Electronics Mart India IPO

Electronics Mart India is India’s fourth largest retailer of consumer durables and electronics. According to a CRISIL analysis, it was the leading revenue player in the Southern region as of Financial Year 2020, dominating the states of Telangana and Andhra Pradesh.

Additionally, Bajaj Electronics – a brand owned by Electronics Mart India, is a very well-known brand among households in India. Be it NCR or several other regions, people are highly accustomed with retail shops having names as Bajaj Electronics or Electronic Mart India. In 2022, their number of operational stores reached to 105 stores comprising 93 multi brand outlets and 12 exclusive brand outlets.

So, this well-known company recently launched an IPO (Initial Public Offering), which recieved an enthusiastic response from investors. On the opening day of the IPO subscription process,   it was subscribed by 1,69 times. In addition, the IPO saw a fair amount of interest from retail investors as seen by the 1.98 times subscription rate. According to BSE data, it was oversubscribed by 3.14 times on Day 2 till 1 PM, with retail investors booking 5x, non-institutional investors 1.79x, and qualified institutional buyers 2x. Further market experts said that Electronics Mart India shares are currently commanding a premium or grey market premium (GMP) of Rs 34. With that, the shares of the company are all set to list on 17th Oct 2022.

So, let us take a check on whether it’s worthwhile to invest in the IPO or not, and if yes then what are the factors that make for an investable option So, let’s understand the same and do a little deeper analysis.

IPO Offer & Purpose

The IPO comprises of a fresh issue of equity shares of Rs 500 crore with no offer for sale (OFS) component, with a price band of Rs 56-59 per share. The issue goes on sale on October 4 and ends on October 7. The promoter holding will be diluted by 28.3% as a result of the new offering. Finally, the allocation will take place on October 12; those who are not allotted any shares will get reimbursements beginning on October 13.

Usage of IPO

According to the company’s prospectus, revenues from the offering will be used for general corporate reasons as well as additional working capital requirements, shop growth and openings, and debt repayment.

The company intends to use about Rs 111.4 crore to finance the expansion of its stores in Andhra Pradesh, Telangana, and Delhi-NCR. Additionally, it will use Rs 220 crores for working capital requirements, Rs 55 crore for loan repayment and prepayment to HDFC Bank, and the remaining amount for general business needs. And last, it intends to open a new store in Hyderabad.

Business Model & portfolio

With a focus on obtaining retail properties that offer excellent exposure and easy access to clients, the Company’s business model is a hybrid of ownership and lease rental.

The business sells consumer electronics, including computers, televisions, washing machines, and refrigerators. Additionally, it offers home electrical appliances such as geysers, ceiling fans, and kitchen equipment. It offers goods from well-known brands such as LG, Panasonic, Philips, Sony, Oppo, One Plus, and Vivo. Large appliances like refrigerators account for just over 50% of Electronic Mart’s product sales, while consumer electronics like mobile phones account for just over 31%.

Apart from two specialised stores under the name ‘Kitchen Stories,’ catering to kitchen specific-requirements, and one specialised store format under the name ‘Audio & Beyond,’ focusing on high-end home audio and home automation solutions, its multi-brand outlets operate under the brand name Bajaj Electronics.

As, company needs to maintain pre-stock of all these products, so it has a high working capital requirement as compared to normal sellers.

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SWOT Analysis to gain deeper insights into the business & Industry:

Strength

There are 112 stores in total, of which 100 are multi-brand outlets and 12 are exclusive brand stores. Despite the pandemic’s disruption of its operations over the past two years, it kept opening additional stores. As a result, this became the business’s strength in the shape of a larger outlet base.

Further, the company has been working together with diverse businesses for up to 15 years, and it is connected to more than 70 distinct brands. As a result of this collaboration, the business was also able to introduce EBOs.

Weakness

The moat around this company, though, isn’t very large. With competitors like Reliance Retail (via Reliance Digital), Croma, and Vijay Sales, Electronic Mart works in a cutthroat market. However, Aditya Vision is the only listed peer that comes to mind.

