Turbulent markets aren’t a great time to float a share sale, but Electronics Mart India has decided to test the waters with a Rs 500 crore fresh share issue. The issue opens on October 4 and closes on October 7. The fresh issue will lead to a 28.3% dilution of the promoter holding.

The company plans to use nearly Rs 111.4 crore to fund the expansion of its stores in Andhra Pradesh, Telangana and Delhi-NCR. It will use Rs 220 crore for its working capital needs,  Rs 55 crore to repay and prepay loans to HDFC Bank, and the balance for general business purposes,

Electronics Mart is the largest electronic goods retailer in South India and the fourth largest in India. Its major presence is in Andhra Pradesh and Telangana. It is planning to expand into NCR by setting up warehouses and eight new stores. It also plans to set up one additional store in Hyderabad.

The company sells consumer electronics and durables like refrigerators, television, washing machines, mobile phones, and laptops. It also sells household products like geysers, ceiling fans, and kitchen appliances. It sells products of leading brands like LG, Panasonic, Philips, Sony, Oppo, One Plus, and Vivo. A little over 50% of Electronic Mart’s sales of products come from large appliances like refrigerators, and around 31% from consumer electronics like mobile phones.

This business, however, doesn’t have much of a moat. Electronic Mart operates in a competitive space with players like Reliance Retail (through Reliance Digital), Croma, and Vijay Sales. But it has only one listed peer to speak of—Aditya Vision.

At the upper end of the price band, Electronic Mart’s IPO is priced at a pre-issue PE ratio of around 11 based on its annualised FY23 (based on Q1FY23 results). The post-issue PE ratio at the upper end of the price band is around 15 times annualised FY23 earnings. This is way below Aditya Vision’s TTM PE of around 33.

Does the cheap valuation offered by Electronics Mart make the IPO attractive for investors?

Revenues pick up in FY22 but margins are stagnant

Electronics Mart India operates multi-brand outlets and a few exclusive brand outlets of its partners. Out of a total of 112 stores, 100 are multi-brand outlets and 12 are exclusive brand stores. The company continued to set up new stores over the past two years, despite disruption in its operations due to the pandemic leading to slower revenue growth.

Many of these new stores started producing revenues in FY22. This helped the company show revenues and profit recovery in FY22 over FY21. The recovery continued into FY23 as well, as Q1FY23 profit and revenue are nearly half of Electronics Mart’s entire FY20 revenue and profit.

Being a retailer of consumer electronic goods means the company will have to buy up a lot of products beforehand to ensure the availability of stock at its stores. This requires substantial working capital. While the company’s capital-intensive business model requires a ramp-up in working capital as revenue growth increases, it has generated operating cash flows and free cash flows during the past two years. This continued in Q1FY23 as well.

But retail sales of electronic goods don’t have substantial margins. This means higher volumes are the only way to generate higher profits as there is no pricing power with retailers. In a competitive space, with rival brick-and-mortar retailers and e-commerce players resorting to discounts, achieving rapid revenue growth isn’t a certainty. Even with revenue growth, margins won’t rise much, as is evident in the mere 30 bps rise in EBITDA margins in FY22 over FY21. This is despite revenue rising nearly 36% YoY.

The growth in profit helped the company post improved return on net worth numbers in FY22. But its listed peer’s FY22 return ratio was 41.9% (Aditya Vision). This probably explains why Electronics Mart’s IPO is priced so cheaply.

Lack of trademark registration and pending statutory dues are key risks

The company doesn't own the brand name and trademarks for Electronics Mart India, Electronics Mart, Bajaj Electronics, among others. It operates stores under the brand name Bajaj Electronics and Electronics Mart India. It is currently fighting a court case filed by Bajaj Electricals in the Bombay High Court. If the court rules in favour of the pleadings by Bajaj Electricals, then Electronics Mart India won’t be able to use the brand name Bajaj Electronics outside Andhra Pradesh and Telangana.

There are pending cases against the company for evasion of goods and services tax amounting to nearly Rs 80 crore. The company is currently involved in litigation that disputes these demands by the GST authorities. If it loses these court cases, then this will lead to a considerable outflow in terms of GST dues.

Investors who are evaluating investing in Electronics Mart India’s IPO should keep in mind that they will be investing in a low-margin business that has no moat. But the company does generate cash. Until now the company was focused on Andhra Pradesh and Telangana, and has sufficient brand recall in these states. Its expansion into Delhi-NCR and other regions will mean it will have to build its brand from scratch.

This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation