Own Brand Expansion And Omnichannel Reach Will Drive Long Term Retail Dominance

Catalysts

About Vishal Mega Mart

Vishal Mega Mart is a value-focused pan India retail chain offering apparel, general merchandise and FMCG through large-format stores and omnichannel platforms.

What are the underlying business or industry changes driving this perspective?

• Accelerated store expansion into underpenetrated regions such as Kerala, Gujarat and Maharashtra, along with an upcoming entry into Tamil Nadu and a scalable small town format, is set to materially expand the addressable market and support sustained double digit revenue growth.
• Rising contribution from Own brands, already nearly three fourths of sales and still increasing, should support structurally higher gross margins and operating leverage, enhancing long term EBITDA and earnings power.
• Rapid build out of omnichannel and quick commerce, with contribution already reaching high single digits in some locations and strong traction from younger, first time customers, is likely to deepen wallet share and support faster like for like revenue growth.
• Government led consumption boosters such as GST and income tax rate rationalization, combined with management’s commitment to pass on benefits through sharper pricing, should stimulate traffic and basket size, reinforce high volume growth and help protect net margins.
• Strategic supply chain investments, including large automated warehouses and regionally distributed facilities, are expected to enhance availability, reduce logistics cost per unit and improve inventory turns, supporting healthier EBITDA margins and return on capital over time.

Assumptions

This narrative explores a more optimistic perspective on Vishal Mega Mart compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Vishal Mega Mart's revenue will grow by 21.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.2% today to 7.8% in 3 years time.
• The bullish analysts expect earnings to reach ₹16.5 billion (and earnings per share of ₹3.4) by about December 2028, up from ₹7.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹11.1 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 81.7x on those 2028 earnings, down from 84.9x today. This future PE is greater than the current PE for the IN Multiline Retail industry at 54.5x.
• The bullish analysts expect the number of shares outstanding to grow by 1.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.23%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Same-store sales growth has been boosted by timing of major festivals and recent GST and income tax reforms, but as these one off tailwinds normalize and macro conditions or rural incomes fluctuate, demand could revert closer to mid single digit trends. This would slow revenue growth and pressure the ability to sustain high earnings growth over time.
• The rapid rollout of smaller format stores in contiguous markets such as Kerala and pilots in Gujarat, Maharashtra and 50,000 population towns increases the risk of cannibalization, suboptimal store sizes and execution missteps. This could dilute store productivity, compress EBITDA margins and lower returns on capital if sales per square foot lag expectations.
• Heavy reliance on Own brands, already about three fourths of sales, and an explicit strategy to keep opening price points the most competitive in organized retail while upgrading quality and fashion, may face intensified price competition from online value players and local retailers. This could potentially erode gross margins and limit future margin expansion.
• The quick commerce business is growing fast and contributes up to high single digit of sales in some locations, but its FMCG heavy mix, lower gross margin profile and incremental delivery costs could structurally drag on blended profitability if scale does not translate into sufficient operating leverage. This could cap EBITDA margin and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Vishal Mega Mart is ₹180.0, which represents up to two standard deviations above the consensus price target of ₹160.36. This valuation is based on what can be assumed as the expectations of Vishal Mega Mart's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹180.0, and the most bearish reporting a price target of just ₹100.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be ₹211.0 billion, earnings will come to ₹16.5 billion, and it would be trading on a PE ratio of 81.7x, assuming you use a discount rate of 15.2%.
  
• Given the current share price of ₹133.81, the analyst price target of ₹180.0 is 25.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.