V-Mart Retail Limited (Vmart) is tapping the capital markets with its IPO for 44.96 lac shares which has opened on Friday the 1st of February and closes on Tuesday the 5th of February. The issue comprises of a fresh issue of 27.61 lac shares and an offer for sale of 17.35 lac shares. The price band is Rs 195-215. The company had made allocation to anchor investors of 6.74 lac shares at Rs 210 which is the same price at which pre-IPO investors came in with an allotment for 12.5 lac shares.

Business

Vmart is one of the pioneers in setting up stores across various small towns and cities including Sultanpur, Ujjain and Motihari. The company primarily operates in Tier-II and Tier-III cities, with a chain of “value retail” departmental stores offering apparels, general merchandising and kirana catering to the entire family.

The company currently operates 62 stores spread across 53 cities spread over 10 states and union territories with a total area of 5.06 lac square feet. The stores are located in New Delhi, Gujarat, Uttar Pradesh, Bihar, Punjab, Chandigarh, Haryana, Jammu and Kashmir, Rajasthan and Madhya Pradesh. The stores operated by Vmart are primarily located as standalone stores in high street areas and shopping hubs of the cities in which they are located. The typical size of the store is 8,000 square feet.

The company has three business verticals namely Apparels, general merchandise and Kirana Bazaar. Of the present 62 stores, 39 stores are mini hyper stores retailing all three verticals while 23 are family fashion stores which are focussed on apparels and general merchandise. The fashion or apparels business caters to men, women, boys, girls and infants. The company’s primary concept is guided by the principle “SabseSasta, SabseAccha” and “Price ‘less’ fashion”.

Objects of the Issue

The objects of the issue are as follows: –

The company would be raising a sum of Rs 53.83 crs at the lower end of the price band and Rs 59.36 crs at the upper end of the price band through the IPO. It has through the pre-IPO already raised Rs 26.25 crs which would make the total amount raised by the company at Rs 80.08 crs at the lower end and Rs 85.61 crs at the upper end of the price band.

Financials

The revenues of Vmart have been growing consistently and have grown from just under Rs 100 crs in 2008 to Rs 281.9 crs in the year ended March 2012 and to Rs 250 crs in the eight months ended November 2012. There was one bad year in the middle when in March 2010 the revenues inched up from Rs 142.3 crs to Rs 144.1 crs compared to the previous year. The net profits have grown from Rs 3.5 crs in 2008 to Rs 11.1 crs in March 2012 and now to Rs 13.1 crs in the eight months ended November 2012. The net margins have been varying quite wildly and have been at 3.59% in 2008, 0.73% in 2009, 1.61% in 2010, 2.92% in 2011, 3.92% in 2012 and a sharp increase to 5.92% in the eight month period ended November 2012.

The sharp jump in this last period could be an aberration and one should not take this as a sustainable margin. The important point to note is that gross margins are typically in the region of about 30% to 32%. This is lower than what branded and high street retailers like Shoppers Stop enjoy. One must note the difference between the two business models where one is predominantly located in Tier-II and Tier-III towns and the other in major metros, metros and big cities. Secondly in the case of former there is nothing branded sold and at best it is private labels while in the latter it is all branded and a small amount of private labels.

Track Record of Merchant Bankers

There is a single merchant banker for this issue AnandRathi Advisors Limited. They have brought 7 issues to the market in the last three years with 3 issues in 2009-10, 3 in 2010-11 and 1 issue in 2011-12. This is the first issue in 2012-13. Of these issues all the 3 in 2009-10 were trading at a discount 30 days after the issue listed, while all the other issues in 2010-11 and 2011-12 were trading at a premium. If one looks at the current position of the seven issues being discussed here, one would see that 4 of the seven issues are trading at a discount and 3 are trading at a premium.

