Own Brands And Quick Commerce Will Drive Long Term Value Retail Expansion

Catalysts

About Vishal Mega Mart

Vishal Mega Mart operates value retail stores and quick commerce channels across India, offering affordable apparel, general merchandise and FMCG products.

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

• Accelerated expansion into underpenetrated regions such as Kerala, Gujarat, Maharashtra and upcoming smaller towns is widening the addressable market. This may support sustained double digit revenue growth and operating leverage led improvement in earnings.
• Rising adoption of quick commerce, already contributing up to high single digit of store revenue in some locations and skewed toward FMCG, is attracting younger first time customers and increasing purchase frequency. This is likely to lift top line and improve return on capital over time.
• Structural shift toward organized value retail in mid and lower income segments, aided by GST and income tax rationalization that boost disposable incomes, positions Vishal’s low opening price points and Own brands to gain share. This may support robust same store sales growth and stable to expanding EBITDA margins.
• Steadily rising Own brand contribution, already in the mid seventies as a share of sales and gaining traction even in quick commerce, enhances pricing power and supply chain efficiencies. This may translate into stronger gross margins and higher net profit growth than revenue growth.
• Ongoing investments in large automated warehouses and smaller, more efficient store formats in contiguous markets like Kerala are improving inventory turns and cost per square foot. This is likely to drive better working capital efficiency, higher net margins and stronger free cash flow generation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Vishal Mega Mart's revenue will grow by 18.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 7.3% in 3 years time.
• Analysts expect earnings to reach ₹14.2 billion (and earnings per share of ₹2.72) by about December 2028, up from ₹7.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹16.6 billion in earnings, and the most bearish expecting ₹11.2 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 84.1x on those 2028 earnings, down from 87.6x today. This future PE is greater than the current PE for the IN Multiline Retail industry at 53.3x.
• 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 15.2%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current double digit same store sales growth is partly supported by one off benefits such as festival timing shifts and strong monsoons, and as these effects normalize while the broader retail cycle slows, revenue growth could decelerate materially and pull overall earnings growth below expectations.
• Rapid store expansion into new states and smaller towns with smaller formats and different customer preferences may strain execution, leading to underperforming stores, higher refurbishment and right sizing needs and lower store level profitability, which would compress net margins.
• The quick commerce channel, while adding younger first time customers, is heavily skewed toward lower margin FMCG and carries incremental delivery costs, so if its share of sales rises faster than expected without sufficient scale benefits, blended gross margins and EBITDA margins could decline.
• Large automated warehouse investments and an expanding omnichannel footprint increase fixed costs ahead of revenue, and if consumption growth in target regions disappoints or competitive intensity from organized and online value retailers rises, returns on these assets could be subdued and earnings growth could lag revenue growth.
• High reliance on Own brands for more than seventy percent of revenue magnifies the impact of any quality issues, fashion misses or brand fatigue, and if consumers shift back toward national or regional labels as incomes rise, Vishal could face slower volumes and higher discounting, which would pressure gross margins and net profit.

Valuation

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

• The analysts have a consensus price target of ₹159.64 for Vishal Mega Mart based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• 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 analysts, you'd need to believe that by 2028, revenues will be ₹193.8 billion, earnings will come to ₹14.2 billion, and it would be trading on a PE ratio of 84.1x, assuming you use a discount rate of 15.2%.
  
• Given the current share price of ₹138.07, the analyst price target of ₹159.64 is 13.5% 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.