IPO Size: Rs. 4,194 cr

• 60% is Offer For Sale (OFS) worth Rs. 2,528 cr - by Softbank (26% stake to drop to 20%), Premji Invest (10% to reduce to 8%), TPG (5% to 4%), NewQuest (4% to 3%), M&M (11% to 10%) and others 
• 40% is Fresh Issue worth Rs. 1,666 cr (i) new stores and warehouse in India and Saudi Arabia Rs.433 cr (ii) existing store rentals Rs. 223 cr (iii) sales marketing Rs.200 cr (iv) technology Rs.58 cr (v) Rs.169 cr private label business (vi) balance ~35% of fresh issue for acquisition and general corporate purposes

Price band: Rs. 440-465 per share

• 75% issue reserved for institutions and only 10% for retail, as company is loss-making

M cap: Rs. 24,142 cr, implying 17% dilution

IPO Date: Tue 6^th Aug to Thu 8^th Aug 2024, Listing Tue 13^th Aug 2024

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

Omni-channel Mother-Child Care Retailer

Brainbees Solutions, popularly known as Firstcry, is an omni-channel mother-child care retailer, garnering 3/4^th of Rs. 6,500 cr revenue online. Founded in 2010 by Mr. Supam Maheshwari, it operates 1,063 physical stores under Babyhug and Firstcry brands, all in India, of which, 435 are company-owned company-operated (COCO) and balance franchised.

Retailer Needing Funds for Rents Payment

From fresh issue proceeds, Rs. 223 cr is earmarked to pay rent of the 435 existing COCO stores, for FY25, FY26 and FY27. One wonders if the business plan prepared before opening these stores did not budget for this ‘known’ expense? Amusing to see a retailer knock public doors for rent payment! And then the company has ‘diversified’ into an unrelated service-heavy pre-school business, away from core product retailing.

EBITDA: A Misnomer for Retail Business Profitability

Due to the extant accounting standards, the ‘I’ in EBITDA represents interest expense or finance cost, which includes store rentals, despite they being ‘real’ operating expense. Thus, adjusted FY24 EBITDA of Rs. 274 cr is actually Rs. 186 cr, net of Rs. 88 cr lease rentals, and one cannot blindly interpret EBITDA as the benchmark for retailers’ profitability, where stores are on lease.

Incidentally, this company was asked to refile DRHP, as the original filing lacked some key performance indicators, shared with company’s pre-IPO investors.

Profitability Not Anywhere Near

Company reported operating loss of Rs. 96 cr in FY24. The ‘sole-profitable’ business segment of multi-channel India retail reported an operating profit of Rs.167 cr, which is actually Rs. 79 cr, net of lease (as explained above), implying operating margin of a paltry 1.7%, on Rs. 4,579 cr topline. And this is after being in business for 14 years!

This also gives cue that international business, where physical stores will be established in Kingdom of Saudi Arabia from fresh issue proceeds, may take quite sometime to turn profitable.

On 3,500 employees, attrition rate was very high, at 42% and 44% for FY24 and FY23 respectively, which also adds to the cost. FY24 net loss of Rs. 322 cr includes Rs. 94 cr other income and Rs. 178 cr non-cash ESOP cost. Adjusted for both, net loss is Rs. 238 cr or negative 3.7% of topline in FY24. Thus, company is not turning profitable anytime soon.

Nykaa: Closest Listed Comparable

RHP states there are no listed peers, but Nykaa, an omni-channel category-focussed retailer with similar business model (holding inventory on books), can be a good benchmark. Till date, Nykaa has raised Rs. 1,200 cr in primary capital, including Rs. 630 cr via IPO three years ago and clocked topline of Rs. 6,400 cr in FY24, leading to a capital asset turnover ratio of over 5x.

On the other hand, Firstcry has raised about Rs. 3,600 cr in primary capital so far. Its FY24 topline of Rs. 6,500 cr was similar to Nykaa, but Firstcry needed thrice the capital, as Nykaa to generate similar revenue, implying a low capital turnover ratio of only ~2x. This not only implies a low RoE (when PAT positive) but also further need for Rs. 1,666 cr for future growth. Firstcry’s lower gross margin of 36% vis-à-vis Nykaa’s 44% also implies longer time to have a positive bottomline.

Why ‘Professionally Managed Company’?

Company says to have no identifiable promoter, but we wonder absence of ‘control’ when founder, holding 5.94% stake, is the Managing Director and Chief Executive Officer, and one of the only two executive directors on board (4 independent, 2 non-executive, of total 8 directors), drawing remuneration of Rs. 104 cr in FY24 and Rs. 201 cr in FY23. Between Aug-Dec 2023, though company bought back about 93 lakh shares at 1 paisa each from the founder, maybe to part-amend the error?

Anyways, we view the non-classification as promoters escaping accountability and being unfair to incoming investors, as all private market investors take a bet on the entrepreneur before investing in a business.   

Disparity in Rules?

Incidentally, company’s largest shareholder Softbank, holding 25.5% stake is not classified as promoter, whereas same investor holding 29.2% stake in Unicommerce, whose IPO open and close on the exact same dates, is being classified as a promoter in Unicommerce. This disparity in interpretation of rules is not only puzzling, but also surprising on the part of regulator SEBI.