V-Mart Retail (VRL) is one of the few retail companies having a right business model with best product mix, appropriate location/store size and control over costs. Its positioning as a one-stop family shop in Tier-II & Tier-III cities provides an early mover advantage with strong scalability in these high-potential markets. Following low-cost structure, VRL enjoys highest operating margin of 9.4% as against 5.7%/2.1%/ 2.3%/2.8% in case of Shoppers Stop (SSL)/Trent (TL)/Pantaloon Fashion Retail (PFRL)/ Arvind’s Megamart, respectively, in FY14. Healthy operating cash flow of Rs926mn is expected to meet its entire capex requirement of Rs900mn to set up 75 stores over FY14-FY17E. Despite strong revenue CAGR of 38.8%/32.2%/34.3% over the past 3/5/6 years, respectively, and better return ratios/cash flow, VRL trades at 14.8x/8.0x FY17E P/E and EV/EBITDA, respectively, at a 32%-40% discount to other retailers like SSL/TL/Future Retail which trade at 22x-31x P/E and 7x-17x EV/EBITDA. Strong revenue/net profit CAGRs of 29.2%/34.4%, respectively, coupled with a flat net D/E ratio of 0.04x and a 685bps improvement in RoCE at 21.5% over FY14-FY17E would lead to a strong re-rating. We have assigned Buy rating to VRL with a TP of Rs790 based on 27.0x/14.4x, FY16E-FY17E average P/E and EV/EBITDA, respectively.
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