Known for its diverse product range, from apparel to home goods, the company has consistently delivered strong financial performance. Its ability to tap into the vast Indian middle-income market has been a key driver of its success.
Impressive show
Vishal Mega Mart has demonstrated a strong track record of growth and profitability, with revenue rising at a compound annual growth rate (CAGR) of 26.3% between FY22 and FY24. The company’s focus on operational efficiency is evident in its healthy Ebitda margin of 13-14% over the last three years and an improving net profit margin, from 3.6% to 5.2% during this period.
Ebitda is earnings before interest, tax, depreciation and amortisation.
Chief financial officer Amit Gupta, in a recent press meet in Mumbai, highlighted that the company ranks among the top two players in city presence, net profit growth, same-store sales growth, Ebitda margins, and working capital when benchmarked against leading retailers, including Reliance Retail, Avenue Supermarts, and Trent. The company’s revenue is primarily driven by apparel, which contributes around 44%, followed by general merchandise and FMCG products, each accounting for over 25% in FY24. Its average same-store sales growth over the last three years stood around 17%.
Vishal Mega Mart has aggressively expanded its retail footprint, increasing its store count from 334 from March 2022 to 645 by September 2024. This growth has been primarily focused on tier-II and smaller cities, which now account for 70% of its total store network, up from 67% in 2022.
The company’s expansion strategy is evident in its rapid store payback period of just 19 months. This metric, calculated as store capital expenditure to annual store Ebitda, highlights the efficiency of its operations and positions Vishal Mega Mart as the leader in store payback among leading offline-first diversified retailers in India.
“The asset-light model strategy optimizes costs and reduces the payback period, currently around 19 months. The company aims to continue expanding into tier-2 cities and beyond, indicating significant potential for further growth across its pan-India store network,” said Vincent KA, research analyst, Geojit Financial Services.
Geographic gamble
Despite its rapid store expansion, Vishal Mega Mart’s revenue is heavily concentrated in a few key regions. Uttar Pradesh, Karnataka, and Assam together account for over a third of the company’s total revenue in FY24. The northern region, including Uttar Pradesh, contributes a significant 43%. However, the company’s presence in the western region, particularly in key markets like Maharashtra and Gujarat, is relatively limited, contributing only 8.3% of its revenue. The eastern region follows with a 29% share.
“We have a pan-India store footprint across 30 states and union territories. We are currently expanding into Kerala,” Gunender Kapur, managing director and CEO, said while acknowledging the issue. “After that, we will have only three more states where we do not have a presence: Tamil Nadu, Gujarat, and Maharashtra; and we would be launching in these states as soon as we are finished in Kerala in a sequential fashion.”
This can impact its future growth trajectory, say analysts.
“The company’s geographically concentrated revenue could impact its future expansion. To achieve a pan-India presence, a careful management of store expansion and operational efficiency is crucial,” said Kranthi Bathini, director of equity strategy, WealthMills Securities. “This is essential to maintain profitability in a complex retail business.”
Moreover, the company’s e-commerce business remains nascent, contributing less than 1% to its overall sales. Its online channel primarily comprises its website and mobile application.
Attrition woes and FMCG slowdown
The company has faced elevated levels of employee attrition, particularly among key managerial personnel. Its attrition rate doubled–from 20% in FY24 compared to 10% in the previous year–among the senior management personnel. While industry-wide challenges contribute to this, the company must prioritize retention strategies to mitigate future losses and ensure business continuity.
Meanwhile, inflationary headwinds are dampening urban consumer demand, impacting the FMCG sector, a key revenue driver for the company. This comes as a blow, especially after the recent recovery in rural markets. The shift in growth dynamics, as highlighted by Bizom’s data, poses a challenge to the company’s future growth.
“Given the FMCG slowdown in urban markets, the company’s future growth prospects will depend heavily on the quality and nimbleness of its management,” said WealthMills’ Bathini. “They need to be agile in adapting to economic changes, effectively managing supply chains and trade cycles, and seizing opportunities when they arise. This dynamic approach is crucial for sustaining growth.”
The Indian retail and consumer industry is highly competitive, with both organized and unorganized players vying for market share. As Vishal Mega Mart navigates this intense competition, it will be crucial to differentiate itself and capitalize on emerging opportunities.
Growing middle class
The Indian retail market witnessed robust growth between 2016 and 2019, expanding at a CAGR of 12%. This expansion was primarily driven by demographic shifts, government initiatives, and evolving consumer preferences. The rise of the middle-income class, particularly in tier-II cities and beyond, has been a key catalyst.
As of 2023, middle and high-income households constituted approximately 76% of households in tier-II cities and beyond. This figure is projected to rise to 82% by 2028. Moreover, 65-70% of the incremental growth in middle-income households between 2023 and 2028 is expected to originate from tier-II and beyond centres.
This burgeoning middle class is fueling consumption in tier-II and beyond cities. Consequently, these regions are experiencing disproportionate retail consumption growth compared to established tier-I markets, especially in underpenetrated categories such as packaged foods, general merchandise, and cosmetics & skincare. This shift in household demographics aligns with Vishal Mega Mart’s target market, providing ample scope to expand its presence and capture a larger share of India’s retail market.
