Review, GMP, valuations: Should you subscribe to Electronics Mart IPO?

The grey market premium (GMP) on Elecrtonics Mart India's (EMI's) shares was Rs 30-35 apiece, translating into a listing pop of up to 59 per cent

Electronics Mart India’s Rs 500-crore initial public offer (IPO) has opened for subscription on Tuesday, October 4, at a price band of Rs 56-59 per share. The offer, which is entirely a fresh issue, will close on Friday, October 7. 
 

Fifty per cent of the net issue are reserved for qualified institutional buyers, while 15 per cent, and 35 per cent of the net issue is reserved for non-institutional bidders and retail investors, respectively.
 

Ahead of the IPO, the company raised Rs 150 crore from anchor investors at a price of Rs 59 per share. Among the foreign portfolio investors, shares were allotted to PineBridge Global Funds, Societe Generale – ODI, and Cohesion MK Best Ideas Sub-Trust.
 

Meanwhile, Nippon Life, HDFC Trustee Co Ltd, Motilal Oswal Midcap Fund, Aditya Birla Sun Life Insurance Company, Sundaram Mutual Fund, White Oak Capital Flexi Cap Fund, Abakkus Emerging Opportunities Fund-1, Tata AIA Life Insurance Co Ltd, and Mirae Asset Balanced Advantage Fund were among the domestic investors that participated in the anchor book.
 

Seven domestic mutual funds, through 12 schemes, invested Rs 90 crore, accounting for 60 per cent of the total anchor book.

About the company

Electronics Mart India is the 4th largest consumer durable and electronics retailer in India with a leadership position in South India. It is a multi-brand retailer dealing in home entertainment, mobiles, laptop, home appliances, camera, kitchen appliances, and personal care.
 

With around 97 per cent contribution to the revenue from the sales of products, retail is the main business activity of the company. Wholesale, and e-commerce activities, meanwhile, contributed around 2 per cent, and 1 per cent, respectively during fiscal year 2018-19 to 2021-22 (FY19-22).
 

The company operates 89 multi-brand outlets (MBOs) under the brand name “Bajaj Electronics” in Telangana, and Andhra Pradesh, eight MBOs under the name of “Electronics Mart” in the NCR region.
 

Financials

EBIL’s profitability declined between FY19-22 due to higher cost of sales. With net addition of 44 stores during the period at a CAGR of 20.4 per cent, and 4.2 per cent CAGR decline in sales per stores, the company reported a 15.3 per cent CAGR rise in the business from the retail sales of products. 
 

Consequently, consolidated revenue increased by 15.5 per cent CAGR to Rs 4,349 crore in FY22. Cost of revenue increased by 16.1 per cent CAGR, leading to a 146-basis point contraction in gross margin. 
 

However, relatively lower other operating expenses led to a 94-bps contraction in ebitda (earnings before interest, tax, depreciation, and amortization) margin, which stood at 6.7 per cent in FY22. Consolidated ebitda increased by 10.6 per cent CAGR to Rs 292 crore in the same fiscal. Consolidated net profit was Rs 104 crore in FY22, with net profit margin at 2.4 per cent.

The company reported a positive operating cash flow during the period, with 20.7 per cent CAGR growth, and an average operating cash flow of Rs 73 crore. Financial liabilities increased by 18.2 per cent CAGR, however debt-to-equity ratio marginally improved from 2.1x in FY19 to 2x in FY22.
 

Grey market premium (GMP)

As of October 4, the GMP on EMI’s shares was Rs 30-35 apiece, translating into a listing pop of up to 59 per cent. 

Should you subscribe?
 

Nirmal Bang Research | Subscribe

EMI enjoys favorable terms of pricing/margins from brands due to its scale. It has demonstrated superior financial performance in terms of growth with revenue CAGR of 26 per cent over FY15-20 (pre-Covid), and return on equity (ROE) of 17.4 per cent during the Covid impacted year of FY22. We believe EMI is being offered at attractive valuations at PE of 21.8x FY22 and EV/EBITDA of 9.7x FY22.
 

Choice Broking | Subscribe

The organized market share expanded from around 40 per cent in FY13 to 58-60 per cent in FY20. According to Crisil Research, the share of the organized market in consumer durables retail is likely to expand to 70-75 per cent by FY27.
 

Given that EMIL plans to expand reach across select geographies, and deepen the footprint in existing markets; enhance sales volumes; indulge in technology led effective inventory management and lean operating structure to maintain, and improve operating efficiencies, the outlook for the company remains robust.

Religare Broking | Neutral

Highly competitive intensity across industry, and high concentration in the south region are among key risks. EMIL is the largest regional organized player in the southern region in revenue terms with dominance in the states of Telangana and Andhra Pradesh. 
 

Canara Bank Securities | Subscribe for long-term

The company prioritizes profitability of the store before expansion, and is focused on enhancing the sales volume. It has one of the highest margins among peers with a decent revenue growth. Considering the emerging demographics in India, backed with rising per capita income, improving power situation, multiple financing options, there is a scope for organized electronic retail segment to grow.
 

Angel One | Subscribe 

The post-issue P/E works out to 21.8x FY22 EPS (at the upper end of the issue price band) which is low compared to its peer Aditya Vision Ltd. Further, EMIL has better revenue growth, better return on equity, and expansion plan on the cards. We believe this valuation is at reasonable levels.