Scotts Garments Limited (SGL) is tapping the capital markets with its IPO for 105.07 lac shares in a price band of Rs 130-132. The issue has opened on Thursday the 25th of April and closes on Monday the 29th of April. The issue has received bids for a total of 43,500 shares so far. No inference should be drawn from the level of subscription as the bids are normally made on the last day of the issue closing.
| Price Band | Rs 130 – 132 |
| Total issue size in Rupees | Rs 136.59 crs at the lower band to Rs 138.69 crs at the upper end of the price band |
| Issue size in number of Shares | 1,05,06,954 Equity Shares |
| Employee Reservation | 4,50,000 shares |
| Net issue to Public | 1,00,56,954 Equity Shares |
| QIB’s | 25,14,238 Equity Shares |
| Non Institutional Investors | 40,22,782 Equity Shares |
| Retail Investors | 35,19,934 Equity Shares |
| Book Running Lead Managers | Keynote Corporate Services Limited |
| Co-Book Running Lead Managers | Canara Bank Merchant Banking Division |
| Isssue Opening Date | Thursday 25th April 2013 |
| Isssue closing date | Monday 29th April 2013 |
| IPO Grade | CARE grade 3/5 indicating average fundamentals |
| Paid -up Capital Pre IPO | 2,84,77,380 Equity Shares |
| Paid -up Capital Post IPO | 3,89,84,334 Equity Shares |
| Market Cap pre listing | Rs 370.21 crs at the lower end and Rs 375.90 crs at the upper end |
| Market Cap post listing | Rs 506.79 crs at the lower end and Rs 514.59 crs at the upper end |
| Bid Lot | 100 Equity Shares |
| Bidding Amount for Retail | 1500 Equity shares at Rs 132 or Rs 1,98,000 per application |
Business
SGL is a manufacturer of hi-fashion readymade garments having state of the art facilities. The company has domain expertise in providing sampling and design, and also provides facilities for embroidery, printing, dyeing and washing. SGL primarily caters to exports and more than 90% of its turnover comes from exports. During the year ending March 2013, the company has exported garments to more than 69 customers in 41 countries. The manufacturing capacity of the company is 217.08 lac pieces per annum. The company is operating at its capacity and it would be fair to state that if any further growth in revenues is to happen that will come from capacity expansion. The company employs over 12,500 people as of 30th September 2012.
SGL uses its sampling and design team capabilities for furthering its business prospects by providing samples made from the in-house design team. International buyers approve from the collection offered and once the sample is approved, the same goes into production cutting the delivery time substantially as the sampling is not required. The approval of designs from SGL’s creation also demonstrates their ability at forecasting fashion and creating designs to suit the needs of the customer.
Currently SGL owns 5,196 sewing machines, 15 computerised embroidery machines, and other finishing equipment for woven garmenting facilities. It also owns 2,682 sewing machines, 17 computerised embroidery machines and other finishing equipment for knitted garmenting facilities. The company has its units in Bengaluru, Tumkur and Kolar in Karnataka and Tirupur in Tamil Nadu.
The company has already partially commissioned its unit at Doddaballapur in Karnataka and would be expanding its base to Kolhapur in Maharashtra as part of the expansion from the IPO proceeds.
Objects of the Issue
The objects of the issue are to raise resources to finance: –
- Setting up of unit for trouser manufacturing at Doddaballapur, Karnataka and knitting and fabric processing unit at Kagal-Kolhapur, Maharashtra.
- Margin money for working capital of new units
- General corporate purpose
- Issue Expenses
The company has been sanctioned a term loan of Rs 150 crs for the expansion project by Canara Bank. The balance money would come from the net proceeds of the IPO and internal accruals.The total cost of expansion would entail a total expenditure of Rs 320 crs. The trouser facility would have a capacity of 90 lac pieceswhile the knitted fabric and processing facility would be 14,000 tons per annum.
Financials
The revenues of the company have grown from Rs 430 crs in the year ended March 2010 to Rs 495 crs in March 2011 and to Rs 500 crs in March 2012. In the seven months ended October 2012, they have grown to Rs 329 crs. If these numbers are annualised, the revenue in the current year ended March 2013 would be Rs 564 crs. The net profit in the same period has improved from Rs 27.84 crs in March 2010, to Rs 34.93 crs in March 2011 and to Rs 84.04 crs in March 2012. In March 2012 there were onetime capital gains on sale of investments of roughly Rs 59 crs and if one were to remove the same from the net profit, the same would be Rs 25.04 crs.The net profit in the current seven months ended October 2012 is Rs 20.41 crs which if annualised would become roughly Rs 35 crs.
