We begin coverage on Vedant Fashions (VFL) with a Reduce rating and DCF-based FV of 1,000 Rs. VFL is uniquely positioned to take advantage of rising cost of branded goods. In addition, we like its high gross margins, active-light franchise-driven model and strong brand connectivity with customers. We expect a healthy revenue / EBITDA / PAT CAGR of 21% / 20% / 20% over FY2022-25E, stable return ratios and FCF generation. Upscaling newer brands will help drive growth in the medium term. At 57X FY2024E P / E we find the valuations full.
Largest Indian wedding and party wear player: VFL is best known for its selection of Manyavar-branded wedding and party wear for men. Manyavar has steadily expanded its share of the menswear market. Only 15-20% of the party wear market is currently organized; combined with rising expectations and spending on wedding attire, we believe the target opportunity for VFL is great.
Manyavar brand-led asset-light model with strong supplier and franchisee relationships: VFL operates an asset-light business model driven by franchisee-driven EBOs. It had 595 EBOs in March 2022, covering 223 cities and towns in India as well as 12 international locations. VFL has strong relationships with suppliers (for work, material procurement) as well as 300+ franchisees who invest in the EBOs. Manyavar is the flagship brand, accounting for 84.2% of sales in FY2021.
Expect decent revenue / EBITDA / PAT CAGR over FY2022-25E: We model a healthy 21% and 20% revenue and PAT CAGR over FY2022-25E driven by constant SSSG of 7% (FY2024 onwards), higher EBO footprint, stable gross margins -67% and growth in the e-commerce channel. VFL had a healthy net liquidity of DKK 5.2 billion. Rs in March 2022, which we expect will go up to 13.8 billion. Rs in March 2025.
We like the model and the option, but find valuations rich: We start coverage with a Reducer rating and a DCF-based FV of 1,000 Rs. Our DCF is based on sound growth assumptions: FY2022-45E revenue CAGR of 15%, gradual EBIT margin expansion to 40%, WACC of 12.5% until FY2033 (lower WACC thereafter) and terminal growth rate of 5.5%. Lack of demand, inability to manage the franchise network, supply chain / supplier problems and inability to handle changing customer preferences are key risks.