ICRA stated that the rating upgrade factors in V2 Retail’s (VRL) better-than-expected performance in the current fiscal, led by a sustained improvement in the scale due to healthy increase in sales per square foot and robust same store sales growth.
This has resulted in a healthy improvement in debt coverage indicators in the current fiscal with an interest coverage of 3.4 times in 9M FY2024 and debt to OPBDITA of 3 times in 9M FY2024.
ICRA expects the company to report nearly 30% growth in turnover and an operating margin of 12-13% in FY2024. VRL is likely to sustain its healthy revenue growth and profitability in the coming fiscals.
Following the pandemic, there was a significant inventory build-up at the stores, which had moderated the company’s liquidity profile. Increased reliance on working capital borrowings resulted in a deterioration in its coverage metrics till H1 FY2023.
However, from Q3 FY2023, led by healthy recovery in sales and liquidation of the built-up inventory, the company’s liquidity position improved, as corroborated by better working capital intensity, lower utilisation of working capital facilities and adequate cash and bank balances.
Nevertheless, given the company’s new store addition plans in the upcoming fiscals, its ability to maintain a healthy liquidity cushion will remain a crucial determinant of its credit profile.
The ratings continue to draw comfort from the company’s position as an established value retailer in the country and the extensive experience of its promoters in the retail sector.
Operationally, the company benefits from a healthy share of private label sales, backed by backward integration, its wide geographical presence, and established relationships with a wide and diversified vendor base that optimises its cost structure.
The above strengths are, however, partially mitigated by the company’s working capital intensive nature of operations owing to high inventory levels, which led to moderate coverage indicators and limited cushion in working capital limits barring some improvement in the current fiscal.
Moreover, the operating margins have remained thin in the past owing to intense competition from new entrants in the value retailing segment.
V2 Retail currently operates 107 retail stores, which mainly sell fashion apparel for men, women and children along with lifestyle products from its stores located primarily in India’s tier-II and III cities. The company’s presence is primarily concentrated in Uttar Pradesh, Bihar, Odisha, Jharkhand and Assam. The company is mainly focused on the value retailing segment in India, catering to mass-market consumers.
The scrip fell 1.93% to currently trade at Rs 416 on the BSE.