IPOs are always a thrilling opportunity for investors as they get a chance to be a part of a company’s growth story. The upcoming IPO of Vishal Mega Mart has created much buzz in the market. But is it a good opportunity for retail investors? Let‘s analyze its valuation, financial health, and growth prospects.
IPO Valuation: The Basics
The face value of Vishal Mega Mart‘s shares is ₹10. The price band is ₹74 to ₹78. In general, for a retail investor, applying at the upper price band of ₹78 is advisable to avoid allotment issues. The amount it is raising in this IPO is ₹7,817 crore, but keep in mind that this is a 100% Offer for Sale (OFS).
This means the collection will go to the existing shareholders, not the company. This OFS will not provide money for opening new Vishal Mega Mart stores or improving operations like some IPOs do, which is one of its biggest downsides.
Category Distribution and Lot Sizes
The IPO has reserved 50% for QIBs, 35% for the retail investors, and 15% for HNI. Retail investors can place bids with a minimum lot of ₹14,820, a maximum of 13 lots can be placed below ₹2 lakh. Once your investments are above ₹2 lakh, they come under the head of HNI, who also have the flexibility, since there is no lock-in period.
Promoter Holding: Before and After IPO
The promoters currently hold 96% of the company‘s equity. Post-IPO, their stake will be reduced to 76%, which is within the regulatory limit set by SEBI at 75%. This means that eventually, Vishal Mega Mart will have to further dilute equity either through rights issues or another OFS.
Even so, a 76% promoter holding post-IPO is a very healthy sign of the promoters‘ confidence in the business.
Financial Performance: Growth and Profitability
Revenue Growth
Revenue for the company has been on the steady growth track since ₹5,600 crore, to ₹7,600 crore, and to ₹8,900 crore over the last three years. In the first half of this year, Vishal Mega Mart‘s sales stand at ₹5,000 crore, which puts the annual revenue at more than ₹10,000 crore.
Profit Margins
Profitability has improved significantly. The company‘s net profit increased from ₹200 crore (3% margin) to ₹321 crore (4% margin) and is expected to reach ₹500 crore this year, as per trailing estimates. A 3–5% margin may appear low, but it‘s laudable for a retail company, more so for loss-making startups.
Why the Margin is Low
Retail is a competitive business, with very thin margins due to heavy discounts and offers. Vishal Mega Mart has to be at par or better than the competition like DMart on pricing, which impacts profitability. Yet, the company has been able to maintain and grow its profits.
Key Ratios and Comparisons
Let’s look at the company’s performance metrics:
- RoE/RoCE: Both are at 8%, which is modest, but stable.
- Price book value: At 6x, it is not aggressive but higher than an average.
- PAT Margin stands at 5%, well within the decent profitability area for the retail sector
- EPS and PE Ratio: Before IPO, EPS is seen at 1.02, and after IPO has increased to 1.13. PE stands at 70, which is lower when compared to competitors like Trent is at 163 PE while Ave Supermarts or popularly known as DMart.
While the valuation of Vishal Mega Mart is not cheap, it still compares favorably with its peers on various parameters such as Price-to-Book Value.
Issues and Risks
- 100% OFS Structure – Since the proceeds will not be utilized for business expansion, the company’s scope to open new stores or strengthen its brand is limited. This could impact its future growth trajectory.
- Size of the IPO – Large IPO size of ₹7,817 cr. : Limits potential oversubscription due to many IPOs now open . Small size ones generally draw more attention and participation.
- Retail Competition : Grappling with multiple competitions from old players, especially from the house of DMart and Trent, it can push down the margin in view of changing tastes.
Conclusion
The IPO of Vishal Mega Mart is fairly priced and has steady growth prospects. The company’s profitability, improved margins, and healthy promoter holding are positive signs. However, the 100% OFS structure and lack of immediate reinvestment into the business are drawbacks to consider.
For retail investors, the IPO provides the opportunity for listing gains as long as market sentiment prevails. Long-term investors should watch the company’s ability to manage competitive pressures and sustain its profitability in a price-sensitive retail environment.
Should you invest?
If you are looking for short-term listing gains, the Vishal Mega Mart IPO might be an opportunity for you. For long-term investment, you have to weigh the risks involved because of the OFS structure and limited growth opportunities.
Let us know in the comments: Are you applying for this IPO? Why or why not?
Disclaimer: The opinions and investment advice provided by Finaffair experts are their own and do not reflect the views of the website or its management. Finaffair encourages users to consult qualified professionals before making any investment decisions.
