Baazar Style Retail IPO analysis

Baazar Style Retail IPO (initial public offering) will open for subscription on August 30, 2024 and close on September 3, 2024. Here's a breakdown of the budget fashion retailer's strengths, weaknesses, and growth prospects to help investors make an informed decision.

Baazar Style Retail IPO in a nutshell

• Quality : Its three-year average ROE and ROCE were 2.3 per cent and nearly 13 per cent, respectively, during FY22-24.
  
• Growth : The company's revenue grew around 33 per cent annually during FY22-24, driven by its retail store expansion and same-store sales growth. It reported a net profit of Rs 22 crore in FY24, after a profit of Rs 5 crore in FY23 and a loss of Rs 8 crore in FY22.
  
• Valuation : Post the IPO, the company will trade at P/E and P/B ratio of 132 and 8 times, respectively.
  
• Overview : There is a rapid shift in consumer preference towards organised retail players, especially in the value segment of below Rs 1,000 (per transaction). The growth in the affordable segment of branded products will aid companies like Baazar Style Retail scale up. The market potential is vast as the affordable fashion segment is expected to be worth nearly Rs 5 lakh crore by FY27 with a 14 per cent annual growth. That said, the company faces intense competition from both organised and unorganised players in the industry.

About Baazar Style Retail

Incorporated in 2013, Baazar Style Retail is a budget fashion retailer that primarily sells clothing and general merchandise such as cosmetics, fashion jewellery, and homeware products. The company's main customer base consists of middle-income earners, whose average transaction value is nearly Rs 1,000. With a total of 162 retail stores, it primarily operates in West Bengal, Odisha, Bihar, and Assam. These core markets contributed 88 per cent to its FY24 revenue. Further, the company also sells its own products under the private label brands, which contributed 38 per cent to its revenue in FY24.

Strengths of Baazar Style Retail

• Efficient inventory management : The company operates its stores on a cluster-based expansion model, which means that the stores are located in the same or nearby locations, leading to solid inventory management.
  
• Private labels are a growing force: Its revenue contribution from its private label brands like Square Up, Miss 19, and Kirtle has grown to 38 per cent in FY24 from 25 per cent in FY22, which helped to improve its margins.

Weaknesses of Baazar Style Retail

• High inventory days: The company had high inventory days of 212 as of FY24, which is the highest among peers like V2 Retail and V-Mart.
  
• Market concentration: The company operates at a small scale with revenue concentrated in a few states, and lags behind large players such as Trent (runs Zudio and Westside), which is expanding rapidly.

Risk report

Company and its business

• Was the company's earnings before tax more than Rs 50 crore in the last 12 months?
  No. Baazar Style Retail reported a profit before tax of Rs 29 crore in FY24.
  
• Will the company be able to scale up its business?
  Yes. A shift in consumer preferences toward organised retailers, especially in the budget fashion segment will help the company scale up. Moreover, it's working to broaden its customer base by listing its products on e-commerce platforms such as Amazon, Flipkart, and Meesho.
  
• Does the company have a credible moat?
  No. It faces stiff competition from both organised and unorganised players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post the IPO, the promoters' stake will be 46.5 per cent.
  
• Do the top three managers have more than 15 years of combined leadership at Baazar Style Retail?
  Yes. The promoters have a combined leadership of more than 15 years.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Baazar Style Retail free of promoters pledging its shares?
  Yes. The company is free of promoters pledging their shares.

Financials

• Did the company generate a current and three-year average return on equity (ROE) of more than 15 per cent and a return on capital employed (ROCE) of more than 18 per cent?
  No. Baazar Style Retail's three-year average ROE and ROCE were 2.3 and nearly 13 per cent, respectively. In FY24, its ROE and ROCE were nearly 11 per cent and 18 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. The company's cash flows from operations were negative in FY22 and FY23. Note that we have adjusted its reported cash flows from operations for lease payments.
  
• Is the company's net debt-to-equity ratio less than one?
  No. Baazar Style Retail's net debt-to-equity ratio was 3.0 times as of FY24.
  
• Is Baazar Style Retail free from reliance on huge working capital for day-to-day affairs?
  No. Being a retailer, it has high working capital requirements. Moreover, its inventory days stood at an average of 217 during FY22-24.
  
• Can the company run its business without relying on external funding in the next three years?
  No. The company opened 85 new stores in the last three financial years and it is expanding into new markets as well. This will require the company to raise external capital as the IPO proceeds will only be used to repay debt.
  
• Is Baazar Style Retail free from meaningful contingent liabilities?
  Yes. The company's contingent liabilities as a percentage of equity was 1.4 per cent as of FY24.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. Baazar Style Retail will offer an operating earnings yield of 0.9 per cent.
  
• Is the stock's price-to-earnings ratio less than its peers' median level?
  No. The company will trade at a price-to-earnings ratio of 132 times as compared to its peers' median level of 109 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The company will trade at a price-to-book ratio of 8 times as compared to its peers' average level of 12 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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