Vishal Mega Mart Limited (VMM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Vishal Mega Mart Limited Q1 FY '26 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Agarwal from Strategic Growth Advisors . Thank you, and over to you, sir.

Yes. Good afternoon, everyone, and thank you for joining us on Vishal Mega Mart Limited Q1 FY '26 Earnings Conference Call. We have with us Mr. Gunender Kapur, MD and CEO; and Mr. Amit Gupta, CFO. I hope everyone got an opportunity to go through our financial results and investor presentation uploaded on the company's website and stock exchanges. We will begin the call with opening remarks from management, following which we will have the forum open for question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and the disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now like to invite Mr. Gunender Kapur, MD and CEO, to give his opening remarks. Thank you, and over to you, sir.

Okay. Thank you very much, Rahul. Very good afternoon, ladies and gentlemen, and welcome to the Vishal Mega Mart earnings call. I will very briefly take you through the key highlights for quarter 1 '26, and then we will maximize the time for Q&A. Our business grew by 21% in the quarter. This was based on a same-store sales growth adjusted of 11.4% and of course, new store openings, which were in an absolute sense, 23 number. The gross margin of the business improved from 28.2% to 28.4% in Q1 '26. The EBITDA margin improved from 14.1% to 14.6%, on an adjusted basis, which is pre-ESOP charges and pre-Ind AS 116, it improved from 9.3% to 10.3%. Our PAT improved from 5.8% to 6.6%, and our PAT adjusted for ESOP charges improved from 6% to 6.9% this year. I'm sure all these numbers are with you. In this quarter, we've opened, as I mentioned, 23 new stores. And we've also opened in the quarter 1 store in Maharashtra and Gujarat as a pilot, and I had spoken briefly about this in the last earnings call. As of June end, we now have 717 stores. We are present in 472 cities. We've added 16 cities in this quarter with a total trading area that is 12.4 million square feet. The contribution of our private brands continues to improve in the current quarter in Q1 '26, that is. It is 75.8%, which is 170 basis points improvement Y-o-Y. Our quick commerce business has expanded now to 670 stores across 445 cities in the country. And the number of consumers and customers who are registered on quick commerce has increased to 10 million people. So with these very brief comments on the quarter results, I will now open the floor for questions.

[Operator Instructions] We have our first question from the line of Vivek from Jefferies.

A few questions, please. First, before we -- before I ask you about your business, GK, can you just talk about the -- how -- what trends are you seeing on the ground, briefly about the consumer sentiments, et cetera, whatever you're picking up?

Sure. Firstly, good afternoon Vivek. I can share very personal perspective. I think the expectation continues that the consumer demand will improve after the changes, which were announced on income tax, and that expectation continues. While we do not quite operate in the rural areas, as you know, all our stores are in the urban centers. I have heard in the marketplace that there is some uptick in the rural demand. So yes, first, the expectation that the consumer demand will improve on the back of more money in the hands of consumers and market sources say that there is some uptick in the rural demand. So yes, that's what I've heard, Vivek.

The second question, GK, last quarter, you had mentioned that operating leverage benefits, whatever that you derive, this will be ploughed-back into growth. And this quarter, of course, it's a welcome thing that margin has moved up. But how do you think about from a full year perspective or medium-term perspective on the, let's say, pre-Ind AS margins because I think that's more relevant after the rental cost.

So Vivek, if I recall correctly, and I may be wrong, we have said that the gross margins will remain flat. And as you would notice in the quarterly results, gross margins have improved, but slightly from 28.2% to 28.4%. And as a combination of this and the operating leverage, our EBITDA margin has improved from 14.1% to 14.6%. So I would just, Vivek, for the sake of clarity, repeat that we will keep our gross margins constant. And any improvement in the gross margin would be significantly invested back in growth and improving quality of a business. But our EBITDA margin will continue to improve basically at the back of operating leverage.

And my bad if my understanding was incorrect. Lastly, GK, if we look at some of the retailers in India, a decade back or 20 years back, they started with a journey where own labels started at a smaller proportion. And ultimately, in at least fashion side, it has become 100% of their overall retail sales today. Where do you think your own labels will settle at in the next 5, 10 years?

So firstly, Vivek, in the clothing business, 100% of our business is private brands now. So clothing specifically, yes, it will stay at 100%. But the improvement will largely happen in general merchandise and FMCG. So the increase that we are seeing in the overall gross -- overall contribution of private brands in this quarter, it's mostly in FMCG and general merchandise. That trend will continue, but it may not grow at the same pace as we've grown historically in terms of percentage because quite obviously, the easier and the larger opportunities have already been exploited. So apparel will stay at 100%. GM and FMCG will continue to improve over the years. That is where we are at the moment, Vivek.

We have our next question from the line of Percy Panthaki from IIFL Securities.

Congrats on a very good set of numbers. My question is on the margins. So this quarter, pre-Ind AS basis, you have almost touched 10%. Just wanted to know your normal seasonality in a normal year, is Q1 higher than or lower than the full year margins?

