The Indian wedding market is renowned for its grandeur and scale, often referred to as the “Big Fat Indian Wedding.” This extravagant affair is not just a celebration but also a display of social status and a nod to traditional values. A key element of these opulent weddings is the blend of global trends with Indian sensibilities, especially in attire. Interestingly, the Indian wedding market, particularly the clothing segment, has historically been resilient to economic downturns. Vedant Fashions Limited (VFL), with its flagship brand Manyavar and other brands like Mohey, capitalizes on this robust market. VFL holds a dominant position in what is largely an unorganized sector, standing as India’s largest company in the men’s Indian wedding and celebration wear segment by revenue, OPBDIT, and profit after tax as of fiscal year 2020.
Given its market leadership in a recession-proof segment, Vedant Fashions might appear as an attractive investment. However, a crucial principle in investment analysis is that valuation is paramount. No company is inherently good or bad; its investment appeal hinges on its price. Therefore, before considering investment, it is essential to assess whether the IPO price offers value for new investors. Let’s delve into the details of the Vedant Fashions IPO to understand the pricing and potential investment opportunity.
Vedant Fashions launched its IPO as an Offer for Sale (OFS) of 33.65 million shares through book building, with a price band of ₹824 to ₹866 per share. The IPO was open from February 4 to February 8, 2022. At the upper price band, the company aimed to raise ₹31.49 billion, diluting approximately 15 percent of its stake. A successful IPO would result in Vedant Fashions boasting a market capitalization exceeding ₹210 billion.
Understanding Vedant Fashions’ Business and Brand Portfolio
Vedant Fashions, primarily known for its brands Manyavar and Mohey, positions itself as a comprehensive destination for celebratory apparel. Manyavar is a market leader in the branded Indian wedding and celebration wear sector with a pan-India presence. Besides Manyavar and Mohey, the company’s brand portfolio includes Twamev, Manthan, and Mebaz, catering to a diverse range of customer segments and price points.
Manyavar, established in 1999, is the company’s oldest and most prominent brand. The other brands are relatively newer additions to the portfolio. Manyavar is the largest revenue contributor, accounting for 84.20 percent of the total revenue, followed by Mohey at 7.5 percent. The remaining 8.30 percent is generated by brands like Manthan, Twamev, and Mebaz.
In terms of brand positioning, Manyavar, Twamev, and Manthan primarily focus on men’s clothing, while Mohey and Mebaz are dedicated to women’s ethnic wear. This clear brand segmentation allows Vedant Fashions to cater to a wide spectrum of customer needs within the Indian celebration wear market.
Distribution Channels and Extensive Reach
Vedant Fashions utilizes a multi-channel distribution strategy encompassing Exclusive Brand Outlets (EBOs), Multi-Brand Outlets (MBOs), Large Format Stores, and e-commerce platforms. As of September 30, 2021, the company boasted a retail footprint of over 1.2 million square feet across 212 cities and towns in India and 8 international cities. This network included 535 EBOs in India (including 58 shop-in-shops) and 11 EBOs internationally, located in the United States, Canada, and the UAE.
Pan-India Presence and Revenue Streams
Vedant Fashions has established a strong pan-India presence, with a significant concentration of stores in states like Maharashtra, Uttar Pradesh, West Bengal, and Andhra Pradesh. This widespread network ensures accessibility and brand visibility across diverse regional markets.
Exclusive Brand Outlets (EBOs) are the primary revenue drivers for Vedant Fashions, contributing over 90 percent of the company’s revenue as of fiscal year 2021. This reliance on EBOs underscores the importance of brand-owned retail spaces in their business model.
Vedant Fashions benefits from several advantages, including its leadership position in the expanding Indian celebration wear market, its extensive pan-India presence through a largely asset-light franchise-based EBO model, and the substantial size of the Indian ethnic wear and celebration wear markets. The Indian ethnic wear market was estimated at ₹1.8 trillion and the celebration wear market at ₹1.02 trillion in FY20, projected to grow to ₹2.4 trillion and ₹1.375 trillion respectively by FY25E. Within this, the branded segment is expected to expand significantly from ₹204 billion in FY20 to ₹440 billion in FY25E.
