Vishal Mega Mart – a PE backed turnaround story

Vishal Mega Mart is a story of turnaround – twice. From the small-time trader who had to vision to read the pulse of his customers and understand the macro environment to a PE driven success story. The revenue from operations in FY24 stood at ~Rs 8900 crore, of this 72% came from east and north of India. The IPO (OFS actually) lists tomorrow.

I run a DCF valuation based on a few assumptions (detailed below) to assess the potential for investing.

History

The story starts with a small-time textile trader who owned a small clothing store. Ram Chandra Agarwal, with a keen eye on consumer preferences and estimation of demand, started Vishal Retail in 2001. The products spread from apparel to groceries and general merchandise. The target was the cost-conscious middle-class customer. The chain saw a rapid expansion with over 200 stores in small towns. Combined with the start of the consumption story of the middle-class and the mix of products meant a solid value proposition. Unfortunately, the story didn’t end well for Mr. Agarwal as most of the expansion was funded by debt. In 2010, he sold the chain to TPG and Sriram Group for a paltry Rs 70 crore.

Eight years later, the ownership changed hands once again – this time for a cool Rs 5000 crore. The new owners, private equity players again – Partners Group and Kedaara Capital. The new owners hired Gunender Kapoor, ex Unilever who fixed the issues around compliance, product strategy from sourcing to display and efficiency of distribution centers. The chain took off. Helped by a strong execution team and a robust macro environment the chain did phenomenally well.

Business Model

Vishal Mega Mart focuses primarily on middle- and lower-middle income segments. They offer products in three categories – Apparel (43.78% FY24 sales), FMCG (27.46% FY24 sales), General Merchandise (28.54% FY24 sales). While the company offers transactions over web and app, physical stores contributed 99.34% of FY24 sales. Owing to the price-conscious target segment, Vishal Mega Mart offers its own brands that now account for over 70% of the total sales.

The current holding structure of the company with Private Equity player - Kedaara Capital holding a controlling interest:

The strategy is multi-pronged

1. PAN India network of stores (611 FY24) and distribution centers (35 FY24) enabling an efficient supply chain

2. Customer centric approach results in a large and loyal customer base. The company has 123.41 million registered customers of their loyalty program

3. Growing portfolio of own brands which account for over 70% of total sales – this helps keep costs low.

4. Tech-driven systems for market analysis, sourcing, inventory management, analytics and supply chain.

5. The current holding structure of the company shows the interest of PE players. The company is going public at this time via OFS – no money from the sell will go to the company, instead it will go to the owners who dilute their holding.

Retail landscape in India

The total retail market in India is estimated to cross $1.8 trillion by 2030. This includes all subsectors. The Kearney Research Report published more than 3 years back states the growth will be concentrated mostly in tier 2 and tier 3 cities. However, even here the physical stores will compete with e-comm given the focus has already moved to these locations.

Statista expects the unorganized sector to wield 75% of the market as of 2021.

Vishal Mega Mart operates in 3 sub-sectors within Retail – Apparel, FMCG, General Merchandise. Per the research published by Statista,

1)    Apparel – expected to reach a total market value of $125 billion by 2029 at a 5-yr CAGR of 3.355%

2)    FMCG – expected to reach a total market value of $615 billion by 2027 growing at an average of 27.9% every year between 2020 and 2027

Financial Health

I look at DMart and Trent to get a reading of the landscape. Both companies are well entrenched in the Indian Retail Industry and have USP around product, brand, pricing strategy. Nevertheless, a comparison helps place Vishal Mega Mart in the right slot.

Valuation – based on FY24 numbers

Assumptions

The Model

Computation of Beta for Vishal Mega Mart

Given the wide range of beta and equity values for Osia Hyper Retail and Spencer Retail, I have excluded both and computed the beta for Vishal Mega Mart as 1.0184. This value has been used in calculating the WACC for the company

Drivers

a)     Key Factors

• No financial borrowings as of Sept’24

• Interest payment is reducing and stood at 1.90% ex provisions as of Sept’24

• Debt to Equity averages ~62% as of Sept’24

• Sales from own brand more than 70% of total sales implying high degree of customer loyalty boosting bottom line

• Highly profitable

• Asset light – fixed asset (non-financial) accounts for ~20% of total assets

• Optimal use of IT infrastructure to manage demand planning, inventory in stores, sourcing and market analysis.

b)    Key Concerns

• Almost complete reliance on physical stores

• Geographical imbalance – sales skewed towards East and North of the country

• CapEx is less than 3% of sales from operations.

Recommendation

The fair value of the shares will be between Rs 75 and Rs 95.

Disclaimer

1. I have not applied for the Vishal Mega Mart OFS

2. For this research report, I have used the audited numbers in annual reports and RHP in good faith.

3. All my research is based on internet, and I have not interacted with the company in any manner, shape or form

4. The exuberance for well-run ethical companies is high and often good companies trade at a premium to value derived from cash flow model. This behavior falls in the realm of speculation.

5. This valuation is based on my research. For suitability of the investment to your portfolio, please work with a SEBI registered Investment Advisor.