MOSL initiates coverage on Vedant Fashions with a ‘buy’ call, sees 27% upside; here's why

Domestic brokerage house Motilal Oswal (MOSL) has initiated coverage on retail stock Vedant Fashions with a ‘buy’ call and a target price of ₹1,400, indicating a potential upside of over 27 percent in the next 12 months.

The stock has been in the red in 4 of the last 5 months. Since November last year, the stock has shed over 24 percent. Just in 2023 YTD, it has lost around 18 percent. It has fallen 9 percent in March so far. While it gained around 2 percent in February, it had cracked 11 percent in January.

"The Indian ethnic wear business is a difficult business to replicate, given its high customer needs and complex inventory management. This gives Vedant Fashions an inherent competitive advantage," said the brokerage.

Also, the company has a) a large-scale multi-year growth opportunity, b) no intense competition, and c) a strong margin and return on capital employed (ROCE) profile, which are other key positives for the stock, stated the brokerage, adding that VFL’s franchisee model ensures limited store-related investments and working capital needs.

Notably, the management’s disciplined growth approach, as evident from Mohey and Twamev’s gradual scale-up, has ensured it does not face the risk of bloated working capital and aggressive write-downs, which can hamper its profitability and retract scale, further highlighted MOSL.

It expects the company to report revenue and PAT CAGR of 21 percent and 22 percent, respectively over FY23-25, driven by 15 percent footprint additions.

Manyavar

The brokerage noted that VFL, through the brand Manyavar, has created a strong brand in the deeply underserved men’s ethnic wear market.

"Catering across price points, the brand offerings include a complete ready-made wedding and occasion wear, solving age-old hassles of long lead time and unimpressed wedding attire trousseau. With a revenue scale of ₹1,340 crore (FY23E) across 640 stores, it has built a pan-India presence with limited competition. VFL’s strong brand recall, thanks to it curated marketing strategy with celebrity brand ambassadors and emotional theme-based campaigns has created an aspirational brand yet value for money with industry-leading margins and return profile," observed the brokerage.

It further informed that the men’s celebration wear market – Manyavar’s addressable market – stood at ₹13,300 crore as of FY20. However, it has registered a CAGR of 6 percent over the last five years.

Mohey

While Manyavar remains VFL’s crown jewel, the brokerage predicted that Mohey – the women’s wedding celebration wear category – is a potential game changer, being 5x the size of the men’s segment at ₹73,500 crore (FY20). Further, there are no large non-Saree women's ethnic wear players in the market.

"VFL has taken small steps over the last five years to ensure it does not have to retract, but with 100+ flagship Manyavar stores already selling Mohey’s nucleus of women’s lehengas, sarees, and gowns, it is now poised to try a few independent stores. The company targets to improve store productivity and conversions, and also reduce dead stock rate. We view this as a strong growth lever that could over time contribute meaningfully to revenue share," it said.

Other VFL brands

Twamev, the premium format, is also in its infancy stage which could aid in upgrading Manyavar and Mohey’s customers with a few independent stores. Manthan, the mass market ethnic wear brand, could help create scale through online and MBO routes, it further added.

Margins: MOSL also explained that VFL’s ability to garner gold standard profitability with gross/EBITDA margins of 67.4 percent/49.2 percent and ROCE of 28.7 percent in FY23E is attributed to three key factors: a) right store size and healthy conversions that lead to strong store productivity (revenue/sqft), b) a healthy 4-5x cost-to-MRP ratio with right inventory planning and no dead stock and c) a healthy franchisee-led EBO model with a margin that validates its brand value and allows it to offload part of the inventory to franchisee through security deposits, and create scale by deploying limited upfront store capex.

Bull and bear case scenarios

In its bull case scenario, the brokerage has a target price of ₹1,750 for the stock, indicating an upside of 59 percent.

"In our bull case scenario, we assume an 8 percent CAGR in-store productivity (revenue/sq ft) over FY23-25E v/s a 5 percent CAGR in the base case. We assume a 25 percent/30 percent CAGR in revenue/PAT over FY23-25E. We expect revenue to be driven by improved productivity within in-store sales and the scale-up of other brands within stores," the brokerage forecasted.

In its bear case scenario, the brokerage has a target price of ₹945, indicating a downside of 14 percent.

"In the bear case, we assume a 2 percent volume CAGR over FY23-25E v/s a 5 percent CAGR in the base case. We assume a 17 percent CAGR in both revenue and PAT over FY23-25E. Slower revenue growth can be attributed to a slower pickup in new categories, which hurts store productivity and expansion growth," said MOSL.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.