New Delhi, March 13 -- Vishal Mega Mart Pvt. Ltd is preparing to float an initial public offering under its private equity owners and could target valuation metrics comparable to Avenue Supermarts Ltd, India's biggest listed retailer and the operator of DMart chain.

Gurugram-based Vishal Mega Mart, one of India's biggest value retailers, aims to go public over the next nine to 12 months after recording strong growth over the last few years, a person aware of the matter told VCCircle.

A second person said that the company could seek a valuation of Rs 30,000-40,000 crore for its public market debut.

The IPO plan comes at a time when India's primary market is booming with scores of companies floating share sales over the past couple of years and many more lining up to go public to take advantage of the bullish phase that has pushed benchmark indices to record highs.

The two people didn't specify the possible size of the IPO but said it could involve both a fresh issue of shares by the company and a partial stake sale by its private equity owners-India's Kedaara Capital and Swiss firm Partners Group.

Vishal Mega Mart didn't respond to email queries for this article.

The PE buyout

The company has recorded robust growth in its revenue and profit ever since Kedaara and Partners Group acquired it in May 2018 from PE firm TPG for about Rs 5,000 crore. The deal also involved the purchase of Airplaza Retail Holdings Pvt Ltd, a wholly owned subsidiary of Vishal, to ensure the two PE firms didn't run afoul of India's foreign direct investment rules for the multi-brand retail sector, VCCircle reported at the time.

Airplaza, which became a wholly owned subsidiary of the main holding company in July 2020, runs the retail stores under the Vishal Mega Mart brand while the parent company operates the wholesale and franchise business.

Initially, the front-end retail business was majority owned by Kedaara Capital, which had registered its fund under the Securities and Exchange Board of India's regulations that made it a deemed domestic investor even though almost the entire capital was pulled in from offshore investors. Partners Group owned the other entity that ran the wholesale retail unit.

Currently, the two PE firms own Vishal Mega Mart via a separate partnership firm that has a total contribution of around Rs 4,700 crore. It is not clear who holds how much ownership interest in the partnership firm but two of the three designated partners are Kedaara Capital nominees while the third partner is a representative of Partners Group. It is, however, believed that the Swiss investor has a larger share of the total stake.

Revenue, profit

Vishal Mega Mart, which focusses on budget segment fashion apparel, general merchandise, grocery and staple items, reported consolidated revenue from operations of about Rs 7,586 crore for the year through March 2023. This is up 36% from Rs 5,588 crore the year before, as per VCCEdge, the data research arm of VCCircle. Consolidated net profit jumped to Rs 321 crore from Rs 203 crore.

The company is projected to increase its revenue at a healthy pace, thanks to the addition of more stores to its network and strong same-sales growth. According to estimates, its revenue could cross Rs 9,000 crore in the current fiscal year.

Credit rating firm India Ratings expects the company to post revenue growth in mid-teens over the next couple of years and maintain its EBITDA margin of 14-14.5%. Vishal Mega recorded earnings before interest, tax, depreciation and amortisation of about Rs 1,070 crore for FY23, up from Rs 840 crore the year before.

Back-of-the-envelope calculations show that Vishal Mega Mart could be chasing a valuation of as much as four to five times its annual revenue and 30-35 times its estimated EBITDA for the current financial year.

The competition

Vishal Mega Mart competes with the likes of Mumbai-listed budget clothes retailers V-Mart Retail and V2 Retail, and privately owned firms such as CityKart, Kolkata-based Baazar Kolkata and Style Baazar. Other prominent retailers include Tata Group's Trent Ltd, Aditya Birla Fashion & Retail Ltd, Shoppers Stop and the unlisted Reliance Retail.

India's biggest listed retailer, however, is DMart operator Avenue Supermarts. The company currently commands a valuation of around Rs 257,830 crore. This is about six times its FY23 revenue and 71 times its EBITDA for the year.

DMart recorded consolidated revenue of Rs 38,062 crore and EBITDA of Rs 3,160 crore for the nine-month period ended Dec. 31, 2023. Based on these results, DMart's current market valuation is around five times its estimated annualised revenue for FY24 and 61 times its estimated annualised FY24 EBITDA.

This indicates that while Vishal Mega Mart could match DMart's valuation in terms of revenue multiple, it would lag far behind in terms of the EBITDA multiple.

Vishal Mega Mart recently pre-paid its term loans, a development that would boost its net earnings and may help it bridge the gap with DMart for its lower net margins. The question that remains, however, is whether public market investors would be open to peg a high valuation multiple to Vishal Mega Mart, like they have been doing to prop up DMart over the years.

Published by HT Digital Content Services with permission from VC Circle.