive EBITDA in the quarter, with mall stores showing significantly larger traction in customer footfall, ASPs and consumption sizes during inflationary times.
• Inventory transition is nearly complete: Old Unlimited inventory taken on a sale-or-return model has been sold through; now ~84-85% of inventory is new V-Mart-sourced inventory, up from 60-65% last quarter.
• V-Mart products are resonating: V-Mart products launched in Unlimited stores are being loved by customers, and the company is experimenting with higher inventory levels for pilot understanding of the market.
• The Unlimited brand will likely continue: While a formal decision is yet to be taken, in all probability the company will continue with the Unlimited brand in South India, with some new stores planned to open under that brand in the next couple of months.
• South India store additions are planned: The company expects somewhere between 10 and 12 stores in a year coming from the South, following a zone-wise expansion plan similar to other V-Mart zones at 15-20% addition of the base number.
• South India conversion rate is lower: Conversion in South India is ~50% versus the overall company rate of 63%, which management believes is a genuine number and reflects a different customer behavior; the focus remains on increasing footfall rather than conversion rate.
• IT sector return is helping: The return of the IT crowd to Bangalore and faster movement in metros and tier-1 cities is supporting the Unlimited business in bigger cities and malls.

Merchandising & Inventory

• ASP jumped ~26% YoY from three drivers: A cumulative ~17% price increase taken over the full year, a merchandise mix shift toward occasion wear (a reversal from last year's downgrade to comfort wear starting around Diwali), and the base impact of Unlimited stores which sell at higher ASPs. The mix shift and Unlimited base impact together account for ~7-9%.
• Inventory days are elevated at 110: This was driven by lower operating days and sales in H1, lower operating days for Unlimited stores, strategic upstocking for the season, celebrating Eid in South India for the first time, larger South store sizes, and portfolio expansion in kids and men's comfort wear.
• Management targets normalization to 85-90 days: The company will try to bring inventory days back to the traditional range within this financial year, and does not anticipate days remaining high on a full-year basis.
• Old lower-priced inventory is now exhausted: Only higher-priced inventory remains to be sold, which may create a further headwind for the price-sensitive customer base in the near term. [18-19]
• Inventory is not yet rationalized: Inventory was stocked for the season, which management does not consider over, and they anticipate strong demand in June as harvest income arrives; the inventory position is described as comfortable.

Store Expansion & Capex

• Capex plan continues with confidence: The company will keep opening stores and maintains confidence in the market, targeting ~60 new stores in FY2023, representing ~20% growth on the base of ~370 stores.
• Store growth rate is maintained: Management will continue to grow at the historical rate of 20% plus on the base and looks forward to bettering that number.
• South India will contribute 10-12 stores: At least 10 to 12 of the ~60 new stores should come from the South, with every zone having a target to add at least 10 to 12 stores.
• Unlimited store-level profitability is undisclosed: When asked for Unlimited profitability numbers at the store level on an Ind AS 116 basis, management said it would be difficult to share the number, though they confirmed positive EBITDA.

Online Business & Competition

• Online reached ~2% revenue mix run rate: The company hopes to achieve at least a 5% revenue mix in the coming years, using a mixed approach of own apps plus marketplaces like Amazon and Myntra.
• Customer acquisition costs are rising: Costs are inching higher due to increasing privacy laws on social media platforms, creating a headwind for online expansion.
• Management is skeptical of online value competitors: A survey of Meesho buyers found poor experience with product quality and that customers would not necessarily buy again; management questions the sustainability of loss-making models and believes customers understand where to trust, noting there is a cost to service.

Lalit Agarwal: "I do not know are those sustainable mechanisms there are these kind of win-win which comes in and we will have to just stand by our own principles with our own value systems with our own qualitative offering... these are loss making models they will try to bring out all kind of techniques in the market but I think largely customers understand where they need to trust on and there is a cost to service."

Guidance & Commitments

Key Metrics