Brainbees Solutions Limited (popularly known as FirstCry) made a strong listing at 40 per cent premium (at ₹651 per share) over its IPO price of ₹465. The shares rallied to hit a high of ₹707.7 per share, before settling down at ₹673.5 per share at market close today. This is a healthy 45 per cent gain.

In our analysis of the IPO, dated August 6, 2024, we had recommended investors with a high-risk appetite to subscribe to the IPO with a long-term perspective of 3-5 years. Our recommendation was on the back of a strategic shift in market share from unorganised to organised players in the industry, strong repeat customer rate of 72 per cent, reasonable valuations and encouraging trends like urbanisation, increasing share of women in workforce and increasing number of nuclear families. Now, post sizeable listing gains, what should investors do?.

At the current market price, the market values FirstCry at EV to Sales of 4.7 times (FY24 sales). EV represents the current market cap plus the net cash on its books, including the cash inflow from the fresh issue to the tune of ₹1,666 crores.

How the risk-reward stacks up?

The valuation based on EV has jumped by 35 per cent now to 4.7 times, from the reasonable valuation of 3.5 times of EV to Sales, fixed for IPO. While the reasonable valuations on an absolute level given growth prospects , as well as on a relative basis when compared to another customer-facing e-commerce player like Nykaa which is trading at 8.4 times of EV to Sales, was one of the leading drivers behind our recommendation, the valuation is not yet skewed significantly.

With the bulk of sales still expected to be from the online route, the increase in average order value, which grew at a CAGR of around 8 per cent between FY 2021-22 and FY 2023-24, is a key metric to monitor. In the offline segment, with existing stores both breaking-even and bringing in operating leverage, there is headroom for operating metrics to improve. Further an increasing gross merchandise value, at an overall level, which has grown at a reasonable 25 per cent during the last 2 years, holds the company in good stead.

Despite the inherent risks pertaining to scalability, execution and customer retention and acquisition, the current valuation post-listing seems reasonable based on the trade-off between risks and rewards. This is also considering healthy growth the company has demonstrated as the largest organised player in the largely unorganised industry.

Hence, long term investors with a high risk appetite, can hold on to the company despite the solid listing gains as the company seems to have a foot in the door in the path towards profitability. This a call based on both the valuation and the interesting space in which the company operates in.

For more insights about what FirstCry does and how the prospects look, check out our analysis of the company’s IPO

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