Nuvama sees 77% upside in V2 Retail, here's why

Brokerage firm Nuvama has initiated buy coverage on Retail chain operator V2 Retail for target price of Rs 831, indicating an upside of 77 per cent. Nuvama believes that V2 Retail is a strong candidate for a valuation re-rating on better store economics, aggressive growth plans and size of opportunity.

V2 Retail, a leading player in the apparel and lifestyle segment catering to the neo middle class in Tier II and III cities, is set to embark on a phase of rapid expansion following a successful turnaround in its business.

V2 Retail's strategy revolves around offering value and variety to its customers, with apparel prices averaging at an affordable Rs 280. The company boasts a robust presence in North and East India, operating 117 stores across 17 states and over 89 cities, spanning an impressive Retail area of 12.5 lakh square feet.

In recent quarters, V2 Retail has demonstrated a strong Same Store Sales Growth (SSSG) driven by enhanced throughput and a strategic rationalisation of its store profile. The move has yielded positive operating leverage, propelling the company back to profitability, Nuvama noted.

Looking ahead, V2 Retail aims to further bolster its throughput and expand its store footprint aggressively, primarily financed through internal accruals. With its store rationalisation exercise deemed complete, the company has added 47 stores over the last three years and 15 in FY24.

Expecting robust demand and improved throughput, V2 Retail plans to open more than 25 stores annually in FY25 and FY26, particularly targeting Tier II, III, and IV towns where organised Retail penetration remains low, Nuvama said.

Post the easing of COVID-related restrictions, V2 Retail has witnessed a substantial uptick in revenue per square foot, attributed to increased footfalls and Average Selling Prices (ASPs). Management initiatives such as optimizing display rack sizes, stringent adherence to Standard Operating Procedures (SOPs), and efficient utilization of distribution centres have further bolstered revenue metrics.

Private labels have emerged as a significant contributor, constituting 40 per cent of revenue in FY23 and driving higher gross margins. As a result, operating margins are expected to expand to 7 per cent in FY24 from -3 per cent in FY21.

In terms of valuation and outlook, V2 Retail's revenue and EBITDA witnessed remarkable growth in first nine months of FY24, setting the stage for continued momentum. With a target to achieve Return on Equity (RoE) exceeding 20 per cent by FY26E, the company is set for a potential re-rating in valuation.

As peers like V-Mart Retail and Zudio have achieved significant scale with over 500 stores each, analysts foresee V2 Retail replicating similar growth trajectories over the long term.