Vishal Mega Mart coming with IPO to raise Rs 8432 crore

Vishal Mega Mart

• Vishal Mega Mart is coming out with a 100% book building; initial public offering (IPO) of 1,08,10,81,081 shares of Rs 10 each in a price band Rs 74-78 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 December 11, 2024 and will close on December 13, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 7.40 times of its face value on the lower side and 7.80 times on the higher side.
• Book running lead managers to the issue are Kotak Mahindra Capital Company, ICICI Securities, Intensive Fiscal Services, J.P. Morgan India, Jefferies India and Morgan Stanley India Company.
• Compliance Officer for the issue is Rahul Luthra.

Profile of the company

Vishal Mega Mart is a one stop destination for middle and lower-middle income India. It curates a diverse range of merchandize through its portfolio of own brands and third party brands to fulfil the aspirational and daily needs of consumers. It offers products across three major product categories, i.e., apparel, general merchandise and fast-moving consumer goods, through a Pan-India network of 645 Vishal Mega Mart stores (as of September 30, 2024) and its Vishal Mega Mart mobile application and website. It was ranked among the three leading offline-first diversified retailers in India, based on retail space as of March 31, 2024. The company is also the fastest-growing leading offline-first diversified retailers in India, based on profit after tax growth between Financial Years 2021 and 2024, and among the two leading offline-first diversified retailers in India in terms of same-store sales growth for Financial Year 2024.

The company targets middle and lower middle-income India. The number of middle income households in India has increased from around 201 million in Calendar Year 2018 to approximately 225 million households (approximately 945 million individuals) in Calendar Year 2023, driven by rapid economic development, growing formalization of employment, and a structural shift from an agrarian-based economy towards manufacturing and services. 

The aspirational retail market in India, driven by the consumer desire for products that offer both high-quality and affordability, will remain a significant contributor to India’s retail market. The total addressable market for aspirational retail in India is Rs 68-72 trillion ($820-870 billion) for Calendar Year 2023, and is expected to be Rs 104-112 trillion ($1,250-1,350 billion) by Calendar Year 2028, growing at a CAGR of 9%. Within the aspirational retail market, there has been a consistent shift towards organized retail primarily due to increasing baselines for quality, availability of wider assortment, better pricing, denser urban areas, and large whitespace for organized retailers in aspirational retail. 

Proceed is being used for:

• Achieving the benefits of listing the Equity Shares on the Stock Exchanges
• Carrying out the Offer for Sale of face value of Rs 10 each aggregating to Rs 80,000 million by the promoter selling shareholder

Industry Overview

The Indian retail market experienced robust growth, expanding at a CAGR of around 12% to reach Rs 63 trillion (around $764 billion) by CY2019. This expansion was primarily fuelled by demographic changes, government interventions, and evolving consumption patterns. The rising middle-income segment has played a pivotal role in this growth, with their increasing disposable incomes driving greater demand for branded products, particularly in Tier-2 cities and beyond. This shift reflects broader economic trends, including rapid urbanization and the nuclearization of families, which have reshaped consumption patterns and expanded the consumer base. Government interventions have also played a crucial role in shaping the retail landscape. The implementation of the GST and the liberalization of FDI policies have helped formalize the retail sector. These policy reforms have been complemented by technological advancements, particularly in digital payments. Innovations such UPI have streamlined transactions, making consumer goods more accessible and boosting retail sales. Additionally, government social welfare schemes have injected additional disposable income into the hands of consumers, further energizing the retail market by increasing purchasing power and consumer spending.

India's retail landscape is transitioning towards a more organized direction, with Tier-2 cities and beyond at the forefront of this change. As disposable incomes rise and urbanization continues to spread, unorganized retail spaces are being progressively displaced by both organized offline brick-and-mortar stores and online platforms. These two channels are projected to grow symbiotically, not only attracting a new consumer base but also converting users from unorganized retail through enhanced service offerings and operational efficiency. While Tier-2 cities and beyond are leading the charge, projected to grow at 32% CAGR between CY2023 and CY2028, the potential for organized retail expansion extends beyond these cities. Tier-1 cities, where the share of unorganized retail currently ranges between 50-55%, also present a substantial headroom for growth. As India's retail market continues to formalize, it will gradually move towards the market structures of more developed economies such as the United States and China with 85-90% and 50-60% share of organized retail respectively as of CY2023.

