Vedant Fashions: 6 reasons why the future for VFL looks bright

With 640 stores and a pan-Indian presence spanning 250 cities, Vedant Fashions (VFL) has made a name for itself in the ethnic wear market, which is largely unorganized and underserved by brands (20% branded).

VFL has a sizable growth window due to its low level of competition, expanding cultural appeal, and high brand recall.

Improved operating metrics and plans to add independent stores, scaling up emerging brands (especially Mohey; about 10% of revenue) and serving the sizable women's celebration wear market (about 5x the size of the men's segment at INR735b as of FY20) can be the key growth levers. Further, expanding Twamev's upselling and Manthan's ability to capture the value of the fashion segment could underpin revenue growth moving ahead.

A challenging market to break into

The secret is to be brave. Due to the Indian ethnic wear market's continued fragmentation and difficulty of entry, the majority of clothing brands focus on Westernized clothing. The business has a high cost of retailing, a highly fragmented vendor ecosystem, seasonal inventory management issues, demanding customers who want to explore a wide range of products, and a demanding customer base.

Due to these difficulties, there are no significant wedding and occasion wear apparel players with a presence across all of India.

VFL has addressed these issues through -

a. Strong design skills and decisions based on data preventing discounted sales

b. Auto-replenishment model and a supply chain driven by technology

c. Superior margins thanks to exclusive vendor ecosystems and franchise-based EBO expansion.

Also Read: Reliance Consumer Products Limited's expansion strategy in FMCG : Home, Personal Care, Beverages, Dairy, and more

Superior cash conversion and ROCE

The magic of VFL has created a strong engine of growth with limited capital needs, leading to a superior balance sheet and cash flow. It is likely to garner INR 3.6 billion/INR 4.4 billion OCF (pre-IND-AS 116) in FY24/25E. VFL operates through a franchisee-funded FOFO model, implying a minimal annual capex requirement of INR 50 million.

This leads to a 1x asset turn and 41.1% EBITDA margin (pre-IND-AS 116), translating into an ROIC of 65.9% (pre-IND-AS 116) for FY24E. The high cash pile (including investments) of INR7.9 billion in FY23E and no leverage should ensure a high 40% dividend payout.

The inventory and receivable days have remained high at 196 and 139, respectively, in FY22 due to the inherently seasonal business and high inventory needs of the company. However, adjusted for the security deposit taken from franchisees, the receivable days contracted to 85.

Cash flow and working capital

The decrease in receivables days to 128 days in FY23 (from 139 days in FY22) was a major factor in the improvement of WC days, which increased to 151 days in FY23 from 164 days in FY22. This resulted from an increase in customer sales, which went from -2% in the third quarter of FY23 to 21% in the fourth quarter, releasing the receivables.

FCF post interest and lease liability rose by 31% YoY to INR 3.6 billion, driven primarily by a 35% YoY increase in EBITDA. The INR 1.2 billion dividend payment was made using FCF. Net cash increased to INR 8 billion in FY23 from INR 5.2 billion in FY22.

Product and channel mix

According to VFL, the groom's or bride's attire accounts for 40–45% of the company's annual sales. With a 40% CAGR over the past three years, the online market has maintained its position as a strong channel for non-wedding sales.

Within the larger 3,000-square-foot flagship stores, Mohey continues to have 25% of the available shelf space.

Inventory for Twamev is kept together with Manyavar. With a 26% CAGR from pre-Covid levels in international stores, the company's international revenue is increasing significantly.

As 60–65% of area additions were completed in 2HFY23 (full revenue would be reflected in a corresponding year), the effective SSSG for FY23 is anticipated to be 8% (v/s 16% area adds). The company is observing improved SSSG for stores close to rivals and is also gaining market share from the unorganized sector. The company anticipates SSSG to be in the mid-to-high single digits going forward.

Expansion

The company increased its retail space by 75,000 square feet in 4QFY23. Additionally, it increased its global reach by adding two EBOs during the quarter. The business opened a 20,000-square-foot flagship location in Jubilee Hills. The company is currently calibrating the inventory in smaller stores close to larger stores to increase store productivity.

Market competition and new brands

The opening of independent stores in Twamev is anticipated for 1QFY24. Four Twamev stores will be opened by the company in the first quarter of FY24, and Mohey stores are planned and should open soon. The business is observing strong SSSG above the company average within these brands, as well as an improved conversion rate and inventory rate. On a pilot basis, the company plans to open 8–10 stores in Twamev and 15–20 stores in Mohey. The performance will be tracked in order to determine whether to scale up further.

Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar

Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related investment-related decision.