BackV-Mart Retail gets 'Unlimited' at a good deal; turnaround remains a moniterable
V-Mart has 282 stores, which takes the combined footprint to 356 stores. V-Mart highlights that it currently invests Rs2 crore (Rs1 crore in capex and Rs1 crore in inventory) for any new store
PremiumV-Mart Retail Ltd, a value fashion retailer, has entered the south India market with the acquisition of 74 stores of ‘Unlimited’ from Arvind Lifestyle Brands Ltd, a wholly owned subsidiary of Arvind Fashions Ltd. As a part of the deal, V-Mart will acquire assets at their book value, with an estimated outlay of about Rs150 crore. Unlimited operates these stores across south and western India. It retails fashion apparel and accessories at affordable prices.
At present, V-Mart has 282 stores, which takes the combined footprint to 356 stores. V-Mart highlights that it currently invests Rs2 crore (Rs1 crore in capex and Rs1 crore in inventory) for any new store. As a result, this acquisition allows the company to acquire 74 existing stores in a new territory at a very similar cost. In this backdrop, the acquisition value seems pretty reasonable.
“We find the V-Mart’s acquisition of ‘Unlimited’ timely, especially as the economy comes out of Covid and at an attractive price viz. EV/sales (FY20) of 0.3 times and EV/Store of Rs2 crore," said analysts from Dolat Capital Market Pvt. Ltd in a report on 26 July. EV is short for enterprise value. The broker further added, “V-Mart itself trades at a rich valuation of 3.8 times/ Rs22.2 crore. V-Mart may pay about Rs30 crore additional (about 2% of revenues in first two years and 1% in third year) subject to certain milestone achievements."
Note that V-Mart’s shares trade as much as 37% above pre-covid highs seen in February 2020, making valuations appear rather steep. Meanwhile, Unlimited’s revenues for financial year 2020 (FY20) stood at around Rs530 crore. In comparison, V-Mart’s revenues for FY20 stand at Rs1,662 crore. FY20 revenues are helpful to evaluate pre-pandemic performance of both.
Analysts believe the deal would benefit Arvind Fashions as well, shares of which jumped more than 10% on Monday on the National Stock Exchange, also touching a new 52-week high. “We believe the loss making Unlimited was a key drag on the company’s operational performance," said ICICI Securities Ltd in a report on 23 July. They added, “This divestment will enable the company to focus on its six high conviction brands, strengthen its balance sheet by repaying debt and improve company-wide profitability and return ratios."
Going ahead, investors should closely monitor how the turnaround of ‘Unlimited’ is shaping up. “Concerns do remain on the current profitability of the network of stores despite its relatively mature age profile. Given V-Mart’s success in scaling up in its core territories, we expect it to improve the performance of these stores gradually," point out analysts from Edelweiss Securities Ltd in a report on 24 July.
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