HSBC has initiated coverage with a “hold” rating on the stock with a price target of ₹138 apiece, which implies a potential upside of 9.4% from the previous closing price of ₹126.12 apiece.
Efficiency and scalability
HSBC is of the view that Vishal Mega Mart, a chain that sells apparel, groceries, electronics and home essentials, has created one of the most efficient operating structures across the value segment. The company’s efficient operating and investment structure has driven over a 40% store return on capital employed (RoCE), HSBC said.
At present, the company has 696 stores and HSBC has forecast the same to reach around 940 by financial year 20278 as it increases store density and expands into new cities. It also sees potential for the company to have 1,300 stores in the longer term.
Well insulated
The brokerage said retail in India faces disruption from e-commerce, quick commerce and food aggregators and retailers have tried to insulate themselves to support earnings growth and valuations.
However, HSBC said Vishal Mega Mart’s business model is insulated from industry disruption by diversified product mix, presence in smaller cities, low average selling price and high private label share.
Growth forecast
Over FY25-28, HSBC has forecast the company’s sales, earnings before interest tax depreciation and amortisation (EBITDA) and profit after tax to grow at a compounded annual growth rate (CAGR) of 17%, 18% and 21%, respectively. The same is driven by new store expansion and same store sales growth of around 9% per annum, it said.
Adjusting for goodwill and cash, the brokerage expects Vishal Mega Mart’s return on capital employed profile to remain strong at 60% in FY28 from the current 54%, with internal cash generation sufficient to fund its capex.
Valuation and risks
HSBC has valued Vishal Mega Mart at 65x target price-to-earnings multiple, a 15% discount to Trent’s standalone business.
“With 9% upside implied by our target price, we initiate with a hold rating as we believe the valuation already reflects its superior execution and large total addressable market,” HSBC said.
Upside risks include private labels boosting margins and better cost controls, while downside risks include rising competition, slower-than-expected store expansion, HSBC said.
Earlier this week, promoters of Vishal Mega Mart sold stake worth nearly ₹10,500 crore, with India’s large domestic mutual funds, SBI MF, Kotak MF and HDFC MF being the buyers in the transaction.
The rejig in indices of London-based Financial Times Stock Exchange (FTSE) is likely to bring solid inflows in notable stocks including Vishal Mega Mart, which is estimated to see inflows of $115 million.
Of the 11 analysts that have coverage on the stock, eight have a “buy” rating, two have a “hold” rating and one has a “sell” rating.
Shares of Vishal Mega Mart Ltd. were trading 0.63% lower at ₹125.32 apiece at 11.09 am on Friday, June 20. The stock has gained 18.3% this year, so far.
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