Vishal Mega Mart IPO analysis

Vishal Mega Mart IPO (initial public offering) will open for subscription on December 11, 2024 and close on December 13, 2024. Below is a breakdown of the retailer's strengths, weaknesses and growth prospects to help investors make an informed decision.

Vishal Mega Mart IPO in a nutshell

• Quality: Between FY22 and FY24, the company reported an average three-year ROE and ROCE of around 6 and 8 per cent, respectively.
  
• Growth: During FY22-24, its revenue and net profit grew nearly 26 and 51 per cent, respectively.
  
• Valuation: At the upper price band of Rs 78, the stock is valued at a P/E and P/B ratio of 67 and 6 times, respectively.
  
• Overview: Growing demand for lifestyle products, including apparel, general merchandise and beauty and personal care (BPC), particularly in tier-2 and tier-3 cities is expected to drive growth for Vishal Mega Mart. The retailer targets lower-to-middle income customers that prefer affordable pricing. The domestic retail market is estimated to grow 32 per cent per annum between 2023 and 2028 in tier-2 cities. However, the industry is crowded with formidable competitors like V2 Retail, Bazaar Style and Trent, all of which are on a rapid expansion spree.

About Vishal Mega Mart

Founded in 2001, Vishal Mega Mart is a budget retailer that offers everyday low-priced products via its offline stores, mobile application and website. It offers products across three major product categories—apparel, general merchandise and fast moving consumer goods. It had 645 retail stores across India as of September 30, 2024. The company earns close to 28 per cent of its revenue from sale of products from third-party brands and the rest from its own brands.

Strengths of Vishal Mega Mart

• Diverse portfolio of own brands: It has a robust and expanding portfolio of its own brands, making up 73 per cent of revenue. In FY24, 19 of its own brands generated sales exceeding Rs 100 crore each, with six brands surpassing Rs 500 crore each.

Weaknesses of Vishal Mega Mart

• Revenue concentration: The company derives close to 38 per cent of its sales from only three states—Uttar Pradesh, Karnataka and Assam. In the event of an economic slowdown, political unrest, or any other disruption in these states, the company may have an adverse impact on its business.

Risk report

Company and business

• Did Vishal Mega Mart report earnings before tax of Rs 50 crore or more in the last 12 months?
  Yes. The company reported an earnings before tax of Rs 699 crore for 12 months ending September 2024.
  
• Will the company be able to scale up its business?
  Yes. India's retail market is projected to grow 20 per cent per annum between 2023 and 2028. The expansion of organised players and a secular shift towards discretionary spending is expected to drive this growth, benefitting the company.
  
• Does the company have recognisable brands with client stickiness?
  Yes. The company has been in operations since 2001 and has established itself as a household name in its key geographies.
  
• Does the company have a credible moat?
  No. Other established players like Avenue Supermart, Trent, Reliance Retail, V2 Retail, V-Mart and Baazar Style operate in the same industry. The products, too, have no differentiation.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. After the IPO, the promoters will retain a 76 per cent stake in the company.
  
• Do the top three managers have more than 15 years of combined leadership at Vishal Mega Mart?
  No. The company's Managing Director and Chief Executive Officer Gunender Kapur, and Chairperson Neha Bansal have been with the company only since 2020 and 2022, respectively.
  
• 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 Vishal Mega Mart free of promoter pledging of its shares?
  Yes. The promoters have not pledged any of their shares.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No. It has a three-year average ROE and ROCE of around 6 and 8 per cent, respectively. In FY24, it reported an ROE and ROCE of around 9 and 11 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. It reported positive cash flow from operations in each of the last three years.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. As of Q2 FY25, the company's net debt-to-equity ratio was 0.19 times.
  
• Is the company free from reliance on huge working capital for day-to-day affairs?
  No. The company is in a retail business where it needs to maintain sufficient inventory for day-to-day operations, thus requiring significant working capital.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. The company is profitable and had positive free cash flow in each of the last three years. Hence, it will likely not need external funding to run its business going forward.
  
• Is the company free from meaningful contingent liabilities?
  Yes. The company's contingent liabilities stood at 1.03 per cent of its net worth as of Q2 FY25.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. Vishal Mega Mart's stock offers an operating earnings yield of 2 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock is valued at a P/E ratio of nearly 68 times compared to its peers' median level of 115 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a P/B ratio of around 6 times compared to its peers' average level of 33 times.

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Disclaimer: This story is not a stock recommendation. Investors should do their due diligence before investing.

Also read: What Varanium Cloud teaches us about spotting SME IPO traps