IPO: Cello World

Cello World, Indian consumer houseware company, has launched its IPO (initial public offering). Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : The company has consistently maintained 20 per cent and above operating margin in recent years. Its ROE and ROCE seem inflated due to a negative and lower equity base.
  
• Growth : Its topline and PAT has grown at 30.8 and 32.7 per cent per annum, respectively between FY21-23.
  
• Valuation : The stock will be priced at a P/E and P/B of 48.8 and 15.3 times, respectively, as compared to its peer's median and average of 45.4 and 5.2 times, respectively.
  
• Overview : The company is poised to benefit from the overall shift from unorganised to organised segment in the consumerware market. Other than that, surge in popularity of modular kitchens and demand for aesthetic consumerware products are going to benefit the company.

About Cello World

Cello World is a leading company in the consumerware market in India, with presence in three product categories: consumer houseware (66 per cent of FY23 revenue), writing instruments and stationery (16 per cent), and moulded furniture and allied products (18 per cent). The company is the sole manufacturer, distributor, and marketer of Cello products in India. It has 13 manufacturing facilities across five locations in India.

Strengths of Cello World

• Well-recognised brand name and strong market position: The company's brand "Cello" is one of the most prominent brands in the consumerware and stationery market in India.
  
• Diversified product portfolio across price points: The company caters to diverse consumer requirements and offers 15,891 SKUs across different product categories which enables them to serve as a "one-stop-shop" for consumers purchasing their products.
  
• Pan-India distribution network with a presence across multiple channels: Cello World has 717 distributors and approximately 58,716 retailers for consumerware, approximately 1,509 distributors and 60,826 retailers for stationary, and 1,067 distributors and 6,840 retailers for moulded furniture and allied products.

Weaknesses of Cello World

• The company operates in a highly competitive industry against well established brands. It competes with some big names such as Borosil, Pigeon, Camlin, La Opala, and more.
  
• The company suffers from a need for high working capital . Its trade receivables have been high as a result of which its working capital cycle stands at over 200 days on average. This has forced the company to rely on short-term borrowings.
  
• The company does not own the trademarks of its key brands "Cello", "Unomax", "Kleeno", and "Puro" and just licences them. If the contract is not renewed, it could have a dent on its financials.

Note : The company had negative equity FY21 and very low equity in FY22 as a result of which ROE and ROCE for all three years were skewed. We have chosen to omit those ratios for analysis purposes.

Risk report

Company and business

• Is Cello World's earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. The company's profit before tax for FY23 was Rs 411 crore.
• Will Cello World be able to scale up its business?
  Yes. The company is now setting up a new glassware manufacturing facility in Rajasthan. With the share of organised players expected to rise in all their business segments, it will be able to scale up.
• Does Cello World have recognisable brands with client stickiness?
  Yes. Cello has been a household name for several decades in India.
• Does the company have a credible moat?
  No. While it does have a recognisable brand in its portfolio with a strong distribution network, there are several other competitors that offer similar products.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over a 25 per cent stake in the company?
  Yes. Post-IPO, promoters' stake will be 81 per cent.
• Do the top three managers have over 15 years of combined leadership at Cello World?
  Yes. The top three managers have been with the company since its incorporation.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is Cello World free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Not applicable. The company had negative equity in FY21 and very low equity in FY22 as a result of which ROE and ROCE for all three years were skewed. We have chosen to omit those ratios for analysis purposes.
• Was the company's operating cash flow positive during the last three years?
  Yes. The company generated positive cash flows from operations in the last three years.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's net debt-to-equity ratio stood at 0.3 times as of June 2023.
• Is Cello World free from reliance on significant working capital for day-to-day affairs?
  No. The company's business affairs are working capital intensive. The company average has had receivables as a percentage of total assets at 31 per cent. As a result, it also suffers from a high cash-conversion cycle which has forced it to rely on short-term borrowings.
• Can the company operate its business without relying on external funding in the next three years?
  Yes. The company has been consistently generating cash flows. It also recently raised Rs 483 crore which should help them with their expansion activities.
• Is Cello World free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of equity stood at around 10 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer an earning yield of 2.8 per cent.
• Is the stock's price-to-earnings less than its peers' median level?
  No. The company will trade at a price-to-earnings ratio of 48.8 times compared to peers' median level of 45.4 times.
• Is the stock's price-to-book value less than its peers' average level?
  No. The company will trade at a price-to-book ratio of 15.3 times compared to peers' average of 5.2 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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