Smooth sailing or rough seas ahead? Decoding boAt’s DRHP fine print

Consumer electronics startup boAt has filed a draft red herring prospectus with SEBI to launch its initial public offer (IPO) worth Rs 2,000 crore. The Mumbai-based company is looking to raise Rs 900 crore via fresh issue of shares while its existing shareholders including the founding team have tendered shares Rs 1,100 crores in an offer for sale.

Both co-founders Aman Gupta (now of Shark Tank India fame)  and Sameer Mehta will be selling shares worth Rs 150 crore each while early investor Warburg Pincus will offload shares worth Rs 800 crore in the OFS transaction, according to the company’s papers filed with SEBI.

Interestingly, boAt has been one of the only startups where the founding team controls more than 50% of the equity at the time of IPO as both Gupta and Mehta have 28.26% stake each. That is a testament both to its scorching growth as well as relatively sustainable margins, compared to other startups or even peers in the consumer electronics space. 

The duo had last offloaded shares worth Rs 23 crore each during a buyback exercise in Feb 2021 and there had been no further dilution of their holdings. 

As per the DRHP, out of the total Rs 900 crore to be raised via fresh issue, the electronics marketing brand will utilize an aggregate of Rs 700 crore towards repayment of secured/unsecured borrowings of the company. 

As of 31 Dec 2022, the D2C brand’s total outstanding secured and unsecured borrowings (mostly working capital financing) amounted to Rs 764.2 crore and the repayment will make the company virtually debt free.

The company has appointed Axis Capital, BofA Securities, Credit Suisse, ICICI Securities as the lead book running manager for the offer while Link Intime has been onboarded as the registrar. 

Launched in 2014, the company now controls five brands in its portfolio including boAt, Redgear (acquired in 2020), Tagg (acquired in 2022), wearable brand Defy and its own personal care and grooming brand Misfit. Earlier this month, the company also entered into a joint venture with electronics manufacturer Dixon Technologies to manufacture its products in India.

The DRHP has also filed restated financials for H1 FY22, showing a profit of Rs 118.3 crore for the six month period. The company recorded revenue of Rs 1,548 crore for H1 FY22, annualising to Rs 3,096 crores. This essentially means that the company is on its way to registering over  2.3X growth in revenue during FY22 with over 2.7X growth in profits. Those numbers are astounding, considering the firm started business only in 2014, and the operating model has been primarily a marketplace driven model, with Amazon a primary contributor to sales. While that has led to industry beating expenses on advertising and promotions for instance (lowest), or even cost of sales (well below average), its long term sustainability has to be considered a risk factor.

Besides the obvious pressure from competition both old and new, the firm’s high dependence on marketplaces such as Amazon and Flipkart especially for sales leaves it susceptible to any major policy changes these platforms make. 

Further, an IPO where an offer for sale from existing investors including founders dwarfs the actual funds being raised for the firm has to be seen in the right context. Investor experience with the recent IPO of CarTrade, which was completely an Offer for Sale from existing investors, has been terrible, with the stock down over 50% on its offer price.