The pre-pandemic situation
The retail sector had been witnessing a set of changes before the pandemic hit. A 2019 FICCI-Deloitte report predicted that the Indian retail market would grow to $1.75 tn by 2026 out of which, $200 bn would come from e-commerce retail. Over the years, the sector saw a shift from unorganised to organised retail players on the back of GST, internet penetration, the growth of technically advanced start-ups, an increasing presence of major players such as Reliance Retail, Tata Group, Aditya Birla and the growing service-oriented middle class. However, even before the pandemic struck, the country's economic growth had been slowing down due to subdued consumption growth across sectors, right from automobile to consumer electronics to FMCG products.
During the pandemic
The nationwide lockdown dealt a serious blow to the sector. In July last year, the trader's body CAIT (the Confederation of All India Traders) estimated that Indian retail had suffered a business loss of about Rs 15.5 tn within 100 days of the lockdown in March 2020. Amid the turbulence, various trends emerged. Local kirana stores, along with e-commerce players like BigBasket, Grofers selling groceries, thrived, while retailers selling discretionary categories like beauty and cosmetics, fashion and apparel were adversely affected. Of these retailers, big companies with a strong balance sheet were able to manage the turbulence better as compared to small ones by following several cost-control measures. As the first wave of COVID started receding from the second quarter of FY21, retailers in tier-II and beyond cities and those having a presence in the high street experienced better recovery than the ones in malls. However, the recovery was ephemeral as the second wave of COVID triggered various regional lockdowns.
The present situation
COVID has led to a rapid acceleration in digital commerce. Retail players are now focusing more on a combination of digital and brick-and-mortar models. Reliance Retail, the country's biggest retailer by sales, has increased its physical presence by acquiring Future Retail and other group companies (the deal is yet to be finalised) and its digital presence by launching JioMart. On the other hand, Tata Group is planning to launch a super app to align its offline FMCG and retail business with the online one. Although it's difficult to paint the entire retail sector with one brush, COVID has definitely led to big players becoming bigger.
STOCK VIEW: V-MART
While other retailers focus on India, V-Mart is firmly rooted in 'Bharat'. This leading value fashion retailer operates a chain of stores in tier-II, tier-III and tier- IV cities. Its objective is to offer trendy and fashionable products at affordable prices. Founded in 2003 by Lalit Agarwal (the current MD), the company today operates 279 stores across the country. Of them, 161 stores are located in UP and Bihar. V-Mart follows a cluster-based model (a high concentration of stores in the 100-150 km area) when it comes to expanding its footprint. This strategy helps it manage supply chain and understand customer insights of a specific area better. Besides, the company increased its share revenue from private-label apparel to around 60 per cent in FY20 from 20 per cent in FY12.
The competitive edge
Like other retail players, the company also faced the brunt of the first and the second waves of COVID. Its sales in FY21 were down by 35.3 per cent, while the company turned loss-making. Recently, V-Mart raised Rs 350 crore to bolster its balance sheet and fund its capex plans. Retailers in tier-II and beyond cities are expected to see an improvement in footfall as compared to those based in tier-I cities. It is because of the better spread of e-commerce in tier-I cities and the fear of COVID among shoppers. Additionally, of all the apparel segments, value fashion is least vulnerable to a fall in Discretionary spending. The government's focus on increasing farmers' income and the expectation of a normal monsoon are likely to result in a booming agriculture sector, thereby benefiting the company, as most of its stores are located in tier-II and beyond cities.
Financials & valuations
Before the pandemic hit, the company had managed to increase its sales at a swift rate of 18.3 per cent through FY17-20. However, in FY21, its sales took a hit of 35.3 per cent. Higher fixed costs such as rent, salaries, etc., translated into a substantial decrease in profits (a loss of Rs 6.2 crore in FY21). V-Mart managed to run tight business operations in the past. Its working capital cycle has ranged from 35 to 50 days in the past few years, while the company has been able to achieve an operating margin of around 9-12 per cent. Although the stock has run up by around 80 per cent in the past one year, its current P/B (as of 30 August 2021) of 8.8 is not very far from its five-year median P/B of 8.4. The long term growth story remains there, however, an anticipated third wave can again force the retailer to close its shops.
ABOUT THE CHART AND THE TABLE
Sensex vs sector stocks portfolio
In the analysis above, we have given a three-year chart of the portfolio comprising the top stocks in the sector vis-à-vis the Sensex. This chart will help you assess the movement in the sector as compared to the market. The stocks considered for this chart are the ones given in the table of key stocks. It was assumed that one invested an equal amount in each stock three years ago. If a company was not listed three years ago, it was incorporated in the portfolio from its listing and the appropriate adjustment was made.
Key sector stocks
This table mentions the top stocks in the sector, along with their key financial stability numbers. Given that most companies in the sectors discussed have witnessed a significant drop in their profits, profitability related metrics may not be very useful. One must assess their balance-sheet and cash-flow strength. Following are the key columns in this table:
Net debt-to-equity: This is the debt to-equity ratio adjusted for cash and current investments. A negative ratio indicates more cash/current investments than debt. This is a comfortable position to be in.
Free cash flows: Cash flows from operations minus capital expenditure is free cash flows. They indicate that a company is able to incur capital expenditure from its own cash flows rather than depend on outside funding. This is highly desirable.
Cash flows from operations: This is cash generated from a company's operational activities. A positive value is desirable. A negative value indicates that profits, if any, are not getting converted into real cash, an undesirable scenario.
Interest-coverage ratio: It indicates how easily a company can service the interest on its debt. The higher the number, the better.
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