V-Mart Retail Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Sales surge, footfall divergence: Revenue jumped 50% YoY, but the headline masks a split: richer customers bought more while inflation-hit shoppers stayed home, with Tier 2/3/4 footfalls still under pressure.
• Gross margin lifted by mix and discipline: Gross margin reached 36.3%, aided by higher-margin South India throughput and much lower end-of-season discounting because inventory was healthy.
• Inventory bet placed for festive season: Inventory hit a record ₹917 crores, a deliberate up-stocking for the festive period, though per-store levels remain below pre-COVID festive averages.
• Unlimited is a work in progress: The acquired chain stayed profitable, but management is candidly not happy with progress on attracting new, younger customers and is working to fix areas where performance deteriorated.
• What to watch next quarter: Whether the festive inventory bet pays off without markdowns, the pace of Unlimited's turnaround, and any sign that income-led consumption is returning to rural and Tier 2/3 markets.

Demand & Consumer Health

• A tale of two customers: Average bill sizes rose 15% and ASPs grew 27%, but footfalls remained down ~29% versus pre-COVID on a like-to-like basis. The data shows affluent customers buying more while inflation-hit customers stopped coming entirely.
• Rural distress persisted: Late, untimed rains in October damaged crops across Uttar Pradesh, Uttarakhand and Bihar, with eastern UP flooding that hindered movement for 15 days. Vegetable and pulse prices stayed very high, keeping pressure on the common man.
• Income-led consumption still absent: Management sees no evidence yet of income-driven spending recovery. The dynamic remains an income-versus-expenses arbitrage, and the expectation is that true recovery could take another two quarters.
• Festive period showed green shoots: The festival season grew versus last year but stayed below pre-COVID levels. Customers were excited but constrained by their pockets. Signs turned more positive toward Diwali, and the marriage season restarting from late November offered further hope.
• Price reductions well received: For the autumn-winter season, average cost and selling prices were brought down for the consumer. The acceptability factor improved as people digested that inflation will persist, though consumer balance sheets remain under pressure.

Lalit Agarwal: "Still that income-led consumption is not being seen, and that's what I would not call clearly income. It is largely about income versus expenses and then that arbitrage. So that is not being seen and that definitely could take another two quarters that's my expectation."

Gross Margin & Pricing Strategy

• Margin uplift from multiple levers: Gross margin of 36.3% was driven by higher-margin South India throughput, much lower discounting in end-of-season sales due to healthy inventory, and price increases taken earlier to reflect higher input costs.
• South India carries structurally higher margins: The South India business commands higher gross margins, consciously targeted to mitigate higher operating expenditure from legacy store rentals in that region. New store rentals in South India are in line with the overall India average.
• Long-run margin vision is volume over percentage: Management does not want to overcharge the customer or maximize percentage margins. The stated goal is to sell more quantity and grow rupee margins, with gross margin stabilizing around 34–34.5% over the long term.
• Cotton tailwind emerging: Cotton prices peaked and have tapered down ~30% in the last 1.5 months, though they remain well above pre-COVID levels. The benefit of lower cotton costs should become visible in the spring-summer season, enabling further price reductions for consumers.
• Inventory provisioning provided a one-time lift: The quarter benefited optically from a tactical reduction in provisioning because of better-quality inventory held. This is not a recurring margin driver.

Anand Agarwal: "We do not want to overcharge the customer. We do not want to earn more from the same customer. We want to sell more quantity and increase our rupee margins rather than percentage margins."

Inventory & Working Capital

• Record inventory, deliberate strategy: Inventory reached ₹917 crores, the highest ever, as a thought-out up-stocking for the festive period. Per-store average inventory remains below pre-COVID festive levels, and the bulk is fresh festive and winter inventory with no significant old leftover.
• Inventory days optically elevated: Inventory days stood at 133, higher due to experiments in South India with larger inventory. Normalization to approximately 100 days is expected by year-end, if not sooner.
• Cash flow temporarily overdrawn: The company was overdrawn by approximately ₹100 crores (net ~₹60 crores) due to the festive inventory build. Working capital limits are much higher, and the cash position was described as comfortable.
• Down-stocking cycle ahead: Over the next three months, a lot of inventory will be sold with very minimal purchases, which should improve the current asset situation including cash flows. This follows the normal seasonal pattern.

