Baazar Style IPO: Is it a fashionable investment opportunity?

Kolkata-based value fashion retailer Baazar Style Retail, operating under the brand name ‘Style Baazar’ and backed by renowned investor Rekha Jhunjhunwala, is now taking the leap into the public market. With its initial public offering set to close on Tuesday, the company is aiming to raise ₹835 crore at the upper end of its ₹370-389 price band. This would value Style Baazar at ₹2,900 crore, and it also intends to expand its footprint beyond its current geographical concentration in the eastern region. Could Style Baazar be the next fashion force to dominate the national stage?

High operational efficiency

Style Baazar has demonstrated impressive financial growth in recent years. The company reported a notable turnaround in profitability, with a net profit of ₹5.1 crore in FY2023, which surged to ₹22 crore in FY24. This improvement in the bottom line is complemented by a steady rise in Ebitda margins, climbing from 10.9% in FY21 to 14.6% in FY24. Another significant strength of this brick-and-mortar retail store is the efficient use of space, resulting in consistently increasing sales per square foot. This metric grew from ₹5,226 to ₹7,758 in the last four years. Ebitda is earnings before interest, taxes, depreciation, and amortization.

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Customer loyalty is also a strong suit for the company, with repeat sales contributing around 72% to its gross sales up from 70% in FY23. This upward trend suggests increasing customer satisfaction and brand trust. Moreover, Style Baazar has been the fastest-growing value retail player in its peer group, expanding its store count at a compound annual growth rate (CAGR) of 35.8% between 2019 and 2024. The company now operates 162 stores across several states, outpacing competitors like Baazar Kolkata, M Baazar, Citykart, V2 Retail, and V Mart in store expansion.

Product and geographical concentration

While the company’s strengths are undeniable, its business model remains somewhat constrained by its heavy reliance on apparel products. In fiscal 2024, apparel accounted for nearly 84% of its revenue, while the balance came from general merchandise, making it highly vulnerable to shifts in fashion trends and consumer preferences.

Additionally, despite a strong presence in east India, its geographical concentration could make it vulnerable to regional economic downturns or other challenges. Currently, the company derives around 87.3% of its revenues from stores located in West Bengal, Odisha, Assam and Bihar.

The store cannibalization threat

Style Baazar’s cluster-based expansion model, while efficient, also presents certain risks. By concentrating its business in relatively small geographical areas, the company faces the potential issue of stores cannibalizing each other's sales within a cluster. This approach, while beneficial for resource management, may lead to diminishing returns when multiple stores are located close to each other.

Additionally, the industry is intensely competitive and characterized by many organized players. “The company faces competition from various kinds of fashion players including, players operating in retail, wholesale and e-commerce space. Further, the company competes with national and local department stores and independent retail stores that market similar lines of merchandise,” highlighted an Axis Capital note. Some of the competitors include Baazar Kolkata, M Baazar, V Mart, V2 Retail and City Kart.

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Growth opportunities in smaller cities

However, the future looks promising for Style Baazar, particularly in Tier 2, 3, and 4 cities, which are expected to witness significant growth. These cities are projected to grow at a CAGR of 17%, with their share of the overall market remaining stable. The organized retail market, in particular, is expected to expand rapidly, with share expected to double from 18% in FY24 to 36% by FY27. This presents a substantial growth opportunity for Style Baazar, which has already established a strong presence in these markets.

“The company intends to fortify its market position by deepening its penetration into already-established clusters, broadening its reach inside the focus markets (like Jharkhand, Uttar Pradesh, Chhattisgarh), stepping up efforts to retain customers, and cultivating brand loyalty,” according to Master Capital Services, a financial services firm.