Fundamental Analysis of Electronics Mart India Ltd | Electronics Mart India Ltd IPO detail analysis

Dear friends, we have another promising IPO starting on 4th October. It is the IPO of Electronics Mart India Limited; which is the 4th largest and one of the fastest growing consumer durables and electronics retailers in India and the largest regional organized player in the southern region in terms of revenue with dominance in the state of Andhra Pradesh and Telangana. And there's already a lot of buzz with a grey market premium of nearly 50% for this IPO, the major reason is its very reasonable valuation.  So as usual, we will first cover the business of the company, its promoters, key strength, and competitors, future growth, and financials. Then we will look at the IPO details along with valuations, then we would conclude if it is worth applying for the IPO or not. Alright, let's get started.

Fundamental Analysis of Electronics Mart India Ltd
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Company Profile & Its Business

Electronics Mart India Ltd (EMIL) was incorporated in 1980 as a sole proprietorship with a consumer durable and electronic space in Hyderabad under the name Bajaj electronics in the last 40 plus years, the company has grown into 112 stores as of August 2022, out of which 100 stores are multi-brand outlets and 12 stores are exclusive brand outlets. the company offers a diversified range of products, including  AC, TV, Washing Machine, Refrigerator, Mobile, Laptop, Camera, Kitchen Appliances, Home Entertainment, etc. Their offerings include more than 6000 SKUs across product categories from more than 70 consumer durable and electronics brands. So basically electronics mart is a retail company that doesn't manufacture its own products. It is a retailer with a one-stop solution for all electronics and consumer durables where it sells products for all top brands including LG, Philips, Sony, Goodridge, Voltas, Oppo, Vivo, One Plus, Dell, Havells, Orient, etc. Today company claims to be the 4th largest consumer durable and electronics retailer in India as of FY 21 and it is the largest player in South India with dominance in Telangana and Andhra Pradesh. So if you are from Telangana, Andhra Pradesh, you might have seen these stores of electronics smart under the name Bajaj Electronics. company is now also expanding with 8 stores in the NCR region.

If you look at the business model of the company, the company operates in 3 channels- Retail, Wholesale, and E-commerce. Within retail, it is a mix of ownership and leases rental model; as of August 2022, out of a total of 112 stores electronics mart operates 11 stores are owned 93 stores are under the long-term lease rental model, and 8  stores are partly owned and partly leased. Electronics mart is also engaged in the wholesale business of consumer durables, where they supply products to single-shop retailers in Andhra Pradesh and Telangana region. The 3rd channel is e-commerce which was set up in 2017, where they sell products on their website as well as on a leading e-commerce platform. In FY 22 company generated a revenue of 4000 Cr out of which 91% of the revenue company was from retail business, 1.48% from wholesale, and 0.92% from E-commerce. The company has a total of 9 large warehouses out of which 6 warehouses are in Hyderabad, 1 warehouse is in Vijayawada, and 2  warehouses are in the NCR region.  In the retail business, the biggest challenge is to offer the products at a competitive price point to the consumers as well as maintain a good margin. And for that, you need to have a very efficient logistics network, Robust technological infrastructure, and good inventory management which is the backbone of the entire supply chain. Electronics mart is so far able to maintain a consistent margin and has been able to take benefit of its scale to procure products at competitive rates. This is one of the key strengths of the company and the company's RHP report, has mentioned that among all the organized players in the electronics and consumer durables space, 'EMI' has the 2nd best operating margin which shows the company so far running very efficiently.



Promoters  & its Leadership

If you look at the leadership, Mr. Pavan Kumar Bajaj is the founder, Promoter, Chairman, and MD of the company. He has over 40 years of experience in retail business management. Pavan Bajaj's son Mr. Karan Bajaj is the CEO of the company and he has over 10 years of experience in retail business management. 


Future Growth Prospects

As far as future growth is concerned, the future of electronics and consumer durables is very bright. It is a no-brainer. The demand for AC, TV, Washing machines, refrigerators, Mobile, laptops, Cameras, Kitchen Appliances, and Home Entertainment, would only be going to increase, the simple reason is rising consumption in India. Consumption is one of the biggest themes in India for the next 20-30 years due to the population of 140 Cr people and rising income and spending levels. Millions of people still live in rural areas who do not yet have access to electronics and durable consumer products. Also, due to increasing urbanization, there will be an increasing need for electronics and consumer durables in cities as well.

Another important trend is the growing share of organized retail in India. India has predominantly been an unorganized sector with small MOM & POP stores selling products. However organized retail is capturing more and more market share. As per Crystal's report organized retail market share in the overall retail market was 7.8% in FY 12, that got increased to 8.9% in FY 17. And currently, it is 10%-11% FY 22, and the latest market size is Rs 70-72 trillion. So clearly there's a good scope of growth for organized retail India, which is expected to touch a market of 13%-15% by FY 27. To capture this growing market, Electronics Mart is planning to expand its reach across selected geographies and deepen its footprint in the existing market. Basically, the company follows a cluster-based approach wherein they expand their network in a particular market till they reach a substantial depth and scale. Such clusters lead to effective penetration in an underserved market and concentrated brand visibility due to the focus implementation of marketing and advertising initiative. For example, currently, they have a good presence in Telangana and Andhra Pradesh, and now they're focusing on expanding into the NCR region with a plan to open 26 Multi brand outlets from the current level of 8 outlets. 



