Vedant Fashions, the operator of Manyavar brand in the Indian wedding and celebration wear market, can be preferred for long-term investment, instead of listing gains, say most of experts, citing the company's robust distribution model, inventory management, asset-light model, strong balance sheet with zero debt and better return profile, and better understanding of consumer preferences.
The company will open its maiden public offering for subscription today and the offer will close on February 8. This would be the third IPO in 2022 after AGS Transact Technologies and Adani Wilmar.
The IPO is entirely an offer-for-sale of 3,63,64,838 equity shares by investors Rhine Holdings, Kedaara Capital Alternative Investment Fund-Kedaara Capital AIF 1, and promoter Ravi Modi Family Trust. Hence, the offer money will go to selling shareholders.
The price band for the offer has been fixed at Rs 824-866 per equity share.
"We like Vedant Fashions' focus on growth by doubling its footprint in both domestic as well as international markets in the near term," says KR Choksey Research.
Also read - Vedant Fashions IPO: 10 key things to know before subscribing issue
Incorporated in 2002, Vedant Fashions offers Indian wedding and celebrations wear for men, women and kids, operating business through omni-channel network of 546 exclusive brand outlets (EBOs), 825 multi-brand outlets (MBOs) and 145 large-format stores (LFS) and through online platforms. It is the largest company in India in men's Indian wedding and celebration and follows a franchisee-owned-company-operated (FOCO) model.
It has a multi-brand product portfolio catering to all possible occasions that includes Manyavar (men’s brand), Twamev, Manthan, Mohey, and Mebaz.
In India, the company plans to enter new cities, open more stores in existing cities and penetrate deeper into the existing markets. In the international markets, the company has a roadmap to enter new countries with Indian diaspora and widen its reach in the existing global markets.
It will continue to grow the three existing brands in its portfolio while it will also scout for inorganic growth opportunities.
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"The company's strength lies on four key pillars that it has built over the last 20 years which act as entry barriers: (1) supply chain and vendor management, (2) inventory management, (3) understanding customer preference, and (4) robust distribution model.
It has a strong balance sheet with no debt and it has an asset-light model. Considering these positives, we recommend to "subscribe for long-term gains", said KR Choksey.
Canara Bank Securities also advised subscribing the issue for the long term, considering its operating margins and strong balance sheet, backed with higher brand recall for celebration wear.
"The company has driven its revenue on the back of increased spend on celebrations and shift to ready-to-wear from the tailor-made apparel. It has highest number of EBOs (exclusive brand outlets) and better return and margin profile with operating margin at 43 percent and ROCE (return on capital employed) at 41 percent, which is highest vis a vis its peer brands," said the brokerage, adding it has an asset light EBO model that lets them focus on vendor and inventory management by understanding consumer preferences through the collected secondary sales data.
Choice Broking assigned 'subscribe with caution' rating to the issue.
"At the higher price band of Rs 866, the demanded valuation of Rs 21,017 crore is derived at P/S (price to sales) of 37.2x on FY21 and 29.2x on FY22 annualised sales. Based on quick estimates, the issue is priced at P/S of 21.2x and P/E of 44.7x on FY24E. Thereby, we view the issue is aggressively priced leaving no margin of safety for investors. Thereby it warrants caution on the valuation front," it reasoned.
Financial performance over the reported fiscals has been satisfactory despite significantly loss to business during 2020 due to pandemic induced lockdown. Over FY19-FY21, operating revenue averaged a negative-16 percent slump in the annual growth rate.
"Though with the EBIDTA margin of over 40 percent, the company remained able to report a profit of Rs 132 crore in FY21, showing strong operational efficiencies. Operating cash flow margin remained at a healthy level of average 33.5 percent over FY19-FY21. Return on Equity is expected to improve to 23 percent in FY22 on an annualised basis, thus returning to a historical trend of around 21 percent over FY19-20," said Choice Broking.
Since Indian wedding and celebration wear market is relatively less price-sensitive, it gives the pricing power to Vedant Fashions. However "margin at these levels (over 40 percent) seems challenging to maintain, given the competitions from local retailers, online retailers and non-branded products and building inflationary pressure, business is highly concentrated on wedding and festivals wear and thereby vulnerable to variations in demand," said Choice Broking.
Its key brand Manyavar contributed 84.2 percent to revenue in FY21 and Mohey 7.5 percent to revenue. The growth potential in the industry is immense as the branded Indian wedding and celebration market is expected to grow at 18-20 percent from FY20-FY25.
“Vedant Fashions with its pan India presence and strong reach across channels will help the company grow at faster rate and gain market share," said KR Choksey.
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