Investment Opportunity: Long-term Gain Through Operational Advantage in Urban Company's IPO

Urban Company, an Indian home services company, is launching an Initial Public Offering (IPO) worth ₹1,900 crore this week. The company, which operates in three segments - India services, Native, and International, has seen significant growth in recent years.

Revenue Growth and Expenses

The International segment has experienced a 53% growth, while the company's two largest expenses, employee and Other expenses, have grown slower than revenues in recent years and are likely to significantly lag revenue growth. This trend is expected to continue, with employee and other expenses growing at a CAGR of 5% and 17% respectively, while revenue is projected to grow at a 20% CAGR till FY28.

Geographical Expansion

To enter a new city, Urban Company establishes a base of service professionals, trains them, and sets up local management with centralized services infrastructure. The company currently serves 47 cities in India and plans to expand to 200 cities within the next five to seven years.

Service Offerings

In some cities, the company offers more services than in others, with the potential for introducing remaining services in markets yet to be introduced. The digital platform allows for measuring and driving growth prospects of micro markets, which are geographically a radius of 3-4 km area and based on services.

Financial Projections

Assuming 20% CAGR revenue growth till FY28, flat gross margins, and the aforementioned expense growth rates, the company should report mid-teens EBITDA margin and PAT of ₹250 crore.

Customer Base and Service Professionals

In FY25, the company served 6.54 million transacting customers on average, with 45,619 service professionals. The older customer cohort has reported low double-digit growth in NTV, while new additions are expected to become repeat users over time.

The Native Segment

The Native segment, launched in FY23, has seen a 450% Compound Annual Growth Rate (CAGR). However, the institution behind the brand "Native" is not explicitly mentioned in the provided search results; none of the sources directly associate a specific institution with the brand "Native."

Technology and Profitability

The technology and administrative infrastructure to power the operations are essentially in place and only need incremental, localised additions for further growth. The company has made strides towards profitability, with its India services business profitable at EBITDA and PAT level in Q1FY26.

IPO Valuation

The IPO consists of a fresh issue of ₹472 crore and offer for sale from non-promoters of ₹1,428 crore. At the higher end of the IPO price band of ₹103 per share, the company will have a market cap of ₹14,790 crore and EV of ₹14,198 crore. The IPO is valued at 55 times FY28 Price to Earnings (PE), which is considered high but the long runway for growth and strong scope for profitability may interest long-term, high-risk appetite investors.

In conclusion, Urban Company's IPO presents an opportunity for investors to invest in a company that has shown significant growth in its home services segment, both in India and internationally. With a strong focus on expansion and profitability, Urban Company aims to serve more customers and offer more services in the coming years.