Cello World IPO Opens Oct. 30. Should You Invest Or Not Based On Valuation?

Consumerware company Cello World Ltd. launched its initial public offering to raise around Rs 1,900 crore on Monday, Oct. 31. The issue concludes on Nov. 1. The price band is Rs 617–648 per share.

The IPO consists only of an offer-for-sale; thus, the company will not receive any funds from the issue. A couple of promoter and promoter group entities are participating in the OFS and offloading 2.9 crore shares.

After the IPO, promoters shares in the company will decline to 78.07% from 91.88% earlier. Consequently, public shareholding will increase from 8.12% to 21.93%.

During September–October 2022, Cello World raised Rs 475 crore from four alternative investment funds, of which three are managed by ICICI Venture Funds and one by Tata Capital, by issuing 0.7 crore compulsorily convertible preference shares. These investors entered the company at a valuation of around Rs 5,850 crore, according to Choice Broking, as compared to the current demanded valuation of Rs 13,753 crore.

Upon conversion into equity shares, these investors held 8.12% stake (pre-IPO) in the company. However, these investors are not participating in the OFS.

Looking at the valuation at the upper price band, the issue presents a market cap of Rs 13,753 crore with a price-to-earnings ratio of 49 times on a consolidated basis.

At a higher price band, Cello World is demanding a P/E multiple of 49 times, which is at a significant premium to the peer average of 38.6 times. Thus, the issue is overvalued, according to brokerage Choice Broking.

"There are growth tailwinds for the sector, and CWL is well placed to benefit from the same. But due to the highly priced issue, we are assigning a “Subscribe with Caution” rating for the issue," the note said.

However, Rajan Shinde, Research Analyst at Mehta Equities, believes that this valuation appears reasonable when considering the expected revenue and profit growth. "Due to higher Ebitda/PAT margins and higher ROCE compared to its peers, we advocate good long-term prospects for the company."

Cello World would be a prominent player in its respective business verticals, with a large addressable market growth of an average of 16%, strong financials, and a debt-free company that offers a growth play in the long term, according to analysts at Reliance Securities. "Therefore, we recommend a "subscribe" to the issue," they said in a note.