Lenskart is in focus today. The share price of Lenskart is up over 2% after leading domestic brokerage house, Motilal Oswal initiated coverage with a ‘Buy’ rating. Lenskart is India’s largest vertically integrated eyewear platform, addressing a structurally underpenetrated eyewear category in India. Motilal Oswal believes the superior valuation multiples are justifiable, “given Lenskart’s superior growth profile, limited organised competition and long growth runway.”
Motilal Oswal has initiated coverage with a ‘Buy’ rating. They have set a target of Rs 600 per share. This implies nearly 27% upside from current levels. As per the estimates by the brokerage house, they see a DCF-implied valuation of 55x FY28 earnings. Though they pointed out this is “at a premium to other leading retailers,” they are betting on the growth potential.
Motilal on Lenskart: What’s driving the bullish recommendation
Motilal Oswal lists out several factors that they believe are driving the bullish recommendation. Here is a detailed analysis of their investment rationale –
The big value drivers for Lenskart
According to Motilal Oswal, Lenskart’s “central manufacturing-led architecture, superior store economics, technology-led expansion, and house-of-brands strategy create durable moats in an under-penetrated industry.”
As per their estimates, Lenskart trades at “18% premium to other large retailers in India, though we believe the multiples are justifiable, given its superior growth profile, limited organised competition in the eyewear category and long growth runway.”
The brokerage house projected that Lenskart trades at 0.8x FY28 EV/EBITDA. According to them, this is lower than the 1.1-3x valuation for leading fashion and grocery retailers and 1.1x for Nykaa.
Though repeat purchases are not that frequent in the eyewear industry, Motilal Oswal believes that significantly lower organised competition supports their valuation call. This “could enable stronger growth runway, margin expansion and superior FCF generation,” Motilal Oswal added.
Large addressable markets offer potential
The other important factor that Motilal Oswal highlighted is the size of the total addressable market. They believe that the total addressable market for Lenskart “in its existing geographies exceeds Rs 2.3 trillion, with its market share at 5% in India and less than 2% in international markets, providing a large growth runway.”
India’s overall eyewear market is significantly underpenetrated, with a very low organised retail share in eyewear. The share of organised retail is just 24% and only 35% prescription eyeglasses. penetration is seen as of now. This “massive under-penetration reflects structural gaps such as significant customisation needs to manufacture eyewear for each individual, import dependence, low awareness, limited access to optical stores, shortage of trained optometrists, lack of affordability, and standardised service delivery,” as per Motilal Oswal.
A scaled eyewear market leader with strong moats
Lenskart’s “automated centralised just-in-time manufacturing, which replaces the fragmented, store-level lens cutting, allows the company to deliver micron-level precision at scale at lower costs and faster fulfilment timelines,” the Motilal Oswal report highlighted.
They believe that the “company’s rising focus on vertical integration into the manufacturing of lenses and frames allows it to launch new designs frequently and at 5-40% lower costs compared to third-party procurement by eliminating huge retail mark-ups.”
Their analysis pointed out that “centralised manufacturing and vertical integration also position the company to drive margin expansion while maintaining complete control on product quality.”
Additionally, Lenskart’s investment in the upcoming Hyderabad facility to extend its manufacturing capabilities to future-proof the business is expected to help tackle the “large latent demand and improve turnaround times.”
Key risks and concerns
Motilal Oswal, however, did not rule out the key risk factors. They believe that dependence on China for the import of raw materials is a key risk for Lenskart. High concentration of manufacturing operations in North India is another matter of concern, and the overseas subsidiaries that are loss-making are expected to weigh on profitability. Shortage of trained optometrists is another factor to watch out for.
Conclusion
All in all, Motilal Oswal sees the size of the eyewear retail market that is still not penetrated as the bigger driver of growth. According to them, this sets up the company on a longer growth runway going forward.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.