A grocer’s day out

The huge subscription and listing premium of a brick-and-mortar retailer’s IPO raises concerns 

The bumper subscription and the super-duper listing of Avenue Supermarts is not the first nor will it be the last of how-an-underdog-triumphed kind of story in the primary market. There have been illustrious predecessors and many more are sure to break the record. What the anticipation of the issue, the excitement of blocking funds to subscribe, the nervous wait to get allotment and the thrill of seeing the shares in the demat account do is to validate certain theories and raise troubling questions about IPO investing. The first is the confirmation that there will always be appetite for quality paper. In a bullish market, even mediocre offerings find buyers but not all get more than 100 times subscription. Some are first among equals. A sound business model attracts investors even in times of domestic (worry of demonetization hurting the economy) and global (President Donald Trump’s ability to execute his tax-cut agenda) uncertainties. The promoters in this case are known to run a tight ship, keeping costs down. The aim is not to be a one-stop shop like some of its struggling brick-and-mortar and digital peers. Second, the proportion of the bottom line in relation to the top line is important. Though smaller in revenues compared with the listed competitors, the supermarket’s profit to turnover ratio is far superior. The closest comparison can be with HDFC Bank, whose portfolio is smaller than SBI’s but is more valuable than India’s largest lender by assets. Third, primary and secondary markets can feed on each other rather than gouging each other. The days of an imminent mega offering or bunching of entrants leading to fear of under-subscription seem to be fading as unmet demand chases subsequent opportunities. A hearty response to one can spill over to the others in the queue.

Proportionate allotment encourages the entire family to participate. Many resort to borrowing. The more the applicants, higher are the chances of a crackling show. A strong post-listing performance emboldens investors to take risks. Profit-booking is diverted into debutants lined up. The unlucky ones go back to stocks that have corrected, ensuring continuing buoyancy. Thus, the virtuous cycle keeps turning. The euphoria of investors in getting a chance to part-take in the success of the D-Mart chain is not without concerns. The suspicion is that the stock was under-priced (the offer price translates into FY 2017 P/E of 33, considered modest in today's times for a company growing 40% every year despite limited presence and its peers with fragile health getting near-about or higher discounting), resulting in a mad scramble to get on board. Whether the price range was fixed on the insistence of the issuer or on the advice of the investment bankers and was in synchronization with the results during the running of the book merit an examination by the regulator.The size of the issue could have been enlarged by expanding capital rather than divesting 10% stake. Those who have bagged the shares and do not plan to exit in the short term must surely be feeling short-changed by the enviable differential in the secondary market. The pre-issue hype clouded the fact that the proceedings (Rs 1870 crore) were to retire the Rs 1900-crore debt on the balance sheet. Some of the cash left after deleveraging could have been used for capital expenditure or even buyback. A smaller equity base benefits EPS but also points to lack of confidence in the pace of growth going ahead.

There are two potential dangers. Opening up FDI in multi-retail and threat from e-commerce as internet penetration catches up with rural prosperity. Avenue Supermarts does not have any online presence. Till recently, it was fashionable to be asset-light (Future Retail) over owning real estate (D-Mart).There are doubts about the sustainability of squeezing FMCG companies to get finer prices. At current valuations, the offline grocer is more expensive than many of the large producers of goods on its shelves. It is like HP getting better discounting than Intel. The model seems similar to Reliance Jio's disruption in the telecom space by out-pricing rivals. Thus, the market seems to not mind the thin slice (the average net profit margins of the last three fiscals of 3.5% are comparable with global giant Walmart, which stocks brands at rock-bottom prices and pays employees minimum wages, but better than those of the domestic players), a break from the preference for fat margins over volumes. As a thumb rule, mega subscription and listing premium signal the peak of the market. The bust following Reliance Power’s high-profile entry in January 2008, riding on the bull market, is still remembered despite attribution of the fiasco to global heating and the ensuing liquidity crunch. The experience of investors in some IPOs that opened at more than 100% premium is not inspiring. India’s richest man had to bail out an entrepreneur-driven venture, whose shares had doubled on listing early 2007. The company, meanwhile, went on to accumulate debt of Rs 1400 crore and the promoter walked out of the office empty-handed seven years later.

Mohan Sule