V-Mart Retail is entering the capital market on 1st February 2013 through a public issue of 44.96 lakh equity shares of Rs.10 each, comprising of an offer for sale of 17.35 lakh shares by Aditya Birla Group firm Naman Finance and balance 27.61 lakh shares, through fresh issue. The issue, priced between Rs. 195 to Rs. 215 per share, represents 25.04% of the company’s fully diluted post issue paid-up capital. Issue closing on 5th February, will help the company raise Rs. 54 crore and Rs. 59 crore at the lower and upper price band, respectively, through the fresh issue. Anand Rathi is the BRLM to the issue.

V-Mart Retail, a New Delhi based value retailer, owns and operates 62 stores across 53 cities, with a total area of 5.06 lakh sq. ft. With an average store size of about 8,000 sq. ft., it has stores in tier 2/3 cities of New Delhi, Gujarat, Uttar Pradesh, Bihar, Punjab, Chandigarh, Haryana, Jammu and Kashmir, Rajasthan and Madhya Pradesh offering apparels, general merchandise and groceries / staples, with apparel sales accounting for about two-thirds of company revenues.

For FY12, it reported sales of Rs. 282 crore and net profit of Rs. 11 crore. For 8 months ended 30th November 2012, sales stood at Rs. 250 crore with net profit of Rs. 13 crore, resulting in EPS of Rs. 9.4 on equity of Rs. 13.95 crore. As of 30th November 2012, its networth stood at Rs. 68 crore, leading to BVPS of Rs. 49. In January 2013, company has undertaken a pre-IPO placement of 1.25 lakh equity shares at Rs. 210 per share aggregating Rs. 26.25 crore, Antique Stock Broking being one of the pre-IPO investors.

Post-IPO, promoter stake will decline to 58.83% from 69.51% presently. Selling shareholder Naman Finance, having invested in the company since August 2008, has average cost of acquisition of Rs. 62 per share, and its stake will reduce to 8.74% from 21.74%, post-listing.

The company plans to use IPO proceeds to open 60 more stores for Rs. 70 crore (10 in FY13, 25 each in FY14 and FY15), expanding distribution centres for Rs. 4.4 crore and towards working capital needs for FY13 only of Rs. 10 crore. The business being working-capital intensive, will require additional current assets for stores to be opened in FY14 and FY15, and IPO proceeds will not fund these. Hence additional funding will be required in the FY14. As of 30th November 2012, net debt stood at Rs. 38 crore, which is bound to increase in the future. 

Company’s promoter and MD Lalit Agarwal is a cousin of Vishal Retail’s Ram Chandra Agarwal, which went burst in 2011. The two brothers were working together until 2002, when Lalit Agarwal quit to start V-Mart in Ahmedabad in 2003. This family connection is a big negative in the current fund raising exercise, as V-Mart can be a possible front end for Vishal Retail.

Post-listing, at Rs. 215, company is seeking a market capitalization of Rs. 386 crore. At the lower and upper end of the price band, shares are being issued at PE multiple of 15.6 times and 17.2 times, respectively, which is very expensive for such a small company. There cannot be a like-to-like comparison of V-Mart with Pantaloon Retail, Shoppers Stop or Trent as there are much larger players (over 10 times the market cap), operation in altogether different segments of organized retail, financially more stronger and have an element of possible stake sale factored into their share prices through FDI in retail. In contrast, V-Mart, catering in the value retailing segment of semi-urban India, does not stand to gain much from FDI in retail.

There is nothing exciting in the company. Moreover, historically, retail stocks have never really rewarded shareholders. The sector, operating at wafer-thin margins, amidst rising cost of materials, stiff competition and declining discretionary spend among  consumers is not the best bet in the current scenario.

Fundamentally, this issue looks very weak. Avoid it, as this could be a trap!