Cello World: This newly listed stock is trading 34% above its IPO price; should you buy now?

Global brokerage firm JM Financial, in its latest note, has initiated coverage on Cello World with a positive outlook. The stock, which entered the secondary market in November, is currently performing strongly on exchanges, trading at ₹871 apiece, 34.4% higher than its issue price of ₹648 apiece.

Cello World is one of the leading companies in the consumer ware market in India, with a presence in consumer houseware, writing instruments and stationery, and moulded furniture and allied products categories.

JM Financial has listed the following key factors for its bullish outlook:

Well-positioned to capitalise on the branded segment: Consumers are increasingly favoring organised players due to factors such as quality assurance, standardised products, improved customer service, transparent pricing, and the trust associated with established brands.

JM Financial notes that Cello’s aggressive marketing strategies, extensive distribution network, and expanding product portfolio position it for substantial long-term growth.

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Proven expertise in scaling new businesses: The brokerage said that Cello has demonstrated an excellent track record in scaling up new businesses and product categories. It highlights the company’s entry into the glassware and opalware sector in FY17, as well as its re-entry into the writing instruments business with the “Unomax” brand in FY19.

Small kitchen appliances, which constitute 18% of FY23 TAM, are estimated to see a 9% CAGR in FY23–27 (8% in FY15–23). At present, Cello has limited offerings in this segment. However, the company now intends to scale up in this segment (select product offerings) over the medium term, leveraging the existing distribution network and manufacturing facilities, it said.

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Diversified product basket across price points: Cello is a one-stop-shop solution offering a diverse range of products across different product categories, types of materials, and price points. The wide spectrum of product offerings caters to a diverse range of consumer needs.

As of June 30, 2023, the company offered 15,891 SKUs across its three product categories. Cello introduced 397, 169, and 380 new products during FY21, FY22, and FY23 across three product categories, respectively. The company has demonstrated the ability to expand SKUs and products across various price points.

Significantly outperforms peers: Cello Group’s restructuring in 2021 resulted in its entire consumer-facing products business folding into Cello. The brokerage noted that Cello has outperformed its peers across consumer ware and writing instruments in almost all aspects of revenue growth, margins, and return profile in FY21–23. Cello’s product prices are mostly at a premium compared to its peers, reflecting brand strength, it pointed out.

The brokerage noted that Cello’s FY23 EBITDA and PAT are higher than TTK Prestige – India’s biggest kitchen appliance company in the listed space and expects Cello to significantly outperform TTK Prestige in FY23–26.

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Valuation and outlook: The brokerage forecasts Cello to post a revenue, EBITDA, and PAT CAGR of 16%, 21%, and 24%, respectively, in FY23–26, with a median RoIC (post-tax) and RoE (post-tax) of 26% and 30%, respectively, in FY23–26.

The brokerage believes Cello is well placed to ride on the growth in consumer ware, writing instruments, and moulded plastics on the back of its strong track record of superior growth compared to peers.

Given these positive factors, the brokerage has initiated coverage on the stock with a ‘buy’ recommendation and set a target price of ₹950 apiece, valuing the company at 40x the projected FY26 earnings per share (EPS). This target price indicates an upside of 9%.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.