When an investor encounters an initial public offering of a company that says in its offer document that it has no listed peer, judging the valuation that the company is asking in its share sale is a little difficult.

Take Vedant Fashions, which owns the wedding and celebration clothing brand Manyavar. The company raised Rs 945 crore from anchor investors on Thursday, ahead of its Rs 3,149-crore IPO. The IPO is purely an offer for sale by investor Kedaara Capital and the promoter group. Kedaara Capital is selling its entire 7.5% stake held through two entities and the promoter Ravi Modi HUF is selling a 7.5% stake as well.

Back to the valuation of Vedant Fashion. With a price band of Rs 824-866, the company is valued at 108 times its annualised FY22 earnings (based on H1FY22 EPS) at the upper end. That’s a jaw-dropping valuation multiple. But that’s the thing with not having any listed peers, one can ask for any valuation one wants. Especially if listed fashion retailers like Aditya Birla Fashion and Retail and Shoppers Stop are struggling to eke out consistent quarterly profits.

Vedant Fashions doesn’t seem to have any such troubles as its revenues and profits rebounded in H1FY22 after being hit by the second wave of the pandemic in H1FY21.

The fall in revenues and profits in FY21 was also due to the impact of the pandemic, but the rebound in H1FY22 is quite remarkable. If the company maintains this run rate, it will easily cross FY22 revenues and profits, and then some.

But why is the company’s valuation so steep?

High margins and doubling of valuation in six months

In July 2021, Vedant Fashions bought back shares worth Rs 269 crore (total cash outflow of Rs 331.3 crore including tax and expenses). This is important because the company’s shares were valued just 6 months ago at Rs 495 (adjusted for stock split). Essentially, the company’s valuation jumped 1.75 times in the past six months for a post listing valuation of Rs 21,000 crore.

Is this justified?

Well, if you look at the company’s margins, especially for H1FY22, it does make for good reading. At nearly 49%, the EBITDA margins are quite high.

These high margins helped Vedant Fashions’ cash flows. This thing to keep in mind is that advances received against property juiced up the company’s free cash flows.

The company has a stated dividend payment policy and has also undertaken buybacks in the past to return the cash it generates to investors. This bodes well for shareholders looking to invest in this IPO.

A franchisee-led omnichannel business model

The company sells its products primarily through franchisee-owned exclusive branded outlets or EBOs, with some multi-brand outlets or MBOs and shop-in-shop outlets. But it also operates a largely omnichannel business model where it seamlessly integrates its operations online and offline. As of September 30, 2021, it operated out of 212 cities and towns in India through 515 EBOs and 11 outside of India to serve the Indian diaspora. The company earned 88.1% of its revenues from EBOs, 7.4% from MBOs, and 3.7% from online channels, including its website, the rest from shop-in-shops.

It runs a largely asset-light business with franchisees running stores, and the company focuses on sourcing the products, engaging third parties to do job work, packaging the product, and its distribution. The focus on running an efficient supply chain to eke out cost efficiencies allows Vedant Fashions to deliver higher EBITDA margins.

The company’s thesis is that branded ethnic wear for weddings and other celebration events will continue to grow. A CRISIL report quoted in the prospectus states that branded wedding and celebration wear market is expected to grow 18%-20% from FY 20-25. The men’s wedding wear market by FY25 will be at around Rs 18,000 crore and the women’s wedding wear market at around Rs 1 lakh crore.

The point to note here is that demand for apparel fell up to 32% in the beginning of FY21 due to a fall in footfalls, according to CRISIL Research. The footfalls in stores returned only to 70%-75%. The pandemic hit wedding functions due to restrictions on public gatherings, and this was reflected in the beginning of FY21. But there was a revival in the second half. There could be a similar revival for Vedant Fashions’ various brands in H2FY22 as well, with the festive season and the wedding season coinciding in Q3FY22. But the third wave of the pandemic hit in December 2021. This could impact sales.

For investors, the way to look at this IPO is this—do you want to pay for a brand that has decent recall value in its space (wedding and celebration wear) and own a piece of a clothing retail company? The company’s financials show that it can squeeze out a profit in even a difficult operating environment. That is why it’s asking you to pay a hefty premium. The valuations are undoubtedly rich but the company has a reliable niche. The pandemic hasn’t dented India’s taste for big, celebratory events. An investor would have to take a call if they want to pay a big premium, or wait on the sidelines and scoop up the shares in the secondary market once they list.