Electronics Mart India coming up with IPO to raise around Rs 527 crore

Electronics Mart India

• Electronics Mart India is coming out with a 100% book building; initial public offering (IPO) of 8,92,85,714 shares of Rs 10 each in a price band Rs 56-59 per equity share.
  
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
  
• The issue will open for subscription on October 04, 2022 and will close on October 07, 2022.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 10 and is priced 5.60 times of its face value on the lower side and 5.90 times on the higher side.
  
• Book running lead managers to the issue are Anand Rathi Advisors, IIFL Securities and JM Financial.
  
• Compliance Officer for the issue is Rajiv Kumar.
  

Profile of the company

The company is the 4th largest and one of the fastest growing consumer durables and electronics retailers in India and as of Financial Year 2021, it is the largest regional organised player in the southern region in revenue terms with dominance in the states of Telangana and Andhra Pradesh. It commenced its business operations in 1980 and since then there has been a steady rise in its revenue from operations. It has been one of the fastest growing consumer durable & electronics retailers in India with a revenue CAGR of 17.90% from Financial Year 2016 to Financial Year 2021. It has consistently demonstrated profitability with a robust operating performance. It had the second highest operating margin amongst its peers in Fiscal Year 2021. The company has built a longstanding market presence with more than three decades of experience having commenced its business operations as a proprietary concern by setting up its first consumer durable and electronic retail store at Hyderabad. It converted the erstwhile sole proprietorship into a partnership firm under the name of ‘Bajaj Electronics’ pursuant to a partnership deed dated March 25, 2011 and subsequently converted the partnership firm into a public limited company under the Companies Act, 2013 with the name ‘Electronics Mart India Limited’.

The company offers a diversified range of products with focus on large appliances (air conditioners, televisions, washing machines and refrigerators), mobiles and small appliances, IT and others. Its offering includes more than 6,000 SKUs across product categories from more than 70 consumer durable and electronic brands. Its business model is a mix of ownership and lease rental model, as it focus to secure retail spaces which ensures high visibility and easy accessibility to customers. Under the ownership model, it owns the underlying property including the land and building and in lease rental model, it enter into a long-term lease arrangement with the property owner(s). As of August 31, 2022, out of the total 112 stores it operate, 11 stores are owned, 93 stores are under long-term lease rental model and eight stores are partly owned and partly leased. It focus on deepening its presence in the regions it operate in before venturing into new markets which has led it to establish brand presence in Telangana and Andhra Pradesh markets.

Proceed is being used for:

• Funding of capital expenditure for expansion and opening of stores and warehouses.
  
• Funding incremental working capital requirements.
  
• Repayment / prepayment, in full or part, of all or certain borrowings availed by the company.
  
• General corporate purposes.
  

Industry overview

India’s retail industry clocked a healthy 7.7% compound annual growth rate (CAGR) between fiscals 2017 and 2022, backed by rising urbanisation, nuclearisation, increased disposable incomes, improving affordability and positive consumer sentiments. Low inflation and interest rates as well as favourable economic growth positively influenced consumer disposable income and consumer sentiment, boosting retail spending. However, the industry faced a few hurdles along the way. Demonetisation and GST implementation affected the industry in fiscal 2018. In fiscal 2019, favourable monsoon, ironing out of GST/demonetisation issues, healthy GDP growth supported revival of the retail industry. With the Indian economy caught in crosswinds, GDP grew at a slower pace of 3.7% in fiscal 2020. In a cautious consumer spending scenario, discretionary segments such as gems and jewellery, and apparel were hurt the most, while the impact was lower on non-discretionary segments such as food/groceries, and pharmacy. Thus, overall retail grew at a slightly slower pace of 8.5% in fiscal 2020.

