IPO Size: Rs.835 cr 

• 82% of the IPO is Offer For Sale (OFS) by (i) promoters (55% to shrink to 46% post IPO) (ii) Intensive Group, also one of the merchant banker (to halve 10.5% stake) (iii) Rekha Jhunjhunwala (to halve 7.7% holding, interestingly acquired at Nil cost) and other individual shareholders
• Rs. 148 cr is Fresh Issue for Rs. 146 cr debt repayment (to become net debt free)

Price band: Rs. 370-389 per share

M cap: Rs. 2,903 cr, implying 29% dilution

IPO Date: Fri 30^th Aug to Tue 3^rd Sep 2024, Listing Fri 6^th Sep 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

East India based Value Retailer

Baazar Style Retail, is a Kolkata headquartered apparel and general merchandise retailer, running 162 Style Baazar stores, across 1.5 million sq feet retail space. With 70% stores located in West Bengal, Assam and Odisha, accounting for 78% of company’s Rs. 1,000 cr revenue, business faces geographic concentration risk.

Low Inventory Turn

For any retail business, inventory turnover ratio is a make-or-break and the ultimate long term profitability driver. Baazar Style’s inventory turn is low, at just 2.3x. Apparel retailer Trent operates at 7.8x and grocery retailer Dmart (Avenue) is even higher at nearly 13x. Even regional value-retailers Vmart and V2 Retail operate at 3.2-3.4x inventory turn. Due to this, company’s RoE is also low, at 11% for FY24.

Slim Margins

On 9.5% same store sales growth (SSSG) in FY24, revenue rose 23% YoY to Rs. 973 cr (balance growth through store addition). Private label mix improved to 38%, from 25% in FY22, expanding margin and making company profitable in FY24, with a net profit of Rs. 22 cr, against net loss of Rs. 8 cr in FY22. However, net margins remain slim at 2.3%, translating into an EPS of Rs. 3.1, on equity of Rs. 35 cr (FV Rs. 5 each).  

High Seasonality

Given apparel-focus retailing, seasonality in Baazar Style’s business is very high. 9MFY24 PAT stood at Rs. 28 cr whereas full year FY24 PAT was lower at Rs. 22 cr. This implies net loss of Rs. 6 cr for Q4FY24, due to heavy discounting to clear inventory in Q4. Even after adjustment for non-cash lease accounting (no loss under Igaap), quarterly margins are volatile. Thus, business is faced with both seasonality and geographic risk (East India focus).

Fully Priced IPO

On lower interest expense and even estimating a higher margin for FY25E in a best-case scenario, current year estimated EPS is at Rs.6, discounting the IPO price by a PE multiple of 65x. We find this unsustainable and advise do not get carried away with the frenzy in value retailer sector, on the country’s rising middle class.

While Baazar’s topline growth will continue on back of store addition, room for margin expansion is limited, due to extremely price-competitive business and low inventory turns. Every company may aspire to be benchmarked with Trent or Avenue, but cannot be, as they clock 12% and 5% net margin respectively. Just for comparison, Trent topline grew 50% YoY in FY24, on a base of Rs. 8,200 cr, whereas Baazar’s topline grew at 23%, on just Rs. 800 cr base. Thus, Baazar’s scale is small, presence concentrated and margin slim, to justify much valuation growth from hereon.

SEBI concern on Merchant Bankers’ conflict of interest 

In a recent discussion paper, SEBI has flagged merchant banking being an investor /lender in the IPO-bound companies, due to possible conflict of interest. Incidentally, Baazar Style’s book running lead manager (BRLM) Intensive is company’s single largest non-promoter shareholder with 10.5% stake, as a group, and also a selling shareholder. If regulator is voicing concerns, safe to assume there may have been incidents in the past and prospective IPO investors must not ignore possible corporate governance red-flag.