Strategy execution well on track; margins expand
• Revenue grew 53% YoY to INR296cr(est. INR295cr) driven by a healthy SSSG of 40% and footprint expansion. It added 10 stores in Q4FY24 (15 net in FY24).
• Revenue/sq.ft. grew by 40%YoY to INR10,008 (annualised) on healthy SSSG. • Gross margins contracted by 50bp YoY to 28.3% on higher discounting.
• EBITDA rose 150% YoY to INR31cr (est. INR40cr) with a 410bp margin expansion to 10.6% despite gross margin contraction. Expansion was driven by positive operating leverage on pick-up in throughput.
• PAT turned black at INR4cr (est. INR2cr) against loss of INR8cr driven by higher EBITDA. PAT was higher than expectations on lower taxes.
• On a full year basis, revenue/EBITDA/PAT grew 39%/76% and PAT turned black with an SSSG of 31% for FY24.
• We reaffirm ‘BUY’ with a revised TP of INR841 (12x FY26E EV/EBITDA).
Store addition picks up; envisage aggressive push going forward
VREL added 10 stores in Q4 and store addition for FY24 stood at 15 (net). Over the last two quarters (14 net additions), footprint expansion has picked up pace as business has started generating healthy margins. VREL’s store rationalisation program is now complete and we don’t expect store addition to further pick up from here on as its new stores are witnessing healthy throughput and SSSG from mature stores is also strong. Store count by the end of the financial year stood at 117. Its volume grew by 49% on an annual basis and ASP saw 7% de-growth (INR263) as cotton prices corrected and the company passed on it to the customers. Total area addition for FY24 was at 12.54 lakh sq.ft., a growth of 16%. We are upgrading our store addition target for FY24 to 30 from 20 earlier and we think that there is further room for upgradation if the green shoots convert into sustainable growth in demand. We expect a 23% addition in the store area, given the aggressive push towards store additions.
Steady improvement in revenue/sq. ft. leading to positive operating leverage
REL posted an SSSG of 40%/21% in Q4/FY24 despite overall muted demand conditions. This has resulted in a 31% growth in revenue/sq.ft. to INR10,248. Post-lifting of COVID-related restrictions, VREL has witnessed a steep pick-up in revenue/sq. ft. on higher footfalls which is on account of steps taken by management such as increasing the rack size of displays (higher density on store floor), strictly focusing on SOPs, and utilization of distribution centers which is absent for other value retailers. The company aims to improve it to INR15,000 over the long term (VREL’s revenue/sq. ft. is 20-25% better than its peers). We have upgraded our SSSG assumptions for FY24 to 10% (7% earlier) on account of positive commentary from the industry and a healthy pick-up in throughputs. Contribution from private labels has grown to 40%+ and greater throughput and contribution from private labels is likely to result in an expansion in operating margin to ~7% in FY25 from 3% in FY23. Revenue We expect revenue to grow by 31% CAGR over FY24–26 on healthy store additions and higher throughput.
Valuation and view
VREL has turned around its business with healthy a growth in revenue/EBITDA in FY24. Drivers such as new store expansion and a healthy increase in revenue/sq. ft. can lead to a healthy growth in revenue and EBITDA. RoE expansion to over 20% in FY26E from -4% can trigger a valuation re-rating. The scope for expansion for VREL is large as India has more than 5,000 Tier IV towns. This, along with its healthy store economics, gives it a payback period of less than three years. As VREL’s peers such as V-Mart Retail and Zudio have 500+ stores each, we think that it can achieve healthy growth rates over a longer period. We reaffirm ‘BUY’ with a revised TP of INR841 (from 817 earlier).
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