Matrimony

Matrimony.com is entering the primary market on Monday 11th September 2017, to raise Rs. 130 crore via fresh issue of equity shares of Rs. 5 each and an offer for sale (OFS) of up to 38 lakh equity shares, by 3 PE funds and promoters, both in the price band of Rs. 983 to Rs. 985 per share, with Rs. 98 per share retail discount. Representing 22.5% of the post issue paid-up share capital, at the upper end, total issue size is Rs. 496 crore, of which, OFS portion is of Rs. 366 crore. Issue will close on Wednesday 13th September and listing is expected on 21st September.

Matrimony.com is a 16 year old Chennai head-quartered company, providing online match making and marriage related services in India, through a bouquet of websites such as bharatmatrimony.com, communitymatrimony.com, elitematrimony.com, assisstedmatrimony.com among others, having close to 7 lakh annual subscriptions. While the brand name is strong, same cannot be said for its financials.

The above financial extract depicts that company’s consolidated revenue grew steadily at 12% CAGR between FY13-17, to Rs. 293 crore. However, operating margins have been dwindling, with EBITDA margins swinging widely between 2.8% to 8.6%, during the four years between FY13 to FY16. Magically, in FY17, EBITDA margin shot up to 20.2%, from consistently ruling in mid-single digits. In other words, on 15% YoY growth in FY17 revenue, EBITDA jumped 719% to Rs. 59 crore, from FY16’s Rs. 7 crore. Ensuring IPO can only be the probable justification for this splendid show in financial performance! On this occasion, it is important to draw attention to the fact that this is the company’s second attempt at IPO. Previously, when it was looking to raise Rs. 350 crore via fresh issue, SEBI approval was received in Dec 2016 and it was given to lapse, citing unfavourable market conditions.

Barring unsteady margin picture, company’s financials faced a severe blow (and a pretty bad one, to the extent that company is not even comfortable taking about it) in the form of legal expenses of Rs. 56 crore and settlement cost of Rs. 53 crore, due to a law suit on alleged breach of terms of a term sheet in the US. While the case is now behind the company, the Rs. 109 crore blow has taken a toll on the company’s financials, pushing it back by alteast half a decade, if not more. Such one-offs can be very punishing, especially so, for internet companies!   

After exceptional items, company reported net losses for FY16, FY15 as well as FY14 of Rs. 75 crore, Rs. 3 crore and Rs. 9 crore respectively. Net profit for FY17 jumped to Rs. 44 crore, leading to an EPS of Rs. 20.40. For Q1FY18, revenue stood at Rs. 83 crore while EBITDA was at Rs. 19.6 crore, leading to EBITDA margin of 23%. Net profit and EPS for the June quarter were at Rs. 14.6 crore and Rs. 7.6 crore respectively, on an equity of Rs.10.63 crore, of face value Rs. 5 each. In the past 6 years, company’s equity share capital structure have undergone a lot of changes, including 2 bonus issues (one in the ratio of 77:1 and other in 1:2 ratio), consolidation in face value to Rs. 3 each (from Re. 1) and then to current face value of Rs. 5 each.

The current IPO looks structured solely to provide exit to the PE funds. While PE investor Bessemer is making a complete exit, Mayfield and CMDB are exiting partly, reducing their stakes from 11.92% and 23.75% to 10.5% and 14.9% respectively. Promoter holding of 55.97% will shrink to 50.6%, post IPO. Surprisingly, CMDB, with average cost of acquisition of Rs. 932 crore (most of its investment is less than 2 years old) is also looking to exit its 1/3^rd holding, at near cost. Does it not foresee much growth going forward?

The fresh issue of Rs. 130 crore is also not convincing, for the following reasons:

1. For one, company plans to buy a plot of land worth Rs 43 crore in Chennai for office space. This covers only the cost of land, excluding cost of construction and furnishing. Currently, it incurs less than Rs. 2 crore annually for rent and amenities - Rs. 1.75 crore in FY17 and Rs. 1.82 crore in FY16, to be precise. Incurring Rs 45 crore for an unproductive asset, from public monies, is quite a luxury for a company having negative net worth, yes you read it right - company’s consolidated net worth, as of 30-6-17, was negative at Rs. 16 crore. Even on a standalone basis, net asset value per share is less than the face value, which is a very risky and uncommon phenomenon. On face value of Rs. 5 per share, standalone book value per share is Rs. 3.97, highlighting company’s weak financial position.  
2. Another Rs. 43 crore from IPO proceeds is earmarked to repay bank overdraft, which is the sole debt on the company’s books. As of 30-6-17, standalone balance sheet carried cash and bank balance of Rs. 61 crore, which is more than sufficient to repay the temporary financing facility. Again, no need to dilute equity for this loan repayment.
3. Thirdly, Rs. 20 crore for advertising spend is the only productive use of the fresh issue proceeds, which is being planned via an unnecessary dilution of equity shares worth Rs.130 crore. For Q1FY18, company earned cash profit of over Rs.17 crore. Thus, this advertising planned outlay can be easily funded via earnings of one quarter. Is the company not confident of its own business outlook or is there some weak financial planning here?

Thus, the dilution via fresh issue doesn’t seem to bring in any visible earnings yield. Moving onto the valuation –

At Rs.985, company’s market cap will stand at Rs.2,224 crore and EV Rs. 2,159 crore, which discounts FY17 earnings by very steep PE and EV/EBITDA multiples of 48x and 36x respectively. On FY18E earnings too, these valuations (PE of 38x and EV/EBITDA of 29x) are quite a stretch, in comparison to other listed peers. Online search engine Just Dial, with Rs. 800 crore topline and 27% EBITDA margin for FY17, is ruling at PE and EV/EBITDA multiples of 18x and 11x respectively, based on FY18E, with EV of less than Rs. 2,600 crore. Comparison with another online classifieds Info Edge, having a diverse basket of properties, such as naukri.com, jeevansathi.com, 99acres.com, zomato and policybazaar, FY17 topline of over Rs. 800 crore and 35% EBITDA margin, is trading at FY18E PE and EBITDA multiples of 45x and 30x respectively. Matromony.com not only has a single consumer vertical, but also smaller topline and lower operating margin. Hence, the latter’s premium multiples are not justified. 

Besides aggressive pricing, company has offered an eye-popping 10% discount to the issue price for retail investors.

In the past 12 months, no private issuer has offered any retail discount. Only 2 PSU IPOs offered retail discount, which was also restricted to 5% of the issue price. In the case of matrimony.com, only 10% of the issue size is reserved for retail category. Do we sense a dearth of confidence, that even to mop up Rs. 50 crore, company wants to leave no stone unturned? Besides, Rs. 985 is psychologically a high price tag, that too for stock with face value of Rs. 5 per share.

Despite being in the business for nearly 2 decades, financial has not been achieved, which is a huge risk for any prospective investor.

Fundamentally speaking, fluctuating margins, negative networth, unconvincing issue objects and expensive valuations make this IPO risky and hence an avoid.

Disclosure: No Interest.