Vishal Retail, VRL is open for subscription with an initial public offering, IPO of equity shares aggregating Rs 110 crore.
The price band for the 100% book built issue has been fixed between Rs 230 - Rs 270 per equity share of Rs 10 each. The issue closes on June 13.
First Global report on Vishal Retail IPO
Highlights
The company's revenues are skewed towards North India and contributed 62% to the topline in FY07, while East India contributed 20% in FY07. Apparels contributed 63% to the topline in FY07 (71% in FY06), non-apparels contributed 22% (20% in FY06), and FMCG contributed 15% in FY07 (9% in FY06).
In order to expand its presence across India, the company has plans to open 32 new stores, out of which 28 will be opened in Tier-II and Tier-III cities in the coming years. The proceeds of the issue will be used to open 22 new stores, while the rest of the stores will be funded through internal accruals. At present, it has three distribution hubs across the country and plans to have one more hub for efficient distribution in Southern India.
The company's promoters hold 78.2% of the pre-issue equity, Bennett & Coleman, which has entered into a marketing agreement with Vishal Retail, holds 11.2%, while the Hero Group holds 1.9% of the company's pre-issue equity capital.
The inventory turnover period increased from 73 days in FY06 to 118 days in FY07 (27% of revenues in FY06, as compared to 41% in FY07). The increase in inventory was primarily due to inventory build-up for new store openings in Q1 FY08, as well as the deferment and abandonment of some stores in FY07. Such higher investment in inventories led to negative free cash flows from operations for the last three years.
In order to manage its inventory efficiently, the company is in the process of applying SAP through TCS (the application of SAP has been underway for the last 1.5 years and around 80% of the work has been completed, as per the management).
Key Risks
The company had an aggregate debt of Rs.2.4 bn (a pre-issue debt equity ratio of 1.9) at the end of FY07.
The company's bankers have put a restriction on it to raise funds through debt without their permission. This could have an impact on its ability to raise further funds to meet working capital requirements.
The company has been quite a laggard at the regulatory front and does not have proper licenses under the Factories Act, no approval from the Prevention of Food Adulteration Act, and is yet to obtain registration from state governed bodies for running its stores, etc., in a proper condition.
The company has a number of court cases pending against it, including 5 cases for sales tax evasion, one criminal case for illegal construction of the Pitampura Mall (Rs 16.2 mn), IPR infringement for the trademark 'Megamart' against Arvind Brands (Rs 2 mn) and other complaints in the Consumer court.
The key concern, according to the company's management, is on the employee front. Management plans to sign a two-year bond with all its prospective employees and may also offer stock options to its employees as a retention incentive.
It has entered into land deals for only 13 of its 22 upcoming stores (through the proceeds of the IPO). Although high lease rentals have been a concern for the company, it will prefer to enter into long-term lease for its upcoming stores (and not buy land) in the coming years.
Valuation
At the upper price band of Rs.270, Vishal Retail commands a P/E of 14x our FY08 EPS estimate of Rs.19.0, which is at a significant discount in comparison to its peers, such as Pantaloon, which trades at a P/E of 66x. The stock is available at an EV/EBIDTA of 7.3x, which is much lower than peers like Pantaloon, Shopper's Stop etc. In view of the much higher EBIDTA margin, net profit margin, and return ratios, we believe that the stock is available at a significant discount to its peers. Subscribe.
Vishal Retail, VRL is open for subscription with an initial public offering, IPO of equity shares aggregating 
