Sai Silks (Kalamandir) Limited or Sai Silks is tapping the capital markets with its IPO to raise Rs 89 crs in a price band of Rs 70-75. The issue opens on Monday the 11th of February and closes on Wednesday the 13th of February. The issue has an allocation of 10% for QIB’s, 35% for HNI’s and 55% for retail investors. The issue also offers a safety net for retail investors who have been allotted upto 1000 shares.

Business

Sai Silks is in the business of retailing of sarees under the brand names of ‘KALAMANDIR’, ‘MANDIR’
&’VARAMAHALAKSHMI’.It started as a retailer of sarees in Hyderabad in August 2005. As on date the company operates 15 retail outlets spread across South India and these outlets are cumulatively spread over in 129,035 square feet. The company is presently engaged in retail offering of the following products to all the segments:

• Sarees
• Women’s dress materials and readymades
• Men’s wear
• Kid’s wear
• Gold Jewellery and Silver articles

The retail outlets cater to the entire range of sarees in the price range of Rs300 to Rs 3.5 lacs. With evolution of retail industry in India and change in consumer aspirations, it diversified the portfolio of offerings to includeother retail goods like Women dress materials &readymades, Kids wear and Men’s wear. Currently, it sells different varieties of sarees for different occasions and ready-made apparels for women, men and kids in their retail outlets. In order to expand the product range, it also undertook display and sellgold and silver ornaments in their outlets under franchise and shop in shop model. Accordingly, a franchisee arrangement was entered into on April 1, 2008 with Tanmai Jewellers Private limited for retail outlets at Hyderabad. The Company had also entered into shop in shop arrangement with SaiSwarnamandir Jewellers Private Limited on April 1 2009 for a period of 9 years for display and sale of their gold and silver jewellery in our retail outlets located at Jayanagar, Marathahalli and Malleshwaram, Bengaluru. Presently, it is displaying and selling their gold and
silver jewellery in retail outlets located at Jayanagar and Malleshwaram, Bengaluru only. The company is focussed in Hyderabad and Bengaluru and is present in the three Southern states of Andhra Pradesh, Karnataka and Tamil Nadu.

Retail Stores

The company currently has 15 stores with the 16th being added in the first week of February in Bengaluru. The objects of the issue include opening four more stores and the company is in the process of opening two more stores with its own resources. These six stores would be ready in time for the main season which is Diwali and then the subsequent marriage season. If one looks at last year the company had 13 stores in operation at the end of March 2012. They have added one store each in October, November 2012 and now February 2013 taking the store count to 16. This in the next 6-8 months would increase to 22. In other words the store count in a period of 13 months would have moved from 13 to 22 corresponding to an increase of about 70%. This would reflect in the revenues of the company in FY14 and significant impact on the bottom line in that year while the fruits would be enjoyed in FY15.

Objects of the issue

The objects of the issue are as follows: –

Financials

The revenues of Sai Silks have grown from Rs 64.77 crs in the year ended March 2008 to Rs 193.63 crs in March 2010. They have further grown to Rs 262.76 crs in the year ended March 2012. In the first seven months of the current year 2013 ended October 2012, the company has clocked revenues of Rs 168.15 crs. There is seasonality of sales in this business and the second half is better than the first because of Diwali being in the second half and also the marriage season. Secondly 2 stores have been added in October and November which would add to the revenues. Profits in the same period have grown from Rs 1.09 crs in March 2008 to Rs 4.49 crs in March 2010 to Rs 11.69 crs in March 2012. In the seven month period ending October 2012 the net profit was Rs 7.01 crs.

The business of selling sarees is capital intensive as almost the entire collection of sarees is hand woven by weavers across the length and breadth of India. Secondly opening of new stores requires fresh inventory at one time to fill the stores. The current inventory levels of Sai Silks which is high will continue to remain so for the next 12-15 months until the large number of new stores which are opening in the next 6-7 months stabilise. Once these stores stabilise and the growth in new stores opening as a percentage of existing stores tapers of this issue would remain. The gross margins are huge in this business and as this is a fashion product, to see that stock does not pile up the company has clearance sales on various occasions a minimum of three to four times a year. This helps in moving the stocks. In case something does not move they are also able to move the stock from Tier-I to Tier-2 cities and clear the stock as fashion takes time to move.