Second, retail sales of electronic goods do not have high profit margins. As retailers have little pricing power, this means that the only option to increase profits is through increasing quantities. Rapid revenue growth isn’t guaranteed in a market where competitor brick-and-mortar stores and e-commerce businesses frequently use discounts.

Opportunities

Based on its annualised FY23, Electronic Mart’s IPO is priced at the upper end of the pricing range at a pre-issue PE ratio of about 11. (Based on Q1FY23 results). At the upper end of the price range, the post-issue PE ratio is about 15 times annualised FY23 earnings. This is much lower than the TTM PE of about 33 for Aditya Vision.

The company has been actively growing, and the profits from the IPO will be used to open more locations. Thus, it will have a better chance to enter additional markets and grow their market share.

Threat

The trademarks and brand names for Electronics Mart India, Electronics Mart, and Bajaj Electronics, among others, are not owned by the corporation. The company runs retail locations under the names Bajaj Electronics and Electronics Mart India.

Further, it is currently defending itself in court against a lawsuit brought by Bajaj Electricals. Which therefore translates into a big threat, as Electronics Mart India won’t be permitted to use the name Bajaj Electronics outside of Andhra Pradesh and Telangana if the court rules in favour of Bajaj Electricals’ legal arguments.

Additionally, there are roughly Rs 80 crore in pending lawsuits against the company for avoidance of goods and services tax. The corporation is currently embroiled in a legal battle over the GST authorities’ demands. If it loses these legal battles, there will be a significant outflow of GST dues.

The ecommerce activity in the electronics industry is substantial, and its consumer base has expanded over time. Even while retailers still rely on a substantial portion of the market, there is a good chance that e-commerce will gain market share in the appliance sector. Lastly, other merchants, such as Reliance Digital and a number of unorganised businesses also, compete with the enterprise.

Fundamental Analysis

The business struggled to control its activities, which were on the verge of being shut down, during the pandemic. While the covid was causing mayhem, the company did see a slower rate of revenue growth, but it was still incurring capex to open more stores while rivals were preoccupied with their own internal problems. Due to this, the company was unable to report any significant revenue growth in FY21, but it was successful in utilising the benefit of an increased store count in FY22. The same can be seen in the graph below.

Even with such revenue growth, margins did not significantly increase, as seen by the meagre 30 bps increase in EBITDA margins from FY21 to FY22. While at the same time, revenue increased by over 36% YoY. As a result, the business needs to open more outlets and increase its consumer base. This is due to the fact that more quantity will result in higher margins as the company’s products can provide higher revenue but not substantially higher profits, as described in the weakness.

Moreover, the company has produced operating cash flows and free cash flows over the past two years, despite the fact that its capital-intensive business strategy necessitates a rise in working capital as revenue growth accelerates. This further persisted in Q1FY23 as well. As a retailer of consumer electronics, the business needs to make a large upfront purchase of goods to guarantee stock availability at its stores. This demands a substantial working capital investment.

Brokerages and Our View:

Electronics Mart India offers higher revenue growth, nearly a 17% CAGR over two years, a higher return on equity, and an expansion strategy in pipeline. So, investors can view this valuation as reasonable if they take into account all the favourable aspects. Few brokerages propose subscribing to this favourable value, but investors should also take into account the threats-related data, which make the valuation more grounded.

Investors considering Electronics Mart India’s initial public offering (IPO) should be aware that they will be funding a low-margin, non-moat business. However, the business does make money. Therefore, if someone is thinking about investing in the IPO, they can benefit from listing gains. However, in the long run, it would be crucial to keep a careful eye on potential risks to the business and the success of the company’s expansion goals.

“We believe EMI is being offered at attractive valuations at PE of 21.8 times FY22 and EV/Ebitda of 9.7 times. We recommend subscribing to the issue,” Nirmal Bang said. Angel one also had the similar views while calling it to be reasonably valued and therefore recommended subscribing to the IPO.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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