Focussing on towns where competition is minimal, and efficient sourcing are key strengths.
When consumers cut back on purchases in the face of rising costs, as is the scenario currently, apparel is among the first in the firing line.
Most listed branded apparel players have been struggling for several quarters on end. The vast unbranded — and unorganised — market, which is also cheaper often benefits as a result.
V-Mart Retail derives a good chunk of revenues from unbranded apparel retail. The company is also cushioned by being a retailer of household and grocery staples too.
Using equity infusions to fund the majority of its expansion leaves it with low debt. Sticking to Tier II and Tier III towns where competition is minimal, and which allows sourcing efficiencies is another advantage.
The company’s initial public offer (IPO) is priced between Rs 195 and Rs 215. The offer discounts estimated earnings for FY-14 by 15.3 to 16.8 times on a post-issue equity.
But the company is not immune to consumers deferring purchases, with revenues taking a severe hit in the previous slowdown. Consumer confidence is now ebbing across the board, with even staple FMCG sales witnessing a squeeze, and this is not restricted to urban cities alone.
The retail space is rife with over-priced stocks, and V-Mart’s IPO valuations are already on a par with closest comparable peers. Further, the company has limited scale of operations and will sport a small-cap tag, post-listing.
Given the risks and the high valuations, only those investors with stomach for high risk and a medium term perspective can subscribe to the IPO. Investors are also advised against taking a large exposure in the IPO.
Good product mix
Apparel is the single biggest revenue contributor at 60-68 per cent over the past five years. The segment also offers the highest margins (around 34 per cent), which have remained steady over the years.
The next largest contribution is from FMCGs, personal care products and household care. The share of this segment has fluctuated between 19 and 30 per cent over the years.
But V-Mart does not have the kind of trade terms with FMCG distributors which organised retailers usually have, that entail higher margins and special incentives.
The segment has the lowest margins (around 13 per cent). These margins have also been steadily declining.
The remaining revenues come from home merchandise and accessories such as shoes, bags, toys, stationery and so on. Such a mix of discretionary and staple products could tone down the effects of consumers tightening purse-strings.
V-Mart has a chain of 62 stores, concentrated in the northern and western parts of the country. It will utilise Rs 70 crore, most of which will come from the IPO and a pre-IPO issue, to open 60 stores by FY-15.
New stores are set to be opened in smaller towns and cities in regions such as West Bengal, Assam and Uttarakhand where the company has no presence yet, besides existing markets such as Uttar Pradesh, Gujarat and Rajasthan.
Such a strategy of focusing on smaller towns is quite sensible. For one, it will have a first-mover advantage in establishing presence and its brands since national retailers are yet to tap into these markets.
Two, lease rentals here will be lower than in Tier I cities. Three, the company bunches store locations of about 150-200 km from each other, allowing economies in sourcing and distribution. Four, competition is relatively lower than Tier I cities.
But consumers in these cities are still vulnerable to rising costs, and the weak consumer confidence now will have an effect.
Same-store sales growth, or the growth in sales for stores open more than a year, dipped sharply in FY-12 and has shown only a slight improvement in the eight months to November 2012.
Revenues have grown at an annualised 25 per cent over the past three years to Rs 282 crore in FY-12. In the same period, net profits have doubled annually on economies in staff costs and other expenses to Rs 11 crore.
Operating margins meanwhile improved from 6 per cent in FY-09 to 10 per cent in FY-12. Margins are on par with retail peers.
Debt-equity ratio was at 0.6 times at end-November 2012, lower than most retail peers. Post the issue, debt-equity will go down to 0.21 times.
This leaves the company in a comfortable position with regard to funding expansion outside the scope of the issue objects.
Interest costs also don’t weigh too much. Net profit margins for the eight months to November ’12 stood at 5 per cent due to higher depreciation and taxes.
Given the working-capital intensive nature of the business, the company plans to utilise Rs 10 crore towards funding working capital for this fiscal.
Working-capital cycle has remained more or less steady over the years, and is on a par with its retail peers.
The company will also spend Rs 4.4 crore on developing distribution centres, either by expanding the current four centres or adding to this number.
The offer is open till February 5. On offer are 44.96 lakh shares, of which 17.35 lakh shares are an offer for sale by a private equity investor.
Anand Rathi is the lead manager to the issue.
From this issue, the company will raise around Rs 88-97 crore, (including the offer-for-sale).