Cello World

IPO Size: Rs. 1,900 cr 

• Entirely Offer for sale (OFS) by the promoters (91.9% to drop to 78.1%)

Price band: Rs. 617-648 per share

M cap: Rs. 13,753 cr, implying 14% dilution

IPO Date: Mon 30^th Oct to Wed 1^st Nov 2023, Listing Thu 9^th Nov 2023

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

Consumer Brand Company, operating under 3 business divisions:

1. Houseware (66% of Rs. 1,800 cr revenue, 22% operating margin): Cello branded glassware, opalware, small kitchen appliances etc. Opalware capacity in Daman increased 67% in Aug 2023 and a new glassware unit coming up in Rajasthan by FY25.
2. Writing Instruments and Stationery (16% revenue mix, 23% operating margin): Does not own the ‘Cello’ brand for writing instruments, rather markets under ‘Unomax’ brand established in 2019, now clocking Rs. 300 cr in revenue, demonstrating company’s ability to scale brands.
3. Moulded Furniture (18% revenue, 17% operating margin): through separately listed 55% subsidiary Wim Plast Limited.

Company has established a widespread distribution reach, with ~80% revenue from general trade, 10% exports and balance online and modern trade.

Strong Financial Performance

Both revenue and PAT grew at 31% CAGR between FY21 to FY23, with a healthy EBITDA margin of 25%. On FY23 revenue of Rs. 1,797 cr, company reported EBITDA of Rs. 437 cr and PAT of Rs. 285 cr (16% net margin). In Q1FY24, revenue stood at Rs. 472 cr, with EBITDA of Rs. 127 cr. PAT jumped 25% YoY to Rs. 83 cr, translating into an EPS of Rs. 3.65, against FY23 EPS of Rs. 13.17.

Despite 80% manufacturing done in-house and inventory and debtors outstanding of 3 months each, company’s RoE is healthy at 23-24%.  

Valuation for Growth and Margins

On FY24E EPS of about Rs. 15 per share, PE multiple works out at 43x. Glassware maker Borosil is ruling at a PE multiple of 50x, with Rs. 1,100 cr topline and single digit net margin, while LaOpala is ruling at a PE of 36x on Rs. 500 cr topline and 27% net margin. Writing instrument peers Linc, with Rs. 500 cr topline and single digit net margin, is trading at a 33x PE multiple, while Kokuyo Camlin, at 41x PE on Rs. 800 cr topline and low single digit margin. Given Cello’s high double-digit margin and expected future growth due to capacity addition, the current IPO valuation appears in-line.  

Making Hay While the Sun Shines?

In Oct 2022, company issued equity shares to ICICI Ventures and Tata Capital (~8% combined stake), at Rs. 275.66 per share. Now, after a year, OFS is priced at a 135% premium, when profits have grown by only 24%. More importantly, company is not benefitting from this ‘extravagant’ IPO price, since entire issue is an offer for sale by the promoters. Such financial planning reflects poorly on company and its advisers, as effectively, incoming IPO shareholders suffer. Moreover, OFS size has been increased by 8.6% in 2 months, from Rs.1,750 cr as per DRHP, filed on 14^th Aug 2023 to Rs. 1,900 cr, which although within regulations, reflects promoter greed.

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