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Electronics Mart IPO review (May apply)

•    EMIL is the 4th largest consumer durables and electronics retailer in India. 
  •    It suffered a setback in FY21 on account of the Pandemic. 
  •    Sustainability of margins going forward raises concerns. 
  •    Higher equity base will have issues of servicing going forward.
  •    Cash surplus investors may consider an investment with a long-term perspective.

ABOUT COMPANY:
Electronics Mart India Ltd. (EMIL) is the 4th largest and one of the fastest growing consumer durables and electronics retailers in India and as of Financial Year 2021, it is the largest regional organized player in the southern region in revenue terms with dominance in the states of Telangana and Andhra Pradesh (Source: Company Commissioned CRISIL Report).

The company commenced business operations in 1980 and since then there has been a steady rise in revenue from operations. It has been one of the fastest growing consumer durable & electronics retailers in India with a revenue CAGR of 17.90% from Financial Year 2016 to Financial Year 2021 (Source: Company Commissioned CRISIL Report).

As of August 31, 2022, the company had 112 stores across 36 cities / urban agglomerates with a retail business area of 1.12 million sq. ft. It offers a diversified range of products with a focus on large appliances (air conditioners, televisions, washing machines, and refrigerators), mobiles and small appliances, IT, and others. EMIL’s offering includes more than 6,000 SKUs across product categories from more than 70 consumer durable and electronic brands. Its business model is a mix of ownership and leases rental model, as it focuses to secure retail spaces which ensure high visibility and easy accessibility to customers. Under the ownership model, it owns the underlying property including the land and building and in the lease rental model, the company enters into a long-term lease arrangement with the property owner(s). As of August 31, 2022, out of the total 112 stores it operates, 11 stores are owned, 93 stores are under a long-term lease rental model, and eight stores are partly owned and partly leased. EMIL operates business activities across three channels retail, wholesale, and e-commerce. As of August 31, 2022, it had 2091 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for capital expenditure for expansion and opening of stores and warehouses (Rs. 111.44 cr.), working capital (Rs. 220.00 cr.), and repayment/prepayment of certain borrowings (Rs. 55.00 cr.), and general corporate purposes, EMIL is coming out with a maiden IPO of approx. 84745830 shares (at the upper cap) via book building route, to mobilize Rs. 500.00 cr. It has announced a price band of Rs. 56 to Rs. 59 per share of Rs. 10 each. The issue opens for subscription on October 04, 2022, and will close on October 07, 2022. Minimum application is to be made for 254 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 22.03% of the post-issue paid-up capital of the company. The company has allocated the issue as 50% for QIBs, 15% for HNIs, and 35% for Retail investors.

Joint Book Running Lead Managers (BRLMs) for this issue are Anand Rathi Advisors Ltd., IIFL Securities Ltd., and JM Financial Ltd. while KFin Technologies Ltd. is the registrar to the issue.

The company has converted its entire equity at par so far. The average cost of acquisition of shares by the promoters is Rs. 10 per share.

Post-IPO, EMIL’s current paid-up equity capital of Rs. 300 cr. will stand enhanced to Rs. 384.75 cr. Based on the upper cap of the IPO pricing, the company is looking for a market cap of Rs. 2270.02 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, EMIL has (on a consolidated basis) posted turnover/net profits of Rs. 3179.02 cr. / Rs. 81.61 cr. (FY20), Rs. 3207.37 cr. / Rs. 58.62 cr. (FY21), and Rs. 4353.07 cr. / Rs. 103.89 cr. (FY22). For Q1 of FY23, it earned a net profit of Rs. 40.66 cr. on a turnover of Rs. 1410.25 cr. Thus it has posted growth in its top and bottom lines for the reported periods.

For the last three fiscals, EMIL has reported an average EPS of Rs. 2.84 and an average RoNW of 15.82%. The issue is priced at a P/BV of xx based on its NAV of Rs. 21.27 as of June 30, 2022, and at a P/BV of xx based on its post-IPO NAV of Rs. 29.58 (at the upper cap).

If we annualized FY23 earnings and attribute it to the post-IPO fully diluted equity capital base, then the asking price is at a P/E of around 13.95. Based on FY22 earnings, the P/E stands at 21.85. Thus the issue is fully priced.

DIVIDEND POLICY:
The company has not paid/declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, EMIL has shown Aditya Vision as their listed peer. It is currently trading at a P/E of 31.95 as of September 28, 2022.

MERCHANT BANKER’S TRACK RECORDS:
The three BRLMs associated with the issue have handled 53 public issues in the past three years, out of which 16 issues closed below the offer price on the listing date.

Conclusion / Investment Strategy

EMIL is the 4th largest retailer in consumer durables and electronics with south-centric play. A higher equity base post-IPO raises servicing concerns. Based on FY23 annualized earnings, the issue appears fully priced. Cash surplus investors may consider an investment with a long-term perspective.

Review By Dilip Davda on Sep 28, 2022

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