V-Mart Retail Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Demand split by a K-curve: Q1 was the first COVID-free quarter, yet rural and semi-urban footfalls stayed under pressure while Tier 1 towns and mall stores fared significantly better, a divergence management calls a clear K-graph.
• Pricing misstep hurt volumes: Management fully passed on commodity inflation to consumers, who pushed back, contributing to a subdued May and June; a price correction of roughly 5-6% is now underway, with full impact visible from mid-August.
• South India is the bright spot: The southern business, run under the Unlimited brand, outperformed expectations on both sales and profitability, prompting a more aggressive store-opening stance in that region.
• Gross margins are set to fall by design: Margins are elevated because of price hikes and eliminated discounting; management is uncomfortable with the level and targets a deliberate retreat to 32-34%, sacrificing margin for volume and customer trust.
• What to watch next quarter: Whether the price correction, hitting stores from mid-August, arrests the same-store sales decline, and whether a normal monsoon materializes in the four large, currently rain-deficit operating states.

Demand Environment

• Rural wallet under dual pressure: The core customer, earning roughly Rs. 15,000-40,000 per month, lost nearly six months of income over the last 2.5 years and now faces food inflation of almost 30%, which is consuming household budgets and delaying discretionary clothing purchases.
• K-shaped recovery is the dominant pattern: Bigger cities, Tier 1 towns, and mall-based stores performed significantly better throughout the quarter; the same hierarchy holds in both north/east and south India, with Tier 1 outperforming Tier 2, which outperforms Tier 3.
• Bihar was the hardest-hit geography: Sustained Agniveer-led disturbances over a long period, combined with significantly delayed monsoons, created economic uncertainty and a consequent dip in consumer spending in the state.
• Competitive intensity has structurally risen: The cumulative number of organized retail stores in some towns has doubled or tripled versus pre-COVID levels, and management acknowledges some customer transition to competitors must have occurred.
• Sales per square foot still deeply negative: The metric remains 25-28% below Q1 FY20 pre-COVID levels, though the de-growth is sequentially arresting: May was weak, June was better, and July is better still.
• Monsoon is the near-term swing factor: Four large operating states (UP, Bihar, Jharkhand, West Bengal) are reeling under low rainfall; management notes that historically, one bad monsoon does not create a large consumption impact, but a consecutive second-year failure does.

Lalit Agarwal: "This is a K-graph philosophy which is working where the rich is becoming more richer and the poor is becoming more poorer. This is what we are able to very clearly visualize."

Pricing Strategy & Gross Margin Reset

• A self-confessed mistake: Management fully passed on the commodity price rise to consumers, which consumers did not accept, producing a negative impact in May and June.
• Deliberate margin retreat underway: The company is uncomfortable with current elevated gross margins and plans to return to "honest pricing," targeting a 32-34% gross margin level going forward, down from the current higher level.
• Price correction mechanics: Some price points will see a 5-10% correction, some higher, and some no change; the overall blended correction is roughly 5-6%, though this is subject to change if cotton yarn prices or macro factors shift significantly.
• Fresh inventory as the vehicle: The price correction has already been taken, and fresh inventory is about to hit stores; the full impact on consumer perception and volumes is expected to be visible from 15 August onwards.
• No discounting, just sharper price points: Management is not resorting to promotions or schemes to drive volumes; the strategy is to re-enter the entry-level price points that were inadvertently vacated, which V-Mart has historically been known for.
• Sales were sacrificed in the south: Management admits some sales were deliberately foregone in the southern market by avoiding discounts and schemes.

Anand Agarwal: "Definitely I would not want to continue with this level of gross margins. As I mentioned we had taken a slightly higher price increase and also done away with a lot of eco-level of pricing which we are not very comfortable with. We will come back to the honest pricing and the giving the full value benefit to the customer."

South India & Unlimited Integration

• Integration running ahead of plan: The Unlimited acquisition has worked out extremely well; the business is moving ahead of expectations on both growth and profitability, with revenue jumping QoQ from Rs. 73 cr to Rs. 118 cr.
• Drivers of the QoQ jump: People integration, merchandising revamp, assortment revamp, and significantly higher inventory bets all contributed; the business now has access to a larger inventory pool than was historically available.
• South margins are structurally higher: Gross margins in the south are higher because operating costs there are much higher; management plans to keep a roughly 20% mix from the south, which will carry at least 5% higher gross margins.
• The per-square-foot gap is narrowing: The south's sales per square foot gap versus north/east has narrowed from roughly 20% to roughly 15% lower; the objective is to close it further without reducing rest-of-India productivity.
• New store openings are concentrated in the south: Six new stores were opened under the Unlimited name in the south, delivering better results than openings in the rest of India; the pipeline is largely targeted at Tier 3 markets for first-mover advantage.
• Glass still "half full": Management believes the opportunity in the south may be larger than simply matching V-Mart's north/east productivity levels; they are still experimenting with new concepts, categories, and assortments to understand the new customer.

Store Expansion & Operational Levers

• On track to over-achieve the 60-store plan: The team is confident of exceeding the (+60) store target for the year, with a particular emphasis on south India and an improving east India market.
• East India getting serious attention: Management has taken a bigger bet on the east, strengthened the team, and is trying to gain market share there; a larger store in the core of Kolkata was recently finalized.
• Consultant engaged for scalable processes: A consultant has been working for 6-7 months and will continue for another year, focused on bettering per-square-foot outcomes, scalable structure, product perspective, sourcing, margins, inventory levels, and GMROF improvement.
• Merchandising leadership refreshed: The merchandising, buying, and sourcing head has been changed; the new person brings better experience in women's ethnic, a category management wants to drive to improve women's wear contribution.
• Inventory health at a multi-year best: This has been one of the best quarters for inventory quality because limited buying over the last two years enabled strong sell-through; provisioning is at one of its lowest levels ever.
• Expenses remain disciplined: Except for rent, all costs remain lower than pre-COVID levels on a per-square-foot basis, reflecting efficiency gains; manpower costs on a per-square-foot basis also came down slightly.

Online & Omni-Channel

• Online business finding traction: The online channel continues to grow, finding newer markets and opportunities on newer marketplaces; the launch on Myntra has given a good response, with Myntra customers appreciating V-Mart products.
• Myntra penetration is still minimal: Less than 10% of stores are currently linked to Myntra, giving management significant hope and opportunity to build this business much bigger and stronger by connecting more stores.
• Omni-network is being built out: The company is trying to bring all stores into the omni network; currently, roughly 90 stores are omni-enabled.
• Digital is not yet profitable: The digital business is not profit-making currently, though early green shoots are visible; management does not expect significant profitability or the same margin level as offline while it continues to invest.
• Online capability gap acknowledged: Management admits they are not the best operating team technically, do not have the best efficiency, and do not know online customer acquisition well; the market is working on negative margins to acquire customers.
• Capability building is a 2-3 year project: The company needs to strengthen the team and acquire technological and online capabilities to leverage the potential available, a process management frames as a multi-year effort.

Guidance & Commitments

Key Metrics