Comparisons

The company has chosen to compare itself with Shoppers Stop, Pantaloon Retail and Trent Limited. Shoppers Stop had reported an EPS of Rs 0.83 for the first half of the financial year ended September 2012 and a whopping Rs 2.06 for the quarter ended December 2012, showing the seasonality of the business. In the case of Pantaloon, the company has sold its fashion business to Peter England which makes the business incomparable. The third company is Trent where the VmartRHP talks about consolidated numbers for year ended March 2012. The company on a standalone basis has reported an EPS of Rs 6.37 for the quarter ended December 2012 against a half year ended September EPS of Rs 8.00. Clearly there is seasonality in this business and the quarter ending December has its upside not seen in other quarters as the biggest festival “Diwali” does come in this quarter. Secondly in places where the weather changes into cold, people do prepare themselves for the weather and have adequate clothing to suit the needs purchased in the quarter ending December 2012.

Looking at the numbers presented in the RHP one would like to believe that the issue from Vmart is a great one but I have my reservations.

Valuations

The company is offering its shares in a price band of Rs 195-215. The fully diluted EPS based on 8 month period ending November 2012 annualised comes to Rs 10.93. The shares are being offered at a PE of 17.85 at the lower end of the price band and at 19.68 times at the upper band. The price is certainly not cheap and considering the options available in the market in this sector and others, one may well decide to skip this issue. Also considering the seasonality factor one may realise that the annualised EPS does not come to the desired level.

Concerns

The sector has seen a lot of retail chains going belly up. The best example is Vishal Retail whose name now is V2 Retail Limited. The issue was a roaring success and for the year ended March 2008 which was the first year of reporting results since going public, the company had revenues of Rs 953 crs and a profit after tax of Rs 40.64 crs resulting into an EPS of Rs 18.95. In the very next year while revenues grew, the company slipped into the red and in a matter of 3 more years has been wiped out completely. Yet another company which was not listed but planned to go public and failed was “Subiksha”. One knows how big Private Equity Investors were caught on the wrong foot with investments in such retail ventures.

Leaving aside the live examples some other concerns pertain to the business model. Vmart is primarily a Tier-II and Tier-III player where costs are lower and hence margins remain high. The way real estate prices have been rising the maximum jump in terms of percentage has come in these towns. How long would cheap space be available is a matter of debate and low costs are a key to the growth of this company. Secondly aspiration is the driving force and with advertising whether it is print or electronic is certainly changing the mind-set of the young and influencing their purchasing habits. The advent of online shopping is another factor and these could be negative to the company’s business growth plan.

The company has a very lean cost structure which is rising. Expenses on Rent, Power and fuel, Advertisement and sales promotion and others is 12.95% of sales. With the competition increasing, the costs would rise significantly in Tier-II and Tier-III towns which account for 28.4% and 53.5% of sales respectively. No one knows which multinational retailers set up shop in India, but there being allowed would could create a sharp differential between salaries and working conditions which could affect a low cost retailer like Vmart.

The promoter family led by its CMD are related to the Agarwals of Vishal Retail and Mr LalitAgarwal was the CEO of Vishal Retail till 2002.

Key Drivers

The key driver for Vmart is the aspiration of the masses and the higher disposable income available to the lower levels of the value chain. The low operating costs as long as they are able to maintain them would be the key going forward. The company is looking to double its number of shops from 62 to 122 in a span of 26 months, a feat which is challenging but if achieved could add to the top line and bottom line of the company.

Conclusion

The challenges being faced by the sector and the opportunities available are certainly worth taking a risk. However the track record of the sector and the asking price leave one with no choice but to avoid the issue. The anchor book for an issue which is being hyped is poor with just the minimum requirement of 2 entities subscribing. The issue is being brought because there is a clause under which the PE investor has to be compulsorily provided an exit either by way of a primary issue or a buyback by the promoters before March 2013. All in all I would advise investors to stay away from the issue and look at better opportunities from the secondary market.

SEBI Disclaimer: – I do not intend to subscribe to the issue.