We are pleased to inform you that our Value Pick stock of January 2017 - V2 Retail Ltd (BSE Code: 532867, NSE Code: V2RETAIL) which was released this year on 28th Feb'17 is giving as on date returns of 130% to our Value Picks members. We suggested Buy on V2 Retail at price of Rs. 190.70 on 28th Feb'17 with a target price of Rs. 290. Stock has already achieved our target price and made 52 week high of Rs. 480 recently. Today, V2 Retail stock price closed at Rs. 438.35 on NSE giving absolute returns of 130% in period of 7 months. We advise our members to continue to hold the stock for long term. Below is the summary of V2 Retail Ltd shared by us under Value Pick stock - Jan'17 released on 28th February 2017. 1. Company Background: V2 Retail is one of the fastest growing retail company in India. The company offers a portfolio of products, including apparel and non-apparel.V2 Retail Ltd., which stands for ‘Value and Variety’, sells good quality fashion garments at prices significantly lower than other clothing brands. Currently, V2 Retail has 36 retail stores which are between 3,500 to 25,000 sq feet in size. The company has these 36 operational stores across 10 states with strong presence in northern and eastern India. V2 Retail offers fashion at affordable prices which suits every individual and household. The stores cater to the major chunk of our population and have more than 70,000 products which fulfills all household needs. The benefit derived from centralised procurement system in the form of reduced costs is passed down the value chain to the consumer. Mr. Ram Chandra Agarwal, Promoter of the company had set up his first Vishal Garments store in Kolkata in 1994. In 2001 he had moved to Delhi to launch Vishal Retail, taking it public in June 2007 to raise Rs. 110 crore. Ram Chandra Agarwal got carried away by his success. In a desperate bid to cash in on the popularity of Vishal Retail and rake in big bucks during the stock market boom of 2007, he borrowed heavily to set up facilities. The company came out with an IPO in 2007 at price of Rs.270 per share which oversubscribed by a whopping 81 times and hits a high of Rs.1001 in 2008. Unfortunately, the Lehman crises happened in 2008 and the stock markets went into a tailspin. Vishal Retail went into insolvency because it could not repay its creditors and Ram Chandra Agarwal was back where he started. Company sold its old business to TPG and Sriram Group in 2011 for Rs.70 crores (liabilities to the extent of Rs. 823.20 crores and assets of Rs. 393.78 crores transferred in this deal), Ram Chandra Agarwal lost everything he had built over 24 years. With the little corpus left after paying back major portion of debt and his personal savings, Ram Chandra Agarwal restarted the same business with some differences and with lot of precautions to avoid his earlier mistakes. He changed the name of his company from Vishal Retail to V2 Retail. The best part is that Ram Chandra Agarwal did not give up. Instead, he restarted the retail business from scratch in the name of V2 Retailensuring that he does not repeat the mistakes he made in Vishal Retail and calibrated high progress in a slow and steady manner to build V2Retail. 2. Recent Development: (as on 28th Feb'17) i) Issue of Equity Shares on Preferential basis The company has issued and allotted 40 lacs number of equity shares to promoters and non-promoters at a price of Rs. 75 per share on a preferential basis. Further, the company has issued and allotted 10 lacs number of warrants to promoters (convertible into equity share at a price of Rs. 75 per share) during the quarter. In the month of January, the company has also allotted 20.35 lacs equity shares to Bennett Coleman and Company ltd, other than promoter pursuant to exercise of option against warrant up to the value of Rs. 16.25 crore at a price of Rs. 79.85 including premium of Rs. 69.85 each. ii) Settlement of Loan from Pegasus Assets Reconstruction Private Ltd The company vide proposal for settlement of term loan dated 30th June 2016 from Pegasus Assets Reconstruction Private Ltd (one of the company’s lender) has agreed for one time settlement of its loan including interest at Rs. 42.50 crore along with interest at 12% per annum on monthly rests to be paid till 30th November 2016. During the quarter ended Dec’16, the company has settled the total outstanding amount of loan including interest and has reversed the excess interest amounting to Rs. 15.13 crore recorded in its books which has been shown as exceptional items in the results. The company has also obtained “No Dues Certificates” dated 30th Nov 2016 from the lender to this effect. iii) Selling of the Company’s owned Property situated at Kolkata The company has sold its property situated at Kolkata against a sale consideration of Rs. 18.38 crores and had earned a gain of Rs. 8.19 crores. The proceeds of the preferential issue, sell of property and internal accruals were used to reduce the outstanding loans of the company. 3. Financial Performance: V2 Retail standalone net profit rises 245.19% in the Dec 2016 quarter Net profit of V2 Retail rose 245.19% to Rs 33.38 crore in the quarter ended Dec 2016 as against Rs 9.67 crore during the previous quarter ended Dec 2015. Sales rose 55.71% to Rs 152.81 crore in the quarter ended Dec 2016 as against Rs 98.14 crore during the previous quarter ended Dec 2015. V2 Retail standalone net profit rises 657.14% in the Sept 2016 quarter Net profit of V2 Retail rose 657.14% to Rs 1.59 crore in the quarter ended Sept 2016 as against Rs 0.21 crore during the previous quarter ended Sept 2015. Sales rose 56.44% to Rs 103.19 crore in the quarter ended Sept 2016 as against Rs 65.96 crore during the previous quarter ended Sept 2015. 