Key Risk

Before you consider investing in the company, you should be aware of its key risks.

1. Intense competition 

The biggest risk for Electronics Mart is intense competition. There is intense competition in the electronics and consumer durables space, from organized brick-and-mortar retailers such as Reliance retail, Croma, etc. And unorganized retailers, such as local electronics stores and others. On top of this, e-commerce giants like Amazon and Flipkart have been eating a lot of the market of the retail sector, especially in categories like mobile, TV, laptop, etc. If the e-commerce companies continue to gain market share, it can impact the company's business and dear friends, try to understand this. since Electronics Mart is not a manufacturer of electronics products, the entry barrier is quite low, it means let's say you want an LG TV; then it won't really matter if you're buying it from Electronics Mart, or Reliance retail, or Croma, or local vendor, or from online, you will buy it from where you will get the best price. So, the entry barrier in this sector is basically the price point. You have to offer the best price for the product and for that, you need to have tight control over your inventory management, logistics, and efficient use of technology.

2. Brand Name 

The second risk is brand name. Since Electronics Mart is a well-known brand in the southern part, it gives them a benefit over competitors, but make sure that you understand this competitor risk before applying for the IPO.

3. Regional concentration 

Another risk is regional concentration. EMI generate major sales from Telangana and Andhra Pradesh which makes it vulnerable to adverse social political or natural disaster. 



Financials

If you look at the financials, 

Revenue

If you look at EMIL's revenue on yearly basis, it has grown from 2826 Cr in FY 19 to 3179 in FY 20 Cr 3207 Cr in FY 21 to 4353 Cr in FY 22. Interestingly, even during COVID, The company's sales did not fall.

Profit

If you look at the profit growth, it has grown from 77 Cr in FY 19 to 103 Cr in FY 22, although there was a dip in FY 21 due to COVID.

ROE & ROCE

If you look at the ROE and ROCE, both are looking good. The latest ROE is 17.4% and ROCE is 19%.

OMP%

If you look at the margins, look at the operating margin of Electronics Mart India Ltd (EMIL) is 6%, which is one of the best in the industry.

Debt to Equity Ratio 

If you look at the debt to equity, its current debt to equity is 0.75.

Overall the financials are looking decent, not too good, not too bad.


IPO details

Electronics Mart's IPO window is between 4th October to 7th October 2022, the IPO price band is between Rs 56-59, the shares are available at a face value of Rs 10, and the lot size is 254 shares. So, the total investment for one lot would be Rs 14,986, the issue size is Rs 500 Crore, and out of this there is fresh equity of Rs 8.47 Cr with this promoter stake in the company will reduce from 100% to around 78%. The money raised from the IPO would be utilized for capital expenditure, expansion and opening of stores and warehouses, funding incremental working capital requirements, repayment of some borrowing, and general corporate expenses

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Valuation

At a higher price point of Rs 59, the company would command a market cap of 2270 Cr which would make it a very small cap company. As far as valuation is concerned in FY 22 company generated an EPS of Rs 2.7 which translates to a PE ratio of 21.8. The valuation on which the promoters are launching the IPO of Electronic Mart is looking very attractive and that is the biggest reason why this company is also commanding a premium and grey market.


Conclusion

In this article, we discussed the IPO of Electronics Mart India Ltd (EMIL), I summarise again, the company is the 4th largest retailer of electronics and consumer durables in India, and the future of electronics and consumer durability is very bright. However, the only concern is intense competition from organized players as well as unorganized players in the sector. On top of that, the rising penetration of E-commerce giants is also eating the business of brick and mortar retailers. So ultimately everything was boiled down to competitive price and for that, the most important factor would be inventory management and overall efficiency in terms of cost management. The retail segment is a low-margin business, the major play is around the volume. Since Electronics Mart has a good scale of business, it has a better bargaining power to negotiate the price from brands and procure products at a lower cost as compared to smaller retailers. However, as the company plans to grow, it would be important to maintain the margin. So for now, at the current valuation, the company looks interesting and you may consider applying for the IPO for listing gain. As far as a long-term investment is concerned, you need to keep an eye on the business performance and accordingly decide if you want to hold it for the long term or not. Everything will depend upon companies operating margin and profitability while maintaining growth.  Overall, this issue is worth subscribing to for both listing gain, as well as for long-term wealth creation. I'm going to apply for this IPO. What is your opinion on this IPO? Will you apply or avoid it? Let me know in the comments.

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