The retail sector contracted in fiscal 2021 in line with the decline in GDP and private final consumption expenditure (PFCE), which de-grew 1.7% in fiscal 2021. Retail consumption took a hit due to the nationwide lockdown on account of Covid19. However, the lockdown’s impact varied across essential and non-essential goods. Sale of essentials was allowed and essential products (especially food & grocery) witnessed normal growth. However, non-essential goods were the worst hit in the first quarter due to sales restrictions and witnessed a slow recovery in the second half of the fiscal on account of the pandemic’s impact on incomes, jobs, and salaries. As essentials (food & grocery and pharmacy) form around 57% of overall retail, the decline of overall retail was restricted to 2% as essentials witnessed 10% growth. The retail sector is estimated to have grown 15-17% in fiscal 2022 on the low base of fiscal 2021, backed by a revival in discretionary spending amid the waning impact of the pandemic, increased market activity as well as an improvement in macroeconomic factors. With lockdowns/restrictions imposed in various states owing to Covid-19, consumer confidence was affected in the first half of fiscal 2022. However, the second half witnessed some revival. The third wave during the last quarter of the year had a limited impact on the overall economy and in turn the retail industry.

Pros and strengths

4th largest consumer durable and electronics retailer in India: The company is the 4th largest and one of the fastest growing consumer durable and electronics retailer in India. It has built a history of collaboration with reputed electronic brands that have helped it expand its service offerings. The company is currently associated with more than 70 electronic brands and has a long-standing relationship of more than 15 years with a certain number of brands which operate in product categories such as large appliances, mobiles, small appliances, IT and others. It enjoys a reputation of trust and reliability with these electronic brands and work closely with them. On account of these relationships and its reputation, it has been able to grow in the domestic market and consistently expand its product portfolio. It continues to strengthen these relationships by entering into long-term contracts and through strategic alliances with them. Long-term contracts help it plan its capital expenditure, enhance its ability to benefit from increasing economies of scale with stronger purchasing power and a lower overall cost base, thereby maintaining a competitive cost structure to achieve sustainable growth and profitability.

Increasing market presence and geographic reach with cluster-based expansion: The company’s business has grown steadily in the recent years, primarily through expansion of its store network. As of August 31, 2022, it operate 112 stores in 36 cities/urban agglomerates of which 104 stores are concentrated in Andhra Pradesh and Telangana and eight stores in NCR. It started its business operations by setting up its first consumer durable and electronic retail store in Hyderabad. It opened stores to deepen its reach in the Hyderabad market and gradually opened stores in Tier-II and Tier-III cities in Telangana and Andhra Pradesh. As of Financial Year 2021, it is the largest player in the Southern region in revenue terms with dominance in the states of Telangana and Andhra Pradesh. The company had the second highest operating margin amongst its peers in Fiscal Year 2021. Its expansion and increased market presence is based on its cluster-based approach, wherein it expand its network in a particular market, till it reach substantial depth & scale.

Business model provides operational flexibility to create long term sustainable footprint: The company operates with a mix of ownership and lease rental model. In order to optimise its profitability, maintain its operational flexibility and ensure that its stores continue to be located in densely populated neighbourhoods and residential locations, it has a flexible strategy of owning or leasing its premises according to availability, cost and other considerations. Its endeavour is to build reliable long-lasting relationships with the customers residing in a given area, therefore following the store ownership model or long-term lease rental model, ensures permanency and brand recognition in designated areas. Its ability to find suitable locations on high-street areas and shopping hubs at low lease rentals per sq. ft., has resulted in reduced operational costs, which enables it to achieve higher profitability, which in turn allows it to offer products at attractive pricing.

Diversified product offering: The company offers its customers a wide product range across multiple categories, brands, price points to ensure that its customers have range of product options to choose from and is able to make the value buy decision. It focuses on providing a competitive product range for the leading brands at its store. It strives to ensure that the latest models & new product launches are available in its stores. Based on its geographic and demographic analysis, it decides the product mix which is to be offered by its stores to cater to its customer preferences, demands and trends. It classifies its products internally into three broad categories viz., large appliances, mobiles, and small appliances, IT and others. This internal Concept Classification is very critical and helpful from the supply chain perspective and ensures the right product reaches the right store and targeted group of customers.

Risks and concerns

Dependent on external suppliers for its product requirements: Any delay or failure on the part of the company’s suppliers to deliver products in a timely manner or any deterioration in the quality of products supplied by the suppliers, may materially and adversely affect its business, profitability and reputation. Further, any deterioration in the financial condition or business prospects of these suppliers could reduce their ability to meet its requirements and accordingly result in a significant decrease in its revenues. Certain factors affecting supplies and thereby impeding its access to products are political and economic instability in India or political instability in certain states of India in which its suppliers are located, the financial instability of the suppliers, labour problems experienced by its suppliers, the availability of raw materials to the suppliers, merchandise quality issues, transport availability and cost, transport security, inflation, and other factors. The operations of its suppliers are further subject to various operating risks, including breakdowns and failure of equipment, industrial accidents, employee unrest, severe weather conditions, natural disasters etc.

