Case 075Capital markets and financingCore
Varnika Retail is preparing a Rs 1,200 crore IPO, Rs 400 crore fresh and Rs 800 crore an offer for sale, with peers at 45x to 55x earnings and a 15% IPO discount. Set the price band, the post-issue market value and the dilution.
1The situation
Varnika Retail, a chain of value fashion stores, is preparing to list. Its FY26 profit after tax is Rs 120 crore and it has 40 crore shares: 32 crore held by the promoters and 8 crore by a private equity investor. Listed peers trade between 45x and 55x trailing earnings, and the bankers propose a 15% IPO discount to those multiples.
The issue is Rs 1,200 crore: Rs 400 crore of fresh shares issued by the company and Rs 800 crore of existing shares sold by the investor. State the framework; the reader should confirm the current listing rules on price bands, minimum public float and lock-ins before relying on any threshold.
2Your task
Set the price band, and at each end give the pre- and post-money value, the new shares issued, the dilution to existing holders and the public float after listing.
Quick check
The issue is Rs 1,200 crore. How much of it dilutes the existing shareholders?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Price band Rs 115 to Rs 140 a share, 38.3x to 46.7x earnings after the discount, a pre-money value of Rs 4,600 to Rs 5,600 crore. At the top, the Rs 400 crore fresh issue adds 2.86 crore shares, 6.7% dilution, for a post-money value of Rs 6,000 crore; at the bottom, 3.48 crore shares and 8.0%, post-money Rs 5,000 crore. The Rs 800 crore offer for sale dilutes no one; it moves the investor's shares to the public, taking the float to 20% at the top and 24% at the bottom.
Step 1How do peer multiples become a price band?
Selling a flat, you look at what similar flats in the building fetched and then price a little under, because a buyer who has never seen your flat wants a reason to come to the viewing. An IPO is priced off listed peers with a discount, because the stock has no trading history, the sellers want the book covered and a first-day gain is part of the sale. Peers at 45x to 55x less 15% is 38.25x to 46.75x. On Rs 120 crore of profit that is Rs 4,590 to Rs 5,610 crore of pre-money equity value, or Rs 114.75 to Rs 140.25 on 40 crore shares. Bankers round: Rs 115 to Rs 140, a pre-money value of Rs 4,600 to Rs 5,600 crore. Confirm the current rule on how wide a band may be; many regimes cap the top at a fixed percentage above the bottom, and this band is 22% wide.
Step 2What does each part of the issue do to the share count and the value?
Split the Rs 1,200 crore. The fresh issue is new shares sold by the company: at Rs 140 that is Rs 400 crore over Rs 140, 2.86 crore shares, taking the count to 42.86 crore. The company's cash rises by Rs 400 crore, so post-money equity value is Rs 5,600 plus 400, Rs 6,000 crore, and existing holders own 93.3% of it: dilution of 6.67%. The offer for sale is 5.71 crore of the investor's existing shares at the same price; Rs 800 crore goes to the investor, the share count and the company's cash do not move, and nobody is diluted. At Rs 115 the same Rs 400 crore buys 3.48 crore shares, dilution 8.0%, and post-money is Rs 5,000 crore.
| Bottom, Rs 115 | Top, Rs 140 | |
|---|---|---|
| Multiple after discount | 38.3x | 46.7x |
| Pre-money equity value, Rs crore | 4,600 | 5,600 |
| New shares for Rs 400 crore, crore | 3.48 | 2.86 |
| Shares after the issue, crore | 43.48 | 42.86 |
| Post-money equity value, Rs crore | 5,000 | 6,000 |
| Dilution to existing holders | 8.0% | 6.7% |
| OFS shares sold by the investor, crore | 6.96 | 5.71 |
| Public float after listing | 24.0% | 20.0% |
Step 3Who owns what after listing, and what rules bind the structure?
At Rs 140 the promoters keep their 32 crore shares, now 74.7% of 42.86 crore. The investor sells 5.71 crore of its 8 crore and keeps 2.29 crore, 5.3%. The public holds 5.71 plus 2.86 crore, 20.0%. Listing rules typically set a minimum public shareholding, a period to reach it, a lock-in on promoter shares and a minimum promoter contribution; a float of 20% at the top of the band may or may not satisfy the current minimum, so confirm the figure and the timetable before the structure is fixed. If the rule required more, the fix is a larger OFS, not a larger fresh issue, unless the company needs the money.
Two refinements show you have done this before. First, post-money earnings per share: Rs 120 crore over 42.86 crore shares is Rs 2.80, so at Rs 140 the stock lists on 50.0x, above the 46.7x pre-money multiple, because the Rs 400 crore raised earns nothing until it is deployed; if it earned 6% after tax at 25%, profit would be Rs 138 crore. Second, the use of proceeds is the investors' first question: Rs 400 crore to the company for stores and working capital is a growth story; Rs 800 crore to a departing investor is an exit, and a book dominated by the OFS prices differently. The limit of the exercise is that the band is a starting point: the book-building tells the bankers where demand sits, and the final price is set inside the band on that.
Where candidates lose it
Candidates divide the whole Rs 1,200 crore by the price and call it dilution. Only the Rs 400 crore fresh issue creates shares; the offer for sale is existing shares changing hands, so dilution is 6.7% at the top of the band, not 18%.
The second slip is applying the discounted multiple to post-money value. The multiple prices the business as it is, pre-money; the fresh cash is added on top, and the post-money multiple is higher until the cash earns something.
What the interviewer asks next
- The book is three times covered at the top of the band. Should the bankers price above it, and what stops them?
- If the whole Rs 1,200 crore were a fresh issue, what would dilution and the post-money value be at Rs 140?
- Why is the IPO discount larger for a first-time issuer in a sector with no listed peers?
Company names and figures are illustrative.