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Technology-led companies that came out with their initial public offerings (IPOs) last year are now earning investors' wrath in the broader carnage seen in the stock markets. Shares of One97 Communications Ltd (Paytm’s parent), Zomato Ltd, FSN E-Commerce Ventures Ltd (Nykaa) are down in the range of 20-33% so far this month.

In this jittery environment, Adani Wilmar Ltd's initial share sale opens on Thursday. The issue size is 3,600 crore and the company has allocated Rs940 crore to anchor investors on 25 January. It helps that the valuations of this fast-moving consumer goods (FMCG) company appear moderately priced. According to Ventura Securities Ltd, at the upper end of the price band of Rs230, Adani Wilmar’s price-to-earnings ratio multiple works out to 33.7 times based on estimated earnings for FY22. This is lower than many other larger listed FMCG peers, which though may not be fully comparable. In a report on 22 January, Ventura pointed out, shares of Hindustan Unilever Ltd, Britannia Industries Ltd, and Dabur India Ltd were trading at 63 times, 54.3 times, and 55.4 times, their respective FY22 earnings estimates.

‘Fortune’ is Adani Wilmar’s flagship brand. The company is present in three segments: edible oil, food & FMCG, and industry essentials, which contributed 82.8%, 4.6%, and 12.6% of H1FY22 revenues, respectively. While the edible oil segment has matured and generates healthy cash flows, the food & FMCG segment is in a nascent phase. Shrikant Kanhere, chief financial officer, Adani Wilmar, refers to the edible oil segment as a cash cow which contributes 65% to total volumes.

Note that the food & FMCG segment is a relatively newer vertical and is Ebitda (earnings before interest, tax, depreciation, and amortization) neutral. The company expects this segment to contribute NIL towards Ebitda in the next two years. As such, the food & FMCG segment may not be able to add meaningfully to overall margins immediately.

A significant portion of IPO proceeds will go into enhancing the food & FMCG segment where the company aims to launch new products and improve the distribution network. Further, the acquisitions expected to be funded via the IPO proceeds will also happen in the same space. Some portion of the proceeds will be used to pay off long-term debt.

The two largest segments in terms of volumes-- edible oil and industry essentials-- contribute to the company’s Ebitda margin which stood at 3.6% in H1FY22, down from 4.6% a year ago as higher commodity costs weighed. Over FY19-FY21, revenue and Ebitda CAGR (compound annual growth rate) stands at 14% and 7%, respectively.

In general, the packaged food market in India is under-penetrated, offering significant potential growth, which means long-term prospects are bright. Vinit Bolinjkar, head of Research at Ventura said, “Having established itself in the edible oil market, there is immense growth potential for other products such as wheat, rice, pulses, etc. which have a market size of 300 million ton per annum (MTPA). With only about 5-6 major brand players in the 60-70 lakh crore under-penetrated food sector, Adani Wilmar could lead the sector." Over FY21-24, Ventura expects Adani Wilmar to grow its revenues at a CAGR of 16.7% to Rs58,959 crore spearheaded by the FMCG vertical which is set to grow at a CAGR 31.5%.

Even so, as mentioned earlier, broader stock market conditions remain worrisome. In morning trade, on Thursday, the benchmark Nifty50 index was more than 1% down. Market experts, though, appear reasonably confident about the issue sailing through. Out of the anchor allotment, 39.2% and 8.7% has been allotted to the government of Singapore and Monetary Authority of Singapore respectively. “The fact that these authorities have displayed confidence in the issue augurs well for the issue and there may even be a small listing pop," said Arun Kejriwal, founder of Kejriwal Research and Investment Services Pvt. Ltd.

Nonetheless, the recent market correction has weighed on the premium. According to market observers, Adani Wilmar’s grey market premium (GMP) has dropped to Rs45-50 from Rs100. Post listing, in the near-future, investors would also have to closely follow how rural demand shapes, considering that many FMCG companies have noted a slowdown in the rural market in recent months. Over the medium-term, Ebitda margins will necessitate closer attention since a material increase will be seen only post the growth of the food & FMCG segment.

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