V-Mart Retail Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Sales grew 12% YoY but margin sacrificed: Like-to-like growth was just 1% as the company deliberately cut prices to win back inflation-hit mass consumers, pushing gross margin to 35.4%, 40 BPS lower than last year and one of the lowest in the last four to five years.
• K-shaped recovery persists: Tier-1 markets outperformed smaller towns, and the mass consumer segment remains under budgetary pressure despite some improvement in confidence and jobs.
• LimeRoad is a long-term cash drain, not a near-term return: Management explicitly stated that expecting a positive capital return from LimeRoad “is going to be difficult” and that it will require still more capital, framing it as a futuristic capability build.
• ROCE stress to last six more quarters: New initiatives (LimeRoad, Unlimited, warehouse infrastructure) will keep returns under pressure, with management asking investors for patience on ROCE.
• What to watch next quarter: Whether the January sales recovery sustains, the pace of inventory normalization from 106 days toward the 90-day target, and any sign that mass-consumer confidence is converting into footfalls and spending.

Demand & Consumer Environment

• Mass consumer still strained: Inflation has come down but not enough to relieve budgetary pressure on V-Mart’s core low-income segment; discretionary spending is waiting for confidence to return, and management expects another 1–2 quarters before consumers come out of the shell.
• K-shaped divergence: Tier-1 markets continued to grow and outperform Tier-2, Tier-3, and Tier-4 markets, reaffirming a post-COVID pattern where the rich remained largely unaffected while the poor compromised on consumption.
• Footfalls up, conversion down: Footfalls rose 13% but conversion rate fell to 55% from 58%, a normalization from COVID-era behavior when almost every visitor bought; bill sizes increased, partially offsetting the conversion drop.
• Weather disrupted winter: Unseasonal heavy rains in October and one of the warmest Decembers in 122 years pushed winter merchandise sales into January, denting December numbers but improving January growth.
• Competitive intensity rising: Most competitors are positive on store openings and aggressive on schemes and promotions; management sees tactical moves rather than a strategic shift and expects the newness effect to die down, bringing earlier customers back.

Lalit Agarwal: “I do not see a great high trend strategic move from them in terms of the customer acquisition and in terms of the customer moving because of the fundamental offering which is provided by the retailer. There will be some tactical move... this newness effect will certainly die down over the period and we will be able to establish our relationship with the customers and the earlier customers are going to come back to us.”

Margin & Pricing Strategy

• Gross margin hit a multi-year low: At 35.4%, gross margin was 40 bps lower YoY and one of the lowest in 4–5 years, the result of a conscious effort to improve price offering for value customers; the strategy pulled in sales growth but at a lower margin.
• ASP held flat through corrective action: The company improved product availability at lower price points, applied price corrections at strategic price points, and built better price laddering to ensure availability at key price points, all aimed at bringing back low-income customers who had shied away over the last year.
• Yarn cost relief will flow to customers: Cotton and yarn prices have come down 30% from their September peak but remain 30–40% above pre-COVID levels; marginal relief available for summer 2023 will be passed to customers in entirety to remain competitive in value retail pricing.
• Winter stocks missed the benefit: Winter merchandise purchases were booked 2–3 months in advance, so the quarter did not capture the benefit of lower yarn prices.
• Medium-term gross margin guide: Core V-Mart at 30–33%, Unlimited at 37–38%, for a weighted average of approximately 34%; management expects margins to remain under some pressure as it prioritizes delivering real value to customers.

South India & Unlimited Integration

• New stores performing in line with V-Mart model: All new stores, especially in the south, are performing steadily at similar margins as a normal V-Mart store, with SPSF 20–25% higher than legacy Unlimited stores.
• Legacy Unlimited still a drag: Legacy Unlimited stores run at lower sales per square foot than the main V-Mart business, around ₹520 per square foot, and the differential versus organic V-Mart remains around 15–20%.
• Blended SPSF decline explained: Q3 SPSF versus pre-COVID Q3 FY20 fell to minus 22% from minus 10–11% in Q2, driven by the lower-SPSF Unlimited business dragging the blended number, a festival shift pulling consumption into Q2, experimentation with large-format stores in eastern India, and ongoing pre-COVID comparison pressure; management says YTD recovery should be visible and the direction is positive.
• Merchandise upgrade underway: The company is upgrading quality of inventory, patterns, fits, and sizes for the southern market, acknowledging it is still not fully satisfied with the goal.
• Growth plan intact: The team remains buoyant and bullish on expanding the Unlimited business, with more improvements lined up and some new stores still opening in the south this year.

LimeRoad & Digital Investment

• Acquisition still in stabilization: LimeRoad has been integrated for less than two months; teething issues persist and name-change agreements with partners like Facebook, Google, and AWS are still pending.
• Team and vendor confidence improving: The LimeRoad team is intact, motivated, and charged up; vendor confidence has improved and lost vendors are returning to the marketplace.
• Management declined to share operating metrics: When asked for GMV, run rate, or an update on the 15–20% EBITDA impact number, management said it is still in learning mode and it would be premature to share current data.
• Capital return explicitly flagged as difficult: Management stated clearly that LimeRoad is very long-term and futuristic, will require still more capital, and that expecting a very good or positive capital return “is going to be difficult”; it is framed as a need for future sustenance to cater to millennial customers.
• Digital spend steady at ~20% of EBITDA: The EBITDA percentage share for spend and investment on the digital side, including LimeRoad, remains around 20%.
• Omnichannel pilots beginning: The company has started pilots on omnichannel pieces away from stores and is working on creating a digital experience for customers coming to stores, making them seamless toward digital as well as physical.

Lalit Agarwal: “Expecting very good capital return or a positive capital return from this business is going to be difficult because this is definitely creating capabilities for us to cater to those millennial customers and the retail customers. We will have to invest more in this business and this is a need for the future sustenance.”

Operations & Infrastructure

• Inventory elevated at 106 days: Quarter closed at ₹767 Crores, slightly higher than the target due to late winters pushing sales into January; winter sales were recovered in January, and management is working hard to bring inventory down toward a long-term trajectory of around 90 days.
• South inventory deliberately higher: The company is carrying slightly higher inventory per store in the south to explore newer categories and drive higher sales.
• New warehouse 70% complete: The warehouse development is on schedule to start operations by end of March, with another two to three months before shifting; it is built with a five-to-seven-year view and should improve turnaround time and logistics.
• Store closures and openings: Six nonperforming V-Mart stores were closed in the north; the company remains on track to close the year at around 55 to 60 new stores, with some in the south.
• Store display model evolving: The SBU concept has been launched and a large part of new stores have shifted to hanger-based product lines, though in smaller markets some product categories still require different handling due to cultural expectations.
• Sourcing and design in-sourced: The company has started sourcing fabrics directly from new mills and nominating them to vendors, while designing most designs internally through its own design team.

Guidance & Commitments

Lalit Agarwal: “The investments that we are doing on the new initiatives will definitely the bottomline may not seem similar that we used to have, the ROCE will not seem similar, have patience on those. You have shown enough trust with us continuously for a period of time. Again we will definitely hold it up and we will want your trust not to be diluted.”

Key Metrics