Operate in competitive industry: The company operates in a competitive industry which is characterized by rapid shifts in consumer trends and technology and its market share may be adversely impacted at any time by the significant number of competitors in its industry that may compete more effectively than it. These frequent changes and their impact on consumer demand may result into both price and demand volatility, leading to change in the competitive scenario. Due to the expansive nature of its business, it faces competition from various kinds of players including, players operating in retail, wholesale and e-commerce space. It competes with national and local department stores, independent retail stores and internet businesses that market similar lines of merchandise as it. Many of its competitors are, and many of its potential competitors may be, larger, and may have substantially greater financial, marketing and other resources and, therefore, may be able to adapt to changes in customer requirements more quickly and devote greater resources in marketing and sale of their products or adopt more aggressive pricing policies than it can.

Highly dependent on the brand owners: Many factors are important for maintaining, developing and enhancing the brands, including by increasing brand awareness through brand building initiatives and ensuring customer satisfaction by providing quality customer service. There can be no assurance that companies which are owners of various leading electronic products will be able to effectively promote, develop their brands or maintain standard quality of the electronic products. If any of the offerings which it launch from its stores from time to time do not meet standards for quality and performance or customers’ subjective expectations, the company’s reputation and customer retention may be impacted. If it fails to maintain its reputation or increase positive awareness of electronic products, or the quality of the electronic products declines due to its brand partners unable to maintain the required quality at their end, its business, financial condition and cash flows, results of operations may be adversely affected.

Requires significant amount of working capital: The company has been sanctioned secured fund based borrowings of Rs 8,736.67 million and unsecured borrowings of Rs 3,000.00 million as on August 31, 2022 from existing bankers & financial institutions. The retail industry is working capital intensive and has lot of fixed expenditures for operation of stores and maintenance of inventory levels. It intends to continue growing by setting up additional stores. All these factors may result in increase in the quantum of current assets. Its inability to maintain sufficient cash flow, credit facility and other sources of fund, in a timely manner, or at all, to meet the requirement of working capital or pay out debts, could adversely affect its financial condition and result of its operations.

Outlook

Electronics Mart India is the 4th largest consumer durable and electronics retailer in India. The company offers a diversified range of products with a focus on large appliances (air conditioners, televisions, washing machines and refrigerators), mobiles and small appliances, IT and others. The company's offering includes more than 6,000 SKUs (stock keeping units) across product categories from more than 70 consumer durable and electronic brands. The company operates its business activities across three channels of retail, wholesale and e-commerce. With the object of providing comprehensive electronic solutions, the company has set up diverse consumer durable and electronic retail stores arraying multifarious as well as specialized electronic products. It is also engaged in the wholesale business of consumer durables, where it supplies products to single shop retailers in Andhra Pradesh and Telangana regions. In 2017, it diversified its operations by venturing into the e-commerce space through its website. Its e-commerce website currently functions as a catalogue for the products it retail at its stores. On the concern side, while opening new stores, it consciously follows a cluster-based approach which leads to concentration of its business in a relatively small area rather than a widespread presence. More than one store located close to each other in a cluster may lead to each such store eating into the sales of the other stores in the cluster leading to falling sales in each of such stores.

The issue has been offered in a price band of Rs 56-59 per equity share. The aggregate size of the offer is Rs 500 crore to Rs 526.79 crore based on lower and upper price band respectively. On performance front, the company’s total Income increased by 35.72% to Rs 4353.07 crore for the Financial Year 2022 from Rs 3207.36 crore for the Financial Year 2021. The company’s profit after tax increased by 77.22% to Rs 103.89 crore for the Financial Year 2022 from Rs 58.62 crore for the Financial Year 2021. Meanwhile, the company aims to continue to deepen its store network in its existing clusters to increase its market share in the Hyderabad, Telangana, and Andhra Pradesh markets. Its aim is to follow a peripheral and concentric expansion approach pursuant to which, it will look to target contiguous states, to avail new opportunities. It intends to further expand its financing options to make its products accessible to all its customers and consequently widen its customer base and outreach.