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Should you invest in FirstCry IPO

Childcare products e-commerce Unicorn FirstCry.com has refiled its draft red herring prospectus (DRHP) in Apr'24 for its upcoming IPO (undated) after markets regulator Securities and Exchange Board of India (SEBI) demanded a revision citing gaps in the 1st DRHP filed back in Dec'23. The IPO offer, which comprises fresh issuance of shares worth ₹1,816Cr and an offer-for-sale (OFS) component of 5.4Cr equity shares remains unchanged from the previous DRHP filed by the Pune based company.

 

Is it worth your money? Let's break it down:


Early Days and Growth Story
  • FirstCry was conceived back in 2010 by Supam Maheshwari (IIM-A grad) and Amitava Saha (IIM-L and IIT-V grad) as an e-commerce company acting as a one-stop-online shop for all childcare products catering to the needs of soon-to-be and new parents.

  • Back then more than 90% of the industry was unorganised and in the organised space also, there were no major players who were exclusively catering to the entire value chain of the childcare products market. For example, there was Gini & Jony selling apparels for kids while there were Huggies diapers available in a departmental store, but there was no single place where you could get all things childcare under 1 roof.

  • By capitalizing on the fragmented childcare market, the burgeoning Indian middle class and the .com boom in India, FirstCry blitz scaled, reaching ₹100Cr in revenue in just 5 years, having raised close to $70M (₹350Cr appx.) in the process.


Note: the trailing revenue figures have been adjusted to include numbers of Digital Age Retail Pvt. Ltd. that FirstCry acquired in May'22. The Company’s DRHP reveals, “Prior to the acquisition, our online platform was operated by Digital Age, pursuant to a platform sharing agreement. Further, certain of our physical stores were franchised to Digital Age.” Therefore, for meaningful comparison with later years, we have considered Digital Age’s revenues too in all years.

Digital Age’s standalone financials reveal a revenue of ₹3010Cr in FY23. The company was acquired for a miniscule consideration of ₹240Cr.


  • The company tasted overnight exponential growth in FY21 when the pandemic hit the world. As parents found themselves homebound with their tiny tots, FirstCry's online channels saw a massive surge in demand. In-house brands stepped up to fill the gap left by out-of-stock international labels. Smart supply chain moves like circumventing China early on gave them an edge over rattled rivals. As evident in the chart above, the company's revenue zoomed 2.5x in FY21. In comparison Flipkart's business grew by only 26% in FY21.

  • In June 2021, FirstCry also added GlobalBees as its subsidiary (founded by Supam Maheshwari and Nitin Agarwal). GlobalBees is a rollup e-commerce venture that acquires and consolidates direct-to-consumer (D2C) brands. Only a month later, SoftBank and others invested a whopping $150M (₹1,110Cr) in the company, making it one of the largest Series A round by an Indian Startup. Later that year the company became one of the youngest Unicorns of India. For the 9 months ending Dec'23, the company reported revenue of ₹910Cr (12x growth in 2 years) and positive EBITDA margin.

  • The real test for FirstCry's lasting legacy was FY22 as India slowly unlocked from Covid-19 and experts predicted that e-commerce companies may report flat growth owing to this. However, FirstCry added to its mettle by going deeper into the value chain by launching ancillary services like Intellitots play school and FirstCry Parenting app, thereby significantly increasing engagement levels of the customers with the brand. While Intellitots imparted experiential childhood education to kids through its playschools, the Parenting app dispensed a daily dose of baby Tips&Tricks to overwhelmed new parents. The company clocked an impressive 42% growth in the topline during the year. In comparison Flipkart's revenue grew by 20% that year.

  • Ever since the company's growth has significantly slowed down (see chart above), possibly due to increased emphasis on profitability in its race to IPO. The company has also since shifted its focus to expanding its offline business through its owned stores (especially of its home grown brand BabyHug) and its international business in Dubai and Saudi Arabia. Out of the total IPO proceeds of ₹1182Cr, 68% is budgeted towards opening of new offline stores and warehouses in and outside India.


Profitability
  • The Pune-based startup posted a consolidated net loss of ₹486Cr in the full financial year FY23.

  • In the 9 months ending Dec'23, the company reported EBITDA margin of 0.78% at the group level. However, if we study its segment results closely, we find that the company's core business in India has a strong EBITDA margin of 9%. It is only the company's international business that continues to be EBITDA negative (-20%), possibly due to its aggressive growth strategy in this domain. To give you an idea, in the 9 months ending Dec'23:

    • FirstCry recorded 88% growth in Gross Merchandise Value (GMV) from its international business.

    • International business contributed 12% to the retail proceeds.

    • The average order value (AOV) from internation business was almost 4 times of its Indian business @₹8,613.

  • Ad and sales promotion expenses as a % of topline has come down to 7.58% in FY 24 from 11% FY22. The high advertisement costs are because more than 3/4th of FirstCry's topline comes from online sales. The % is likely to further reduce going forward because of the company's growing focus on offline market.

  • Since the company does not have a stable track record of profitability, it is not worthwhile to comment on the its return on capital employed (ROCE).