4. Investment Rationale: (as on 28th Feb'17) i) The size of India’s retail industry is expected to more than double to $1.3 trillion by 2020. India’s huge population with large proportion of young, increasingly brand-and fashion-conscious population, high potential growth in consumer expenditure, growing middle class are some of the factors due to which the macro trends for the sector looks favorable. Further, organised retails penetration in India’s total retail is on increase. Recent policy changes and greater external liberalisation of retail sector will bring many more foreign retailers to India. It is expected that FDI will accelerate the growth of organized retail. Organized retail whose share in total retail was 8% in 2012 is expected to have 24% share of total retail market in India in 2020. Among organized retail segments, mass grocery and apparel are segments growing faster than other segments. ii) Of the total Indian retail market, 8% constitutes the organized retail segment which is estimated to grow at a rate of almost 30% by 2020, and hence at a much faster pace than the overall retail market which is forecast to grow by 16% in the same period. Clothing & Apparel make up almost a third of the organized retail segment, followed by Food & Grocery and Consumer Electronics. India has one of the largest numbers of retail outlets in the world. The sector is witnessing exponential growth, with retail development taking place not only in major cities and metros, but also in Tier-II and Tier-III cities. iii) As the Indian customer is evolving with respect to habits, lifestyles, tastes and preferences. The company continuously try and understand the consumer needs through market research and keep churning its product basket as per needs of the consumer. Management of the company is confident in performing well going forward, the company remain focused on Tier 2 and Tier 3 cities, building a brand and looking to penetrate the unexplored markets by opening new stores. The company is continuously increasing its sales network as part of its expansion strategy. iv) V2 Retail has opened 4 stores during last 2 months, one at Silchar (Assam), one at Agartala (Tripura), one at Itanagar (Arunachal Pradesh) and one at Motihari (Bihar). The company would continue to focus on east and north-eastern states besides Uttar Pradesh and Uttarakhand as part of its strategy to expand its business. v) The company is also expanding its in-house brands and labels to cater the market. Currently, 50 percent of V2 Retail's revenue comes from men's apparel and 25 per cent each from ladies and kids apparel. V2 Retail has private labels including Herrlich, Godspeed, Stylla and Zavinci which are gaining good acceptance in smaller towns. vi) V2 Retail being a turnaround company has registered sales CAGR of 44.9% and profit CAGR of 134.4% during last 12 months with ROE of 3.5%. As on Dec 2016, promoter’s shareholding in the company is at 56.42% out of which 75.94% shares are pledged. We do not see this as a major concern considering the fact that the company has successfully restructured its business and reduced pledged shares percentage from 96.61% in Dec’14 to 75.94% in Dec’16. Institution shareholding in the company is negligible at 0.1%. vii) For the quarter ended Dec 2016, adjusted profit before tax (PBT) increased by 118% YoY from 9 crores to 20 crores in Q3FY17. Revenue grew by 56% YoY in Q3FY17 from 98 crores to 153 crores. Revenue for the 9 months of FY17 grew at 51% YoY from 241 crores to 364 crores. Even after demonetization, the company has maintained sales momentum in Dec quarter led by healthy demand and new stores opening. Finance cost for the Dec’16 quarter was reduced 1.52 crores due to repayment of outstanding loan. Operational EBIDTA grew by 73% YoY in Q3FY17 from 13 crores to 23 crores. Operational EBIDTA margins improved from 13.5% to 15% during Dec’16 quarter which is expected to improve further in coming quarters with better demand, improvement in internal efficiency and cost optimization. viii) V2 Retail is currently trading at trailing PE multiple of 16, however the Industry PE is at 55. Bigger players like Trent, Future Retail and V-Mart Retail are trading at trailing PE multiple of 82, 39 and 37 respectively. Moreover, market capital to sales ratio of V2 Retail is 1.24, however the same for Trent is 4.98, Future Retail is 0.82 and V-Mart Retail is 1.40. With upcoming IPO of D-Mart, the successful retail chain run by legendary Billionaire investor Radhakishan Damani, we expect there is a possibility of re-rating of the entire retail sector, as V2 retail is available at attractive valuation, we believe that stock has potential to deliver decent returns from current levels over next 12 to 18 months. 5. Key Concerns & Risks: i) With the entry of big players in retail Industry due to the permissible 100% FDI in Single Brand Retailing and 51% in multi brand retailing, the competition will become intense. Increase in competition is expected to alter the dynamics of business and further sustaining/ acquiring space and manpower resources. ii) The Company strategy is to increase the number of departmental stores, and increase its market share in existing Tier II and Tier III cities through additional new stores in those cities. However, any economic slowdown may affect the direct consumption which may impact the revenue growth of the company. 6. Saral Gyan Recommendation: (as on 28th Feb'17) As per our estimates, V2 Retail can deliver PAT of 39 crores for full financial year 2017-18 with annualized EPS of Rs. 13.5. At current price of 190.70, stock is available at forward P/E multiple of 14.1X based on FY17-18 earnings which makes it attractively valued compared to otherretail players in the Industry. Considering the company’s strong presence in northern and eastern India, strong revenue visibility with ongoing expansion plan, increasing preference of branded clothing in young middle class population living in smaller town and cities and attractive valuations of the company compared to other retail players in the Industry, Saral Gyan team recommends “Buy” on V2 Retail Ltd at current market price of Rs. 190.70 for target of 290 over a period of 12 to 18 months.
70% at current market price of 190.70
30% at price range of 150-160 (in case of correction in stock price in near term)
Portfolio Allocation: 3% of your equity portfolio.
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