Track Record of Merchant Bankers

The company has two merchant bankers namely Ashika Capital Limited and Vivro Financial Services Pvt Ltd.

Ashika Capital Limited

Ashika Capital Limited has brought five issues in the last three years with 3 issues in the year 2011-12 and 2 issues in the year 2010-11. Of these five three were trading at a discount 30 days after listing and 2 were trading at a premium. The situation continues to be the same today also with three issues trading at a discount and two issues trading at a premium.

Vivro Financial Services Pvt Limited

Vivro Financial Services Pvt Ltd has not brought any issues to the market in the last three years.

Comparisons

There are many players in the retail industry but there exists no listed saree retailer. There are a few brands which do manufacture/sell sarees like Hakoba and Prafull but they are in the synthetic space and not the handmade variety. Secondly they being manufacturers are selling through the retail chain not necessarily managed by them. Thirdly they do not have a price range as large as that of what offered by Sai Silks. There are some designer brands selling sarees, but the unit sales are few in number. In short there is no comparable of Sai Silks in the industry, and certainly not in the listed space.

It is probably with this in mind that the company has chosen to offer a voluntary safety net to original retail investors who are allotted upto 1000 shares for a period of six months. The salient features of the safety net are covered separately and may be accessed at the end of the article.

Valuations

Sai Silks is offering shares in a price band of Rs 70-75. Based on March 2012 numbers the EPS is Rs 5.78 on the old capital and the PE between 12.11 at the lower end and 12.97 at the upper end of the price band. The seven months results are not comparable and annualising them does not give the correct picture because of the seasonality figure and the fact that two stores were opened in October and November. If one were to hazard a guess on numbers one could safely expect the revenues to be Rs 310-315 crs for the year ending March 2013 and assuming a net margin of a little over 4.75% expect a net profit of between Rs 14.75-15.25 crs. If one assumes the profit to be Rs 15 crs on a fully diluted basis the EPS on the lower price band of Rs 70 would be 4.55 while at the upper price band would be Rs 4.67. This implies a PE band of 15.37-16.04 on a fully diluted basis,and assuming profits for the current year ended March 2013 are Rs 15 crs.

The stores typically break even within the first quarter itself as stores are set up after understanding the needs of the respective area to which the store would cater.

Concerns

The biggest concern is the interrelated transactions of the company with the promoter group. One does appreciate that the promoter is a first generation entrepreneur and began business as a partnership concern which was converted into a private limited company and then a limited company. There is a sourcing arm of the company which is a separate entity owned by the promoter group. Similarly the flagship brand ‘Kalamandir’ is owned by the promoter group. There is a royalty agreement in place where the company would pay Rs 1 lac per store per year subject to a ceiling of Rs 49 lacs as royalty. From the road show and a meeting with the promoters and their merchant bankers it appears that the company and its promoters are seized of this issue and plan to resolve the same in due course of time.

The other concern is about the high level of working capital and inventory needed in the business. The answer that the same would be on a declining trend once the critical number of stores is reached is fair and it appears that over the next 12-15 months the same would be visible.

Key Drivers

Sarees continue to be the attire of choice for occasions for the majority of Indian women and ethnic wear for the rest of women. Sai Silks is into both of these segments. Secondly the wide acceptance of sarees being daily wear and richness of the sarees making it suitable for formal wear makes it a great business opportunity. Lack of organised trade gives organised players a big toehold in a competitive environment where brand, quality, service and assurance are the keys of success. Sai Silk is well poised to take advantage of these opportunities.

Conclusion

The issue looks a tad expensive considering the limited eight year track record of the company. It hs come a long way from when it set up shop and is well poised to reap benefits in a market which has hardly any organised players. The safety net for six months for original retail investors being allotted upto 1000 shares is a bonus as it allows investor to monitor the progress of the company and taking a call whether to continue with their investments or exit at cost as a worst case.

SEBI Disclaimer: – I intend to subscribe to the above issue.

Safety net article