Unlimited: Turnaround in Progress

• Profitable but underperforming: Unlimited remained profitable, with new stores operating at similar or better sales per sq ft versus traditional V-Mart, benefiting from lower rentals and similar operating costs. However, management is candid about underperformance in areas where the acquired business was previously strong.
• Customer profile shifting: ASPs have declined 10–12% because of the introduction of lower price point products. The number of customers increased, but bill sizes dipped slightly. Attracting new, millennial customers has proven difficult.
• Strategy reset underway: The focus is on improving basic models and the Tier 3 store model. Management wants to bring more trendiness to the assortment, and the LimeRoad acquisition is expected to help with this by making the product story more fashionable and attractive to younger consumers.
• Margin arbitrage to continue temporarily: Unlimited will continue to enjoy some margin arbitrage until the store count scales up and the rental and cost model normalizes. After that, the goal is to standardize margins across India.

Lalit Agarwal: "I'm not too happy with what we have done till now. We definitely could boast out and say that we have been doing good work. But yes, I think we have not done bad as we could have."

Expansion & Strategic Bets

• South India is the priority market: Six to seven new stores opened in South India, mostly in Tier 3 towns, giving management very good confidence and response. The South India market is expected to become very important, with a full-pronged effort to capture it fast.
• Store rollout on track: Sixteen new stores were opened and two closed, taking the total to 405. The company remains on target to open at least 55–60 stores for the full year, with a healthy rollout expected in the next quarter.
• Three large-format composite stores added: New large-format stores opened in Calcutta, Agartala and Odisha, which pushed the FMCG mix marginally higher to 11–12%. FMCG remains tactical, with the long-run share expected to stabilize around 10%.
• LimeRoad acquisition closed: The acquisition was completed on 11 November, and the team has been onboarded. The first 90 days will focus on fixing broken processes from a prior cash-flow crunch and bringing the business back. After that, the focus shifts to integrating omni culture, technology development, and merging the two customer bases. Results are expected next year.
• LimeRoad investment guardrails set: Management does not expect to spend more than 15–20% of V-Mart's EBITDA on further LimeRoad investments. The business plan for the next four years recognizes this constraint, and the business is not a high cash-burn model. No significant cash outflows are foreseen going forward.
• Infrastructure build-out: A new omni-enabled warehouse with online processing capability is targeted for completion by February–March. The Bangalore warehouse acquired from Unlimited is already performing well. A consultant has been brought in to guide on future strategy for supply chain, product design, sourcing and fashion.

Competitive Positioning & Operations

• Winter wear as a differentiator: The winter wear range, including an early launch that captured the hoodie and sweatshirt fashion trend, was cited as a key competitive moat that makes V-Mart stand apart from both national and local retailers.
• Merchandising team restructured: The merchandising function has been split into three parts: designing, buying, and sourcing. This, combined with innovations in product mix and sourcing strategies, is expected to improve inventory position and price positioning going forward.
• Customer retention focus: Repeat rates and average bill sizes increased due to a focus on retention, loyalty algorithms, and customer lifetime value tools. Continued investment is planned in brand imagery, store display, visual merchandising, technology, forecasting, and inventory management.
• Online business doubled: The marketplace business on Myntra and Flipkart grew 100% in the quarter, and overall online including omni-business doubled.
• Sales per sq ft improving: Sales per sq ft has been bettering every quarter, both from existing stores and new stores. Some large and premium properties delivered particularly good sales per sq ft. Management sees this trajectory continuing.

Lalit Agarwal: "Our range of winter wear, our pre-winter wear range definitely has made us stand apart."

Guidance & Commitments

Key Metrics