boAt IPO: Significant Opportunity And Risks

Imagine Marketing, the owner of the “boAt” brand, has filed a draft red herring prospectus (offer document) for an Initial Public Offering (IPO).

The company was founded in 2013, and launched boAt in 2014, which has grown to become a popular electronic goods brand in India.

The offer consists of a fresh issue of Rs 900 crore while existing investors offload Rs 1,100 crore of the shares they hold.

Of the Rs 900 crore raised, Rs 700 crore would be used to repay borrowing by the company while the balance would be used for general corporate purposes.

As of 31 December 2021, Imagine Marketing has outstanding loans worth Rs 721 crore.

Business Model

Imagine Marketing is a direct-to-customer (D2C) company that owns several digital-first brands, which primarily sell through digital channels and marketplaces.

The company is ranked first in the hearables category and second in the wearables category, in terms of volumes.

The company has mainly focused on audio products (hearables) so far. However, it is now increasing its focus on the wearables segment as well.

For the quarter ending September 2021, the company’s smart-watch brand had a significant market share of more than 20 per cent in the market.

The company’s business model entails procuring goods from contract manufacturers, with whom it has strong relationships. These manufacturers have been largely based out of China, though Imagine Marketing has taken steps to move manufacturing to India and Vietnam.

In India, the company has been exploring contract manufacturing with Dixon Technologies for its Bluetooth-enabled hearables business. Imagine maintains oversight over production and works with producers over design, specifications, and standards.

The company has built relationships with component suppliers of its products as well. These suppliers include Qualcomm (Qualcomm Ventures is one of Imagine’s shareholders), Google, Dolby, Bharat FIH, and several others.

Once the products are sourced, the company sells them through its sales channels. Marketplaces such as Amazon and Flipkart contribute to the largest segment of sales, followed by the company’s own website.

The digital-first business model gives the company exposure to more than 90 per cent of India’s total pin codes at a single go, without having to focus on building a distinct distribution network.

So far, the company has focused on growing its digital presence, but is launching its products through offline stores as well. Online entities include Tata Cliq, Tata Croma, and other prominent retailers and distributors in the country.

Online marketplaces contribute to more than 85 per cent of the company’s sales, and the company remains the top-selling hearables brand on these marketplaces.

According to Flipkart’s brand awareness index, boAt enjoyed the highest brand awareness score in the personal audio and wearables segment. Its high customer rating of over 4 for multiple products helps it to attract more customers who are looking for quality products at reasonable prices.

Like all D2C businesses, marketing and advertising is the main task for the company. Its brand awareness is the result of digital marketing efforts to create awareness and drive brand conversions.

Over the years, the advertising and promotion budget has increased at a significant pace. In the financial year (FY) 2019, the expenditure stood at Rs 12.3 crore and it increased to Rs 46 crore for the first half of FY22.

The marketing efforts have been driven by partnerships with influencers and celebrities from the fields of sports, music, and movies, among others.

Company’s Financials

Revenues have grown at a rapid rate, increasing from Rs 225 crore in FY18 to Rs 1,313 crore in FY21.

For FY22, the half-yearly revenues have already crossed Rs 1,547 crore, which is higher than the sales for the entire previous fiscal.

The company has remained profitable for the last three fiscals while the highest component of costs has remained the electronic goods that it resells.

Given the company’s focus on building an asset-light D2C company, capital expenditure on plant, property, and equipment (PPE) are minimal. For FY21, the company generated Rs 1,313 crore in revenues with just Rs 1.7 crore invested in PPE, as it focuses on leasing out offices and warehouses.

However, Imagine’s high working capital requirements have caused its cash flows to turn negative in recent years. Over the last three fiscals, two have seen the generation of negative cash flows from operations. The company’s debt has jumped from Rs 41 crore to Rs 731 crore. Hence, the company would be using IPO proceeds to reduce debt.

Nevertheless, the business has scaled up with a high return on capital employed, which has stood at more than 15 per cent for the last three fiscals and went up to 66.82 per cent in FY20.

Challenges For the Business

There are several risks that could derail the company’s business.

The company operates in a highly competitive segment, where consumers are price-sensitive as well. New brands offering quality products at similar or lower prices could take away market share from Imagine, as customers might lack brand loyalty.

In addition, the company’s heavy reliance on marketplaces (more than 80 per cent of revenues) for its product sales could spell trouble as well. Of these marketplaces, the top two contribute to more than 70 per cent of total revenues.

The products’ visibility is heavily impacted by the algorithms and the company’s ability to secure promotions with online marketplaces. Any issues the company faces with these marketplaces would ultimately affect the company adversely. In case the company is removed from these marketplaces, the company stands to face a huge loss of revenue.

Further, a large part of the company’s products come from overseas, with the shift to India and Vietnam having begun recently. Hence, supply chain issues, import duty changes, and foreign currency issues remain a risk for the company.

Finally, valuations play a significant role in determining future returns. According to reports, the company could be listed at valuations of $1.5-2 billion. However, a year ago, Imagine Marketing had been valued at Rs 2,200 crore. At these valuations, the company is looking at a 5-7 times jump in its valuations, possibly as it’s likely to double its revenues in the current year.

Hence, investors should decide the sustainability of such growth, and whether the growth adds true value.