So I'll tell you in slight detail as to how it pans out. Our quarter 1 is typically good. Our quarter 3, which is the festive quarter is the best. And relative to these 2 quarters, quarter 2 and quarter 4, with the End of Season Sale and we have events like Shradh, which is, for example, this is in September. So quarter 2 and quarter 4 are relatively muted. Quarter 1 and quarter 3 are very good. Between the 2, quarter 3 is higher.

Understood. Very clear. And just wanted to understand on margins, how you look -- you did reply to Vivek, but just confirming that, that as long as you get operating leverage, you would be okay to let margins expand. There is no limit to that number. You're not capping it saying that even the operating leverage will be reinvested at some point of time.

No, we are not saying that at all. But I must say that the improvements on the EBITDA margin at the back of operating leverage will be in the same ballpark as they've been in the past, which is 0.2, 0.1, 0.3, the similar ballpark.

The next question is from the line of Latika Chopra from JPMorgan.

I just wanted to double-click on SSG. At 10.5%, it has clearly outperformed most of the other retailers in this quarter and despite some of the festivities moving in Q4 of last year. At a very broad level, we understand the key most of your business. But what is driving this extent of outperformance versus peers? Also, I heard you talking about improving demand environment. Does that give you a confidence that in sustaining this double-digit kind of SSG momentum for the rest of the year? And if you could give incremental flavor also on how much of this is transaction-led versus, say, mix led?

Latika, I just wish to confirm the first thing which you said. Our performance this quarter was indeed to a very small extent, impacted by the fact that Ugadi and Eid Festivals, which were in April last year, this year, they were in March. So yes, so that is absolutely correct. What was the second?

Growth driven by the transaction.

So Latika, our growth in quarter 1 was largely driven by transactions with a smaller contribution coming from people buying more items and people upgrading to higher price points. The largest contributor to the growth was the improvement in the number of transactions.

Understood. And the other part of the question was your confidence levels in sustaining this kind of momentum of double-digit SSG since some of your peer groups have clearly not delivered this kind of numbers. I'm just trying to understand, clearly, execution momentum would keep numbers at these levels.

So Latika, I can summarize my feeling by saying that our endeavor every quarter would be to ensure that we are consistent with our past performance. If you recall, we had said that earlier also. So I can reconfirm that statement that our endeavor, our effort would be absolutely, in a very disciplined manner, directed towards ensuring that our performance is consistent with our past performance.

Understood. And second piece, just on margin side, any incremental thoughts on what are you sensing on labor inflation and rental inflation in general? And how should one think about that?

So as you know, the rental inflation will happen as per the lease contracts that we sign with the landlords. And that is typically 5% per annum. The wage inflation will also happen in the ballpark of 5% to 7%. It is a bit dependent on when the state elections happen, et cetera, because that's the time the minimum wages go up. And they may go up by more than 5%, 7%, which I just mentioned. But that's typically the kind of wage inflation that we have experienced and our expectation that will be that it will be in a similar ballpark. Beyond that, as you know, commodity prices are more stable at the moment and very difficult to predict on commodity prices, how they'll pan out given the global context. So yes, so we are just very vigilant and watching how those prices pan out.

We have our next question from the line of Nihal Mahesh from HSBC.

Two questions. First, in the quarter, we did mention, obviously, about the benefit of operating leverage. Just to clarify for the other expenses, we saw a growth similar to top line despite 10% SSG. So what has driven this kind of a high increase in the OpEx for us, just to understand better?

So our total expenses have gone up basically, as I mentioned, on account of the contracted rentals going up, on account of wage inflation, on account of our marketing expenditure. And yes, those are the key elements which have contributed to our increase in expenses. And there is really nothing else beyond that.

Understood. GK, the second question was on the private label share. I think last quarter, you did mention that at least in the FMCG business, around 60% of the volumes and around 35% of value happens via the private label business. Just to understand that from here, just like in apparel, is there an aspiration to take this number to 75%, 80%? You just mentioned right now on the call that maybe the low-hanging fruits have been taken. But is the aspiration to keep inching this up or the number staying at the current level is also something that you find that?

No, our endeavor again would be to ensure that this number keeps inching up. But I did mention that the pace of increase as a percentage would probably be lower than when we started with the private brand agenda. But yes, I can confirm that the number will keep improving, both in general merchandise and FMCG.

Just one follow-up here that incrementally, the hindrance is more about certain categories having an adoption or from a supply chain perspective, maybe getting our offerings in place to be equally good or better than, say, what branded competitors are offering?

So it will be on two fronts. One is, of course, the smaller the category, the more challenging it becomes to create a supply chain for a private brand because the volumes are very low. So that, of course, is one challenge. And as you would know that the larger categories have largely been done. And what is left is the smaller categories. And the second factor would be that categories which are highly emotional in nature and where the emotional content of the benefit of that category or brand is very high, we would be -- our adoption would be somewhat slower because we don't advertise in mass media or individual private brands. So quite obviously, where the emotional content of the brands is very, very high, and you can think of many examples of that in FMCG. There, of course, our adoption in our expectation would be somewhat slower. So both the factors. The supply chain for smaller categories because of very low volumes would be somewhat more challenging and expensive and also the brands where for example, soft drinks and things of that sort, the relevance and adoption of a private brand could be somewhat lower.