India’s underpenetrated e-Commerce market presents a substantial growth opportunity, with e-Commerce penetration at approximately 7% as of CY2023, significantly lower than markets like China (32% as of CY2023). This indicates significant headroom for expansion, particularly in Tier-2 cities and beyond, where current e-Commerce penetration is only 3-5%. Offline organized players are leveraging this opportunity by offering an omni-channel experience to consumers across all cities, including Tier-2 cities and beyond, ensuring a seamless integration between online discovery and offline purchases. This seamless integration enhances consumer engagement and conversion rates. In-store digital kiosks enable consumers to explore products and check availability, encouraging online purchases when items are out of stock instore. Conversely, online channels guide consumers to physical stores for final purchase decisions, especially when tactile verification is needed, such as with apparel.

Pros and strengths

Serving a large and growing section of the Indian Population: It is a one stop destination for middle and lower-middle income India. It serves this section of the Indian population through its diverse portfolio of quality, affordable and branded products, fulfilling their daily and aspirational needs. The number of middle income households in India has increased from approximately 201 million in Calendar Year 2018 to approximately 225 million households (around 945 million individuals) in Calendar Year 2023, driven by rapid economic development, growing formalization of employment, and a structural shift from an agrarian-based economy towards manufacturing and services. It has a large network of stores in Tier 2 cities and beyond in India, with 451 stores as of September 30, 2024. With wider access to digital channels, consumers in these areas are increasingly exposed to new products and services, driving demand and expanding retail opportunities as they aspire to emulate higher-tier urban lifestyles. As the Indian retail market matures and basic needs are increasingly met, there is a broad-based shift towards discretionary spending.

Diverse and growing portfolio of own brands across product categories: The company has a diverse and growing portfolio of own brands across the apparel, general merchandise and fast-moving consumer goods product categories. Its own brand portfolio includes its own brands for men, women, children and infants in the apparel category, its own brands for household and home furnishings, travel accessories, kitchen appliances, utensils, crockery and footwear and lifestyle products in the general merchandise product category, and its own brands for food products, non-food products and staples in the fast-moving consumer goods category. During Financial Year 2024, 19 of its own brands recorded sales exceeding Rs 1,000 million each, with six of its own brands recording sales exceeding Rs 5,000 million each.

Pan-India presence with a track record of successful store growth: The company operates a Pan-India network of 645 stores across 33 Tier 1 cities and 381 Tier 2 cities and beyond, as of September 30, 2024. It is ranked among the two leading offline-first diversified retailers in India, based on the number of cities present as of March 31, 2024. During the six months’ period ended September 30, 2024 and 2023, and the Financial Years 2024, 2023 and 2022, it opened 35, 24, 61, 66 and 88 new stores, respectively, and closed a total of 26 stores during these periods. It has a new store selection methodology that considers factors such as population, market density, proximity to its consumers, and accessibility by road, with parking facilities, among others. Its stores, with an average floor area ranging around 18,000 square feet, offer a consistent shopping experience to its consumers with consistent designs and layouts that prioritize visibility, ease in navigation, and accessibility. As all its stores are operated on a leasehold basis, this model allows it to roll out new stores with optimal upfront investment, and deliver short payback periods on per store investment.

Professional and experienced management team: The company has a professional and experienced management team led by its distinguished board of directors. The company’s Managing Director and Chief Executive Officer, Gunender Kapur has over 41 years of experience in management and investment in the consumer and retail sectors. As part of its management, it has recruited and retained employees from a variety of backgrounds, including consumer good, retail, management, technology, and marketing. This includes Amit Gupta (Chief Financial Officer), Manoj Kumar (Chief Operating Officer), Dhruva Kumar Dubey (Chief Human Resources Officer) and Karthik Kuppusamy (Chief Information Officer). Anne Puvis, Samir Agrawal and Vishal Mehrotra are its category heads for its apparel, general merchandise and fast-moving consumer goods product categories, respectively. S Raamesh and Kuldeep Sharma are its supply chain and legal and compliance heads, respectively.

Risks and concerns

Derive significant revenue from stores located in Uttar Pradesh, Karnataka and Assam: The company derives a significant portion of its revenues from sale of products from its stores located in Uttar Pradesh, Karnataka and Assam, which are the top three states in terms of revenue contribution to its business. The company has generated aggregate of 37.36%, 37.54 and 37.53% across all three product categories from Uttar Pradesh, Karnataka and Assam in FY24, FY23 and FY22 respectively. While it has not faced any such material instances in the six months period ended September 30, 2024 and the Financial Years 2024, 2023 and 2022, in the event of a slowdown in the economic activity in Uttar Pradesh, Karnataka and Assam, or any other developments including political unrest, natural disasters, disruption or sustained economic downturn that result in a decrease in demand for its products, it may experience an adverse effect on its business, results of operations, financial condition and cash flows.

