V - Mart

MCAP - 1000cr
CMP - 550

S/H Pattern (Dec 14)

Promoters 58.49%
Institutions 30.13%
Non Institutions 11.38%
Retail is a tough business
Subhiksha expanded to 1600 stores before closing down because of liquidity crisis
Future group sold Pantaloon Retail to Aditya Birla Group to pare down its debt
Vishal retail went into Debt restructuring when operations became unviable

A lot can go wrong in retail business :

Inventory Mismanagement
Debt : especially short term Debt makes you overly optimistic
Reckless expansion, chasing unprofitable growth
Inefficient supply chain
 Few Quotes

We are a golden egg laying duck, we are in trouble. Lessons from Vishal Retail
We need their support and upon getting it we will
No enormous investments or debts in the
restart operations and repay all debt. It is not easy,
beginning
but we have to make it happen. - R Subramanian,
Slower expansion to keep debt in check
Subhiksha
Increase management bandwidth before
expansion
We need Rs 300 crore immediately to re-start
operations, the company's founder chairman R "Earlier, credit was cheap and I was expanding
Subramanian said. "We got into trouble during the recklessly," - Ram Chandra Aggarwal, founder of
second half of last year, when we were unable to tie Vishal retail, now V2 Retail
up funds for our ongoing operations. That slowly
started choking and has lead to paralysis of
operations completely now. - R Subramanian,
Subhiksha
Introduction
Varin Commercial Private Limited was incorporated in 2002 and renamed V-Mart Retail
Limited; the Company operates family fashion stores in the value-for-money retail segment.

V-mart currently operates 107 stores with three verticals apparels, general merchandise
(non-apparel and home mart) and kirana bazaar.

Their competitors are local retailers. The USP of the company is providing mall like
experience to the consumer at competitive prices compared to local retailers.

1 . source : http://businesstoday.intoday.in/story/vishal-retail-transformation-to-v2-benefits/1/21755.html
Retail as a Business
Retailing is a tough business. During my investment career, I have watched a large
number of retailers enjoy terrific growth and superb returns on equity for a period, and
then suddenly nosedive, often all the way into bankruptcy. This shooting-star
phenomenon is far more common in retailing than it is in manufacturing or service
businesses.

In part, this is because a retailer must stay smart, day after day. Your competitor is
always copying and then topping whatever you do. Shoppers are meanwhile swayed in
every conceivable way to try a stream of new merchants. In retailing, to coast is to
fail.

~ Warren Buffett, in his 1995 letter to shareholders

Strategy

moving away from Kirana (low margin) to Apparels (high margin)

Tier II and III focus.
It has delegated the warehouse management to APL logistics (3PL).
The management has avoided manufacturing.Rather it sources its
products from 1500 vendors and suppliers
One of the biggest lessons of the Vishal Retail debacle was to avoid
manufacturing. When the company was struggling with debt, the first
things to be shut down were the factories.1

1.http://businesstoday.intoday.in/story/vishal-retail-transformation-to-v2-benefits/1/21755.html
Managements Focus on Profitability

It takes 2-3 months for new stores to become profitable .

We would rather grow 30% compounded across ten years supported
by revenue growth in every single year as opposed to 50%
compounded with three down years in ten. - concall
They have closed down 16 stores till date and reduced sizes of some.
Lowest Debt to Equity ratio in retail industry.
Operating with lowest rent as a % of revenue of 3-4 % compared to
industry standard of 11-15%
Cluster Strategy

The company usually opens new stores within 100-150 Kms of an

established store . These strategy is followed to have a better control on
inventory , to understand the area and consumer preference before
committing capital .

http://www.farnamstreetblog.com/2014/04/the-ink-spot-strategy/
Excerpt from Made in America :-

But while the big guys were leapfrogging from large city to large city, they became so
spread out and so involved in real estate and zoning laws and city politics that they left
huge pockets of business out there for us. Our growth strategy was born out of
necessity, but at least we recognized it as a strategy pretty early on. We figured we
had to build our stores so that our distribution centers, or warehouses, could
take care of them, but also so those stores could be controlled. We wanted them
within reach of our district managers, and of ourselves here in Bentonville, so we
could get out there and look after them. Each store had to be within a days drive
of a distribution center.

- Made in America , Sam Walton

Growth of Wal-mart stores in USA

http://www.youtube.com/watch?v=Ly_JHzkA5u4
Cluster Growth Model
How Much Does it cost to open a new store

Amount per sq ft Average store size Investment

Capex Rs 1200-1300 8000 ~ 1cr

Inventory Rs 1200-1300 8000 ~ 1cr

Total Rs 2500 ~ 2cr

Maintenance capex is low after the initial investment.

 Financial Performance

2008 2009 2010 2011 2012 2013 2014 9M2015 CAGR

Sales 98 142.2 143.7 214.1 281.9 383.5 575 550 34.3 %

Operating 9.1 8 11.4 18.7 28.2 39.1 53.8 60.6

34.47 %
Profit

Margin 9.3 5.7 7.9 8.7 10 10.2 9.4 11 +170bps

PAT 3.5 1.1 2.3 6.3 11 18 25 35.7 42%

Improvement in Inventory Turns

2008 2009 2010 2011 2012 2013 2014

Sales 98 142.2 143.7 214.1 281.9 383.5 575

Inventory 34.8 49.3 53.4 71.1 86.9 110.8 167.7

Inventory
2.8 2.9 2.7 3.0 3.2 3.5 3.4
Turns
Inventory as a percentage of Trade payables

2008 2009 2010 2011 2012 2013 2014

Inventory 34.8 49.3 53.4 71.1 86.9 110.8 167.7

Trade
13.2 12.1 16.1 23.2 33.7 37.2 64.1
Payables

Trade
payables
38 % 24.6 % 30.1 % 32.6 % 38.8 % 33.6 % 38.2 %
as % of
Inventory
Some important figures :-

IPO 2013 2014 9M2015

No. of stores 62 69 89 107

Sales per sq ft
- 685 778 830
(per month)
Same store sales
- 14% 12% 10%
growth
Retail space
5.06 5.58 7.26 8.73
( lakh sq ft )

Same store sales growth has increased due to gain in footfalls , increased transaction size frequent
visits.
Competition
Even though the transaction size is small in case of v-mart , it beats other major
retailers hands down in term of margins , sales per sq ft and cost efficiency.

Pantaloons Shoppers Stop V-mart

Sales per sq ft (per

678 653 830
month)

Operating profit
3% 4% 11 %
margin

ROE -ve 5% 19 %

Debt Equity ratio 1.81 0.62 0.26

Management compensation
Opportunity Size

The size of Indian Retail Industry is estimated at US$ 500 billion.

Organized retail is 8 %
Rising purchasing power of consumers
Propensity to spend
Low Median Age
1600 possible places mapped by the management
Valuations :-

The company is currently available at 1000cr

operating cash flows before working capital changes is expected to be about
~ 50 cr for FY15
Using reverse dcf , at current market value, market is expecting a growth
rate of 11 % for 10 yrs with no growth thereafter at 10 % discount rate

I think company can grow its earnings much faster than 11% given the large
opportunity size without using any outside capital.
Things to looks out :

If the company is able to open 20-25 stores without accessing outside

capital , then there is less chance of any financial irregularity
As the size of the company grows , one should keep a close look at
Inventory size and inventory turns because thats where most retailers
falter
Thank You