ECOS (India) Mobility & Hospitality IPO: 12 key risks to know before subscribing to the issue

ECOS (India) Mobility & Hospitality IPO: The ₹601.20 crore initial public offering (IPO) of ECOS (India) Mobility & Hospitality, a provider of chauffeur-driven mobility, opened for subscription today, August 28. The IPO, which will conclude on August 30, has fixed a price range of ₹318 to ₹334 per share. Ahead of the IPO, ECO Mobility raised ₹180.36 crore from anchor investors.

About the IPO

The public issue is an offer for sale of 1.8 crore equity shares. Through this sale, Rajesh and Aditya Loomba, part of the promoter group, will sell up to 99 lakh and 81 lakh equity shares, respectively.

As outlined in the Red Herring Prospectus (RHP), the company will not receive any proceeds from this offer; all profits will go to the selling shareholders based on the shares they sell.

Qualified institutional buyers have been allocated 50 percent of the issue, while 35 percent is set aside for retail investors and the remaining 15 percent for non-institutional investors.

Retail investors need to apply for a minimum lot size of 44 shares, requiring an investment of ₹14,696.

The allotment of shares for the ECOS Mobility IPO is expected to be finalised on Monday, September 2, 2024, with the listing on BSE and NSE on Wednesday, September 4, 2024.

The book-running lead managers for the issue are Equirus Capital Private Limited and IIFL Securities Ltd, with Link Intime India Private Ltd serving as the registrar.

About the firm

For over 25 years, ECOS has provided corporate clients with employee transportation services (ETS) and chauffeured car rentals (CCR). It boasts a fleet of approximately 9,000 vehicles, from compact to high-end models. The company also offers speciality vehicles, including limousines, baggage vans, classic cars, and vehicles equipped for individuals with disabilities.

According to its RHP, the firm has listed peers like Wise Travel India Ltd and Shree OSFM EMobility Ltd, with P/E ratios of 20.82 and 23.73, respectively.

The company's operating revenue increased significantly, reaching ₹554.41 crore in fiscal 2024, up from ₹422.68 crore in fiscal 2023 and ₹147.34 crore in fiscal 2022. Correspondingly, its profit after tax grew to ₹62.53 crore in fiscal 2024, ₹43.59 crore in fiscal 2023, and ₹9.87 crore in fiscal 2022.

GMP today

In the grey market, the IPO is trading at a premium of ₹194, which indicates an estimated listing price of ₹528—a 58 percent gain over the issue price of ₹334.

‘Grey market premium’ indicates investors' readiness to pay more than the issue price.

Key Risks

The company identified some key risks that could materially impact its business:

Service standards compliance: The company is held to high-quality service standards as outlined in its contracts with customers. Any failure to meet these standards, such as delayed reporting, vehicle breakdowns, or issues with chauffeur behaviour, could result in penalties ranging from ₹100 for minor violations to a full waiver of the invoice for serious breaches. Non-compliance could lead to the cancellation of bookings, harming the company’s reputation and impacting its business, financial conditions, and cash flows.

Vendor relationships: The company heavily relies on vendors to supply vehicles and chauffeurs. These vendors are responsible for fleet maintenance, chauffeur management, and providing replacement vehicles in case of damage or accidents. Any deterioration in relationships with these vendors or difficulties in establishing new ones could disrupt the company’s ability to offer services, reduce the variety of vehicles available, or lead to a complete withdrawal of a vendor’s fleet. This reliance on vendors is crucial as it directly affects the company's operational capabilities and overall business performance.

Customer concentration: A significant portion of the company’s revenue comes from a few key customers, many of whom are not bound by long-term contracts. If any of these major customers decide to stop using the company’s services or terminate their contracts, it could have a severe impact on the company's business, cash flows, and financial condition. The company’s future success depends on retaining these customers and securing commercially viable contracts. Additionally, any financial distress or insolvency among major customers could delay payments, further straining the company’s financial health.

Intense competition: The chauffeur-driven mobility industry is highly competitive, with numerous players ranging from large multinational corporations to small local businesses. The industry is characterised by low barriers to entry, low switching costs for customers, and the presence of well-capitalised competitors. Price is a major competitive factor, and to remain competitive, the company may need to lower its prices, which could reduce revenue and profitability. The company’s ability to maintain its market position depends on effectively managing this competition while balancing pricing strategies.

Litigation risks: The company, its directors, and promoters are involved in several ongoing legal proceedings. These litigations, if resolved unfavourably, could result in significant financial liabilities, including damages, penalties, or other compensatory measures. The costs associated with defending these claims, along with potential reputational damage, could adversely affect the company’s business operations, financial condition, and overall results.

Geographic concentration: While the company operates in 109 cities across India, a significant portion of its revenue is generated from major urban centres. These cities face intense competition and are more susceptible to economic fluctuations, regulatory changes, and other external factors. Any negative developments, such as economic downturns, social unrest, or adverse weather conditions in these key markets, could reduce demand for the company’s services, affecting its financial performance and future growth prospects.

Outsourced technology: The company’s technology infrastructure, including mobile applications, backend systems, and operational tools, is developed and maintained by an outsourced team. This dependency poses a risk. If the outsourced technology team decides to terminate the contract, the company could face significant disruptions in its operations. Additionally, any delays or failures in maintaining or upgrading the technology could lower the quality of services, adversely impacting the company’s business and financial results.

Chauffeur shortages: The company’s ability to expand and maintain its operations is heavily dependent on the availability of chauffeurs, both those employed directly and those supplied by vendors. As the company seeks to grow its fleet, the demand for skilled chauffeurs increases. A shortage of chauffeurs or increased costs to attract and retain them could negatively impact the company’s profitability. This issue is particularly pressing as the company expands, requiring a larger and more reliable workforce to meet customer demands.

Fleet costs: The company’s business model relies on maintaining a modern and well-functioning fleet of vehicles. However, rising costs for new vehicles and the associated expenses of fleet maintenance could adversely affect profitability. If the company is unable to acquire new vehicles at favourable terms, it could face increased operating costs and depreciation expenses. Additionally, an ageing fleet could diminish the company’s competitive advantage and increase the risk of vehicle breakdowns, impacting service quality and customer satisfaction.

Industry changes: The company’s operations are closely tied to broader trends in the automotive industry, public transportation, and related sectors. Factors such as changes in fuel prices, the rise of ride-sharing platforms, advancements in public transportation infrastructure, and new environmental regulations could all impact the company’s business. For example, shifting towards more efficient public transportation options or increased competition from ride-sharing services could reduce the demand for chauffeur-driven services, affecting the company’s revenue and growth potential.

Fuel cost fluctuations: The cost of fuel is a significant factor in the company’s operational expenses, and it has fluctuated considerably due to various factors, including international oil prices, geopolitical tensions, and government policies. Any sharp increase in fuel costs could reduce the company’s profitability, as it may not be able to pass these costs on to customers. The company’s financial performance is, therefore, vulnerable to fluctuations in fuel prices, which are often beyond its control.

Dividend uncertainty: The company’s ability to pay dividends in the future is contingent on its earnings, financial condition, and capital requirements. While the company declared dividends in Fiscal 2024, it did not do so in Fiscal 2023 and 2022, and there is no guarantee of future dividend payments. The company’s capacity to undertake bonus share issuances also depends on its financial health. Additionally, the company has encountered challenges tracing certain corporate records, which could further complicate its ability to manage shareholder expectations and maintain consistent dividend payments.