At Rs 295-299 per share, the Initial Public Offering of Avenue Supermarts - the parent of retail chain D-Mart - has been "priced to perfection'', according to Sanjiv Bhasin, Executive Vice-President of Markets and Corporate Affairs at IIFL.Speaking to CNBC-TV18, Bhasin said he expects the IPO to be oversubscribed. Given a paucity of good stocks and the surging Nifty, investors could expect to be rewarded, he said.The Rs 1,870-crore issues opens on Wednesday and closes on Friday. The company is divesting 10 percent of its total equity shares.Also Read - D-Mart parent hits IPO Street, all you need to know about itBhasin was bullish on D-Mart's prospects, saying that going public would provide impetus for expansion as more than 70 percent of its current business comes from Maharashtra and Gujarat. He said that most of the proceeds from the IPO would go towards bringing down debt.He added, however, that it would be difficult to budge the market cap and that the initial pop would be difficult to sustain.Market expert SP Tulsian of sptulsian.com said that the stock would be robust and grey market indicators appeared to to suggest that the listing price would be around Rs 475-550.Also Read - COMMENT: D-Mart is a must-have in an investor's shopping trolleyHe said he expected a topline growth of 25 percent for D-mart in the next three years, concurring with Bhasin that both margins and volumes would expand.Below is the verbatim transcript of Sanjiv Bhasin & SP Tulsian's interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal. Sonia: I want to understand from you what kind of growth this can eke out over the next couple of years because it has already quadrupled its revenues over the last five years and in that sense how much do you think is already in the initial public offering (IPO) price and what kind of value would it offer to investors?
Bhasin: It is coming at a time when Nifty is making new highs, there is a lot of hype and it will be hugely oversubscribed. However, I agree that it has already been priced to perfection and growth from here will be a little bit tedious but given the atmosphere where we have seen huge expansion on their margins and the volume going ahead, you could still a bit of an upside.
However, 77 percent of the business comes from Maharashtra and Gujarat. It's been a low key kind of a retail player and now there will be an impetus for expansion and also a huge part of the proceeds will be used in reducing debt which over a period of time will improve the return on equity. However, as a caveat, if you recall, we had a very big buy on Future Lifestyle Fashions around Rs 125 level and in the space of six months that stock is up 70 percent and from a marketcap of below Rs 2,000 it is almost Rs 3,800 crore.
D-Mart would list at a marketcap of close to Rs 17,000-18,000, which will mean that at least the marketcap will be difficult to budge immediately but given that there is a paucity of good stocks, I think investors will be rewarded but we have to be only careful about the subscription ratio. So going ahead market performs with an initial pop which may not be able to be sustained at higher levels.
Latha: You told us that you would advice subscribe at Rs 295-299. Chances are if so many people are positive on the stock, it opens at probably Rs 350. Up to what gap up is it still value for money?
Tulsian: It is difficult to take a call but if you take grey market premium situation, it has been prevailing, I do not think that Rs 350 will be the listing price because the price could be anywhere between Rs 475-550 if you take the indications coming in from the grey market - one. Second, if you see the kind of appetite which we have been seeing from the high net worth individuals (HNIs) and financing which is given to the HNIs against the margin; I have heard that people are offering at a margin just of about 2-4 percent - that means they are prepared to finance 96 percent of the application to the HNI category. So definitely HNI category is going to see the subscription of over 100 times. I won't be surprise to see it 150 times.
However, it is very interesting to see what retail response is seen been evoked to this IPO. If it comes to at about six-eight times plus then again there will be disappointment amongst the retail category and more appetite can come in. As I have already discussed that the kind of growth which they have been saying, I am expecting topline growth of about 25 percent for the company to be seen for the next three years and we have already seen the robust EBITDA margin which is about 2.5 times of Reliance Retail and Future Retail, obviously things will get proportionately increase on the bottomline as well with a profit after tax (PAT) margin of about 4 percent plus for the company against sub-2 percent for Future Retail because it is difficult to work out the PAT margin for Reliance Retails because of the consolidated performance. So overall my view is that things are looking quite robust for the stock and I am expecting the listing to happen at least at Rs 450.Anuj: What would it do for the listed space because we have a couple of stocks which have started to move up, for example Future Retail has moved up, we have seen a bit of a rerating in Reliance, of course that is a bit to do with telecom as well but some part of it is retail. So what would this mean for the listed space?
Tulsian: I think that this is partly frenzy been seen in many other retail stocks because you are right in saying that Reliance Retail is merge into Reliance Industries' total. No one has been able to give the sum of part valuation, if I say that I am giving a valuation of Rs 15,000 crore for Reliance Retail then nobody will question that or one can always argue it anywhere between Rs 10,000-20,000 crore.
If I take on D-Mart maybe at the issue price the enterprise value will come to about Rs 20,000 crore. In other cases - either in case of Future Retail or in case of Reliance Retail, it will be difficult to take enterprise value but even if I add a part of the loan in that amount or take the same as enterprise value also, as I said for Reliance Retail at about Rs 10,000-20,000 crore. So this kind of frenzy is seen in many other. I do not want to name those other retail stocks. The only right comparison for D-Mart could be Future Retail because as I said now Reliance having a marketcap close to 425,000 crore, enterprise value closer to Rs 550,000 core or Rs 525,000 crore, there is no point in taking because this forms a small percentage maybe 2-3 percent. So, if I take a right comparison for D-Mart, it will be only Future Retail or if I want to put a straight answer to your question, I would say that the real beneficiary or the relative beneficiary of this increased valuation of D-Mart will see getting reflected only in Future Retail. In case of other retail stores, I am not trying to question on their financials and all sort of things but I am not comfortable and it could be a big trap, so there is no point in chasing the momentum or frenzy with other retail space - those who are operating in many other specialised verticals also.
(Disclosure: Network 18, which publishes moneycontrol.com, is a part of the Reliance Group.)For entire interview, watch accompanying videos.
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