Growth Strategies and Future Outlook
Vedant Fashions’ growth strategy focuses on expanding its retail footprint both domestically and internationally. The company aims to increase its retail space from the current 1.2 million sq ft to approximately 2 million sq ft. However, it’s important to note that IPO funds are not earmarked for this expansion. Other growth levers include up-scaling and cross-selling opportunities within its existing customer base and exploring disciplined acquisitions to further consolidate its market position.
While these advantages and growth strategies present a positive outlook, potential investors must consider critical factors, particularly the IPO valuation, to determine if the offering price is justified. Understanding what value is left on the table for new investors is crucial before making an investment decision.
Concerns and Red Flags
Despite the positive aspects, several concerns warrant attention. These issues, while seemingly minor, can reflect on management quality and intentions.
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Complex Holding Structure: A simplified organizational structure is generally preferred for investment transparency. Vedant Fashions’ promoter holding structure, involving trusts and HUFs (Hindu Undivided Families), is considered complex. The promoter classification involves Ravi Modi Family Trust (74.59 percent), Ravi Modi HUF (16.02 percent), and Rhine Holdings (7.20 percent). The trustee of Ravi Modi Family Trust is Modi Fiduciary Services Private Limited, where Ravi Modi holds 74 percent and Shilpi Modi 26 percent. This intricate structure raises concerns about transparency and control, which persist even post-IPO.
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Offer for Sale (OFS) – An Exit Route for Existing Shareholders: An OFS IPO structure, where existing shareholders sell their stake, is often perceived as an exit strategy for early investors who have already benefited from the company’s growth. Retail investors are then offered shares at potentially inflated valuations to facilitate this exit. The issue is compounded by the fact that Vedant Fashions promoters recently conducted a share buyback. The rationale behind an OFS after a recent buyback, without fresh capital infusion for future growth, raises questions. It suggests that existing promoters and investors might be capitalizing on past growth and seeking an exit.
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Share Buyback at Significantly Lower Prices: Vedant Fashions promoters executed a share buyback just months before the IPO, at a price significantly lower than the IPO price. The buyback in July 2021 was conducted at ₹495 per share (adjusted for face value split), while the IPO upper price band was ₹866.
This substantial price difference within a short period prompts questions about the fairness of the IPO valuation for retail investors. Why were shares bought back at nearly half the price just months before being offered to the public at a much higher valuation?
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Competition from Unorganized Market and Margin Sustainability: Despite Vedant Fashions’ leadership in the branded segment, the Indian ethnic wear market remains dominated by unorganized players. Fashion trends are dynamic, and sustaining market leadership in this sector is challenging. Product duplication with cheaper alternatives is prevalent in Indian markets, particularly in Tier III and semi-urban areas, where Vedant Fashions currently has limited exposure. Furthermore, the company’s current EBITDA margins of 48-50 percent, achieved without significant sales or discounts, might be unsustainable in the long term. Increased competition and evolving market dynamics could pressure these margins.
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Stretched Valuations: The IPO valuation appears stretched. For fiscal year 2021, Vedant Fashions reported a profit after tax (PAT) of ₹1.329 billion, down from ₹2.3664 billion in FY20, although FY21 was impacted by COVID-19 restrictions. For the first half of FY22 (H1FY22), the company posted a PAT of ₹984.1 million. Annualizing this to ₹2 billion for FY22 results in an estimated EPS of ₹8.24 and a P/E ratio of 105x at the upper IPO price band. Even if the company returns to its FY20 PAT levels of ₹2.36 billion, the P/E ratio remains above 90x. These valuation metrics suggest that the IPO price might be excessive, especially considering the recent share buyback at a significantly lower price.
While brand appeal and aspirational value can justify premium valuations to some extent, investors should exercise caution against overpaying. Considering the complex holding structure, OFS nature of the IPO, recent buyback at lower prices, competitive landscape, potential margin pressure, and stretched valuations, it is advisable for investors to avoid subscribing to the Vedant Fashions IPO.