We have our next question from the line of Gaurav Jogani from JM Financial.

Sir, I have only one question with regards to the competitive intensity, I mean, we see there is a lot of expansion by players not only in the apparel space, but even the largest grocery player is also kind of expanding in the northern part of India. How do you see the competitive intensity impacting your overall cost items even in terms of rental, there will be more demand for the space, more demand for labor. So your incremental addition, does this impact the cost dynamics in any way?

Okay. So quite honestly, competitive intensity at this level, what we are experiencing at the moment has been a feature of our industry for the last 3, 4 years, actually after COVID. It has never really gone down in a significant way as far as expansion is concerned by all the other organized sector players. So that continues, and you're absolutely right there. And our approach in this situation is to be very disciplined about our execution. And by that, what we mean is that we get properties in the right locations and do not take a large risk there. We get properties with the right level of rentals and do not take a huge risk there. And we execute brilliantly in terms of opening new stores and running new stores because our goal remains the same, which is to open successful new stores and focus. So yes, in summary, I can say that the competitive intensity has been at this level for quite some.

We have a next question from the line of Tejash Shah from Avendus Spark.

Congrats on a very good set of numbers. GK, just you briefly mentioned on consumer sentiment and very much kind of our SSG seems to be doing far better than what the broader consumer sentiment seems to be. So just two dimensions there. Has the footfall improved for us or the conversion rate has improved dramatically, a; and b, do you think we are gaining disproportionate market share in our relevant market? Or is it not trackable on a live basis?

Okay. Great. See, our growth, SSG this quarter has been largely driven by increase in footfall, right, by increase in transactions. the contribution of people -- existing customers buying more number of items has been lower, relatively speaking. Now given the fact that we are largely gaining new footfall and that is driving our same-store sales growth, my speculation is that we are gaining market share.

Perfect. And we were running some pilots in Gujarat and Maharashtra last time when we spoke. So any update on the same, where are we on that?

Okay. Great. I'm happy to report that we have opened in June quarter, 1 store in Gujarat. Now we have two new stores in Gujarat, in Naroda, Ahmedabad and one in Anand. And equally, we have one new store in Maharashtra in Pune, Talegaon. Of course, it's too early to come to a conclusion on the performance, but I can tell you that the early signs are very encouraging. And based on that, we have actually now started looking for incremental properties in both these states.

Sure. And the last one, if I may. GK, there was an unfortunate incident in Karol Bagh store. So how are we ensuring or what measures are we taking so that at least on the safety side, we are not compromising for our store -- current network and the future network?

So firstly, the incident in the Karol Bagh store was absolutely the most horrible and deeply distressing thing which has happened to our business ever since we started operations 13, 14 years back. I cannot recall anything which has been more depressing and more distressing for us. And we mourned the loss of the two lives, and it has been an episode, which we will probably never be able to forget. Now shifting gears to the second part of your question. Immediately after that episode, while we are still waiting for the final conclusion by the regulators on what specifically happened there because as you can imagine, the store was immediately sealed after the fire incident, and we still do not have access to the store. So we are waiting for the conclusions to be arrived as to what exactly happened. But in the meantime, we have contracted the two best fire management companies on the planet and asked them to review our fire management systems and actually apply their latest technologies in our stores. So there is a very large pilot, which has already started and ensuring that we upgrade our stores to the latest level of understanding, knowledge and expertise. So that's at one level. So there is -- I wish to confirm that there is a pilot which has already started with both of them. And these are the #1, #2 in the world. At the same time, we have launched a major training campaign for our store employees and reviewed all the SOPs at the store, and the compliance of the SOPs at the stores with a lot of focus and daily rigor. So we are dealing with the issue on both the fronts. One is to upgrading our fire management system to what is absolutely the latest and best in the world in the stores, including processes and at the second level to ensure that the compliance with SOPs and the daily execution of the SOPs, which are critical for any fire management process is being monitored, reviewed and corrected every day of the year in 100% of our stores.

We have our next question from the line of Sagar Tanna from Alchemie Capital.

Can you talk more about our quick commerce and how is it shaping up, especially in the 3 categories? And what are the trends that you are seeing in those micro markets?

So yes, sure. So firstly, we -- as you know, we are continuously expanding our quick commerce offering to our consumers and customers across our stores. So at the end of June quarter, we were servicing 670 out of the 717 stores that we have and the quick commerce benefit was available in [ 445 ] cities in the country. There are now 10 million customers who are registered on quick commerce. And the contribution of quick commerce to our overall store revenue is improving. I can give you a range for the very new and highly competitive towns, it could be 2% to 3%. But in towns where we've been there for a while and which also are somewhat less competitive, our contribution is as much as 6% to 8% of the store revenue. So it's a constantly developing and evolving situation because every day, we are adding new stores. And therefore, all the stores are at very different levels of evolution. But I can confirm to you that we are very satisfied with the way it's progressing.