Central distribution centre is located in North India: As of September 30, 2024, the company had one central distribution centre, one distribution centre and 17 regional distribution centres. The geographical location of its central distribution centre in North India renders its supply chain operations susceptible to regional risks, adverse changes and events occurring in and around the region. Regional risks, adverse changes and events that may affect its business operations may include and are not limited to disruptions to its infrastructure, significant natural disasters, workforce disruptions, as well as changes in the general economic conditions, regulatory environment and local government policies. While it has not experienced such disruptions to its supply chain operations due to regional risks, adverse changes and events occurring in and around the region in the six months’ period ended September 30, 2024 and the Financial Years 2024, 2023 and 2022, it cannot assure that it will not face such disruptions in the future, which may adversely affect its business, results of operations, financial condition and cash flows.

Business is subject to seasonality: The company typically experience seasonal fluctuations in the sale of products across its three product categories, with higher sales volumes associated with the festive sale period in the third quarter of each Financial Year, which encompasses holiday events such as Durga Puja, Diwali, annual sales events and other national and regional festivals. The company’s revenue from operations for the six months’ period ended September 30, 2024 and 2023 was Rs 50,325.13 million and Rs 42,194.61 million, respectively. Due to these seasonal fluctuations, its sales and results of operations may vary by quarters, and the sales and results of operations of any given quarter may not be relied upon as indicators of the sales or results of operations of other quarters or of its future performance.

Dependent on third parties for transportation: The company engaged third-party transport service providers to transport products from its central distribution centre to its regional distribution centres and stores. It typically does not enter into any agreements with these third-party transport service providers and engage them on a needs basis. Apart from one of its Promoters, Samayat Services LLP, which provides it with transportation services, none of its transportation service providers are related to its Promoters, members of Promoter Group, Key Managerial Personnel or Directors of the company. Its operations and profitability are dependent upon the availability of transportation facilities in a time and cost-efficient manner. Accordingly, its business is vulnerable to increased transportation costs, transportation strikes and lock-outs, shortage of labour, delays and disruption of transportation services caused by events such as weather related problems and accidents.

Outlook

Vishal Mega Mart is a hypermarket chain that sells a wide range of products like apparel, groceries, electronics, and home essentials. It owns its brands and third-party brands to meet the everyday needs of consumers. The company operates an asset-light business model, leasing all its distribution centers and stores, while its products are manufactured by third-party vendors or sourced from third-party brands. On the concern side, the company derives a significant portion of its revenues from sale of products from its stores located in Uttar Pradesh, Karnataka and Assam, and any adverse developments in these states may have an adverse effect on its business, results of operations, financial condition and cash flows. Moreover, the company’s central distribution centre is located in North India, which may expose its supply chain to regional risks, which in turn may adversely affect its business, results of operations, financial condition and cash flows.

The company is coming out with a maiden IPO of 1,08,10,81,081 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 74-78 per equity share. The aggregate size of the offer is around Rs 8000.00 crore to Rs 8432.43 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations increased by 17.48% to Rs 89,119.46 million for the Financial Year 2024 from Rs 75,860.37 million for the Financial Year 2023, primarily due to an increase in revenue from existing and new stores opened during the Financial Year 2024. Moreover, its profit for the year increased by 43.78% to Rs 4,619.35 million for the Financial Year 2024 from Rs 3,212.73 million for the Financial Year 2023.

There is significant potential for further expansion of its Pan-India store network, and intends to expand its store footprint by entering new cities and towns and strengthening its presence in existing cities and towns through its established store rollout model. The company aims to continue to introduce new products and own brands and increase the span and penetration of its existing own brands, thereby enhancing its proposition to its consumers. The company’s recently introduced products include down jackets, its athleisure apparel range, microwave lunch boxes, garment steamers, air fryers and infrared cook tops, among others. The company also plans to introduce new apparel ranges for men, women and children, new products such as study lamps and high wattage induction cooktops in the general merchandise category and new food and non-food products such as chilly noodles and body wash, in the fast-moving consumer goods category.