Thanks @sahil_vi for your notes, very informative.
Viewing this purely from a risk-reward perspective - Lets say they easily achieve their guidance of doubling revenues in three years, and maybe even beat it. They have categorically said that they expect gross margins to be in the 13-15% range, so no margin expansion coming for sure. In fact if anything, there is a risk of gross margins contracting a bit if they are closer to 13% than 15%.
So we’re potentially looking at 25% top line growth with 25% or less bottom line growth if they execute well. The company now trades at 1.5 times sales for a 15% gross margin business. Can it rerate further from here? Maybe it can, but I wouldn’t bet my bottom dollar on it because I don’t think there is a long and clean a runway to scale in this kind of business, and that too in new states, given the fact that there are deep pocketed national players waiting in the wings and the business has no real moat. Plus the comfort of buying white goods through Amazon, Flipkart etc is only is only going to increase. Maybe Bihar is today where Mumbai and Delhi were a decade ago with respect to e-commerce adoption for white goods. I expect the gap tp bridge a lot faster than a decade.
In my view, they are likely to hit an air pocket at some point in time, an analogy that @Worldlywiseinvestors shared on twitter recently, where they will likely scale to a point and then hit an air pocket. If the market thinks this way as well, it will not ascribe a significantly higher multiple to the business. I wouldn’t take on so much execution risk for a maximum reward inline with earnings growth. The risks outweigh the reward IMHO.
Another worry is that a couple of the promotors have sold close to 4% of total float last month during the run up too. This after they’ve been aggressively buying all through the last two years. Would have been great if someone would have asked them why they sold all these shares.
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