Other noteworthy factors
  • Supam Maheshwari- founder and CEO of FirstCry continues to own nearly 6% of the company pre-IPO. In FY23 he drew a salary of ₹200Cr.

  • Some of its key leaders like CTO Mr. Prashant Jadhav (part of founding team), CHRO Ms. Manjula Rao and CFO Mr. Gautam Sharma have all been with the company almost from its inception back in 2010- a healthy sign.

  • The company does not own a single manufacturing facility. It works through a network of over 900 contract manufacturers and 8,000+ brands. It will be interesting to see if the company shifts this to in-house manufacturing in the future to improve margins.

  • In the early days the company expanded its offline market primarily through a franchise model. However, now the company is focusing more on developing its self-owned network of stores and thereby reducing its dependency on franchise owned stores (As against 5% in 2021, 33% of the offline sales come from self-owned stores now).

  • FirstCry Parenting’s YouTube channel has over 1.4 million subscribers as of March 31, 2024 which speaks of the strong community that FirstCry has nurtured over the years. The community effect helps increase brand loyalty and also massively reduces cost of acquisition of new customers.

  • The company has a huge commitment of ₹738Cr sitting in its Non-current liabilities to purchase equity stake in brands acquired by GlobalBees from their existing shareholders. For example, GlobalBees has signed an agreement with shareholders of Frootle India wherein the shareholders can require GlobalBees to purchase another 23% stake of Frootle India by Mar'24, based on future performance of the brand. The company has only earmarked ₹174Cr from the IPO proceeds for this purpose.


Competitive landscape
  • With over 1.99 million sq. ft retail space and 1,018 Modern Stores in 508 cities, FirstCry is India’s largest multi-channel retailing platform for Mothers’, Babies’ and Kids’ Products, in terms of GMV as of Dec'23.

  • FirstCry is also the ONLY large organised speciality vertical Multi channel player in India Childcare Products market. Other organised players usually function in one or a few segments of the entire value chain.

  • FirstCry therefore competes with horizontal online platforms such as Amazon, Flipkart, and Meesho, among others and vertical online platforms such as Hopscotch, Myntra, and Ajio, among others, and multi-brand and exclusive retailers such as Reliance Trends, and Gini & Jony, among others.

  • In totality Firscry owns close to 10% of the organised childcare market in India.

  • As of 2023, 84% of the childcare market in India was unorganised. While this speaks of the massive untapped potential for FirstCry to capture, RedSeer predicts that the share will only reduce to ~79% through 2028. This is possibly due to low disposal income of the Next Billion Users (NBUs) combined with Indian's ingrained culture of purchasing low priced childcare products because of the inherently high churn of such products during the early stages of a child's growth.


Concluding remarks
  • The company has a little over ₹1,400Cr of working capital as of Dec'23. Even if we consider the cash burn rate of FY23, the company has a comfortable runway of 3.5 years. On top of it, the company has made significant strides in FY 24 to break-even, reporting a negligible ₹7Cr of cash used in operating activities in the 9 months ending Dec'23, which means no more cash burn. Fresh proceeds from IPO of another ₹1,800Cr further adds to its arsenal giving a positive signal to the investors of the company's financial health (provided they successfully IPO and also are able to sustain their margins).

  • The customer lifecycle on FirstCry is inherently limited, as parents typically only need baby and toddler products for a finite period. Once children outgrow these products, parents often discontinue their engagement with the brand. This natural customer churn necessitates an aggressive customer acquisition strategy for FirstCry. To sustain growth and maintain market dominance, the company will have to continuously invest in marketing and promotional activities to attract new parents and soon-to-be parents, ensuring a steady influx of customers to replace those who have moved on. This may result into difficulty in improving margins.

  • The average spend per child on childcare products in the US is ₹2,15,000, whereas it is ₹9,300 in India. After adjusting for the Purchasing Power Parity (PPP) between USA and India, Indians are still spending almost 7 times lesser in childcare products today. With a growing young population and rising disposable income of Indians the average spend per child is therefore likely to increase at a high rate for the next few years, presenting a significant opportunity of growth for FirstCry.

  • India has 25 million baby births every year, almost a fifth of the world’s. With this, the Indian childcare products market is projected to grow at a CAGR of 13-15% to ₹5,000Bn+ by FY28. With a robust online presence (over 7M unique transacting customers), coupled with a widespread network of physical stores, FirstCry's position is solidified as a dominant player in the Indian baby care market. The company is therefore well-positioned to capitalize on the anticipated growth of the industry.


So should you invest in FirstCry?

Well we've done our part of crunching the numbers. Now it's up to you. We're [zip emoji]


 

Note:

  • The numbers have been extracted from RedSeer industry report on Childcare industry and FirstCry's DRHP, unless otherwise mentioned.

  • The analysis and opinions expressed regarding FirstCry's performance and metrics are the independent conclusions of the authors and do not represent the views of the company or any affiliated individuals. While we strive for accuracy, we cannot guarantee that our analysis is exhaustive or definitive. Investors should base their investment decisions on their own judgment and due diligence. Public market investments inherently carry risks, and we urge investors to thoroughly review all related scheme documents before proceeding with any investments.

 

This article is a part of the May'24 edition of our Startup Newsletter. Here's the complete publication:


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