The margins have been under pressure and it is with this in mind that the company is doing expansion and backward integration at the same time. The setting up of the knitting fabric and fabric processing plant in Kolhapur, Maharashtra will help in reducing costs as currently the company buys grey fabric and processes the same. The manufacturing plant for fabric and entire processing of the same would make a significant reduction in costs and help in improving margins and also reducing delivery time for customers. There would also be an improvement in quality control as it would be under direct supervision and under one roof. Finally there are incentives for setting up the unit in Maharashtra from the Central government which include 10% capital subsidy and a 5% interest subsidy. The state of Maharashtra gives a further subsidy on interest so that the effective rate of interest would be no more than 2%.
| Rupees in | lakhs | |||
| 7 months | ||||
| Mar-10 | Mar-11 | Mar-12 | Oct-12 | |
| INCOME | ||||
| Revenue from operations | 43017.07 | 49527.73 | 50025.46 | 32939.88 |
| Other Income | 418.91 | 847.14 | 6587.83 | 593.43 |
| Total Revenue | 43435.98 | 50374.87 | 56613.29 | 33533.31 |
| Expenses | ||||
| Cost of Raw Materials and other components consumed | 22142.10 | 22112.77 | 29019.10 | 17846.07 |
| Changes in inventories of finished and traded goods | -2517.85 | 569.44 | -3538.98 | 395.78 |
| Other Expenses | 16602.70 | 20022.64 | 17372.02 | 10027.39 |
| Total Expenditure | 36226.95 | 42704.85 | 42852.14 | 28269.24 |
| Earnings before interest, tax depriciation (EBITDA) | 7209.03 | 7670.02 | 13761.15 | 5264.07 |
| Depriciation | 1239.81 | 1452.06 | 1442.12 | 1158.90 |
| Finance Charges | 1644.61 | 1491.41 | 2082.23 | 1114.98 |
| Profit Before Tax | 4324.61 | 4726.55 | 10236.80 | 2990.19 |
| Total Tax Expenses | 1540.37 | 1233.50 | 1832.85 | 949.15 |
| Net Profit after Tax | 2784.24 | 3493.05 | 8403.95 | 2041.04 |
| EPS on pre-IPO capital | 9.78 | 12.27 | 29.51 | 7.17 |
| Fully diluted and annualised EPS | 8.97 | |||
| PE AT LOWER | 14.49 | |||
| PE AT UPPER | 14.72 |
Comparisons
SGL has chosen to compare itself with Mandhana Industries, Bombay Rayon Fashion Limited, Gokaldas Exports Limited and KPR Mills Limited. The comparison with the above companies is not quite appropriate as things have changed. For example Gokaldas Exports is now more of a real estate player and less of a garment manufacturer ever since the promoter family sold their majority stake to a private equity player. Bombay Rayon is more of an integrated textile player having a turnover of over Rs 2,700 crs for the year ended March 2012. KPR Mills is more of a yarn and knitting garment manufacturer. The real comparison could be with Mandhana, who is to a large extent comparable and is quoting at a substantially lower price earnings multiple than SGL. It may also be mentioned that the March 2012 numbers include the one time capital gains income of almost Rs 59 crs which need to be adjusted to compare like with like. One must also remember that Mandhana has recently forayed into retail with its association with the brand “Being Human” a brand associated with Bollywood actor Salman Khan.There is another manufacturer of readymade garments who retails its product under the brand “Killer Jeans” and other brands. The company is known as KewalKiranor KKCL, andtrades at a much higher multiple then what SGL is being offered. The key difference is the retail and retailing under a brand being owned by the manufacturer.
Very clearly in the comparison with its competitors, the valuation is at the upper end of the band of competitors and certainly looks expensive.
Valuations
Theshares are being offered in a price band of Rs 130-132. Based on the old equity minus the one time capital gains which is not a regular business of the company the net profit for the year ended March 2012 is Rs 35 crs and the EPS Rs 12.30. Based on this EPS the PE ratio is 10.57 at the lower band and 10.73 at the upper band. The expected profit for the year ended March 2013,based on seven months ending October 2012 if annualised, also comes to roughly the same Rs 35 crs. Assuming the fully diluted equity of 389.84 lac shares, the EPS on an annualised basis would come to Rs 8.97 making the PE at the lower end of the band as 14.49 and at the upper end of the price band at 14.72.
Concerns and Drivers
The key concerns in the business of readymade garments export are the dependence on a few buyers which is a concern as well as an advantage. The second concern is the huge outstanding and debtor days and the falling margins. The margins would improve going forward once backward integration kicks in and the competitive environment from our neighbours like China and Bangladesh would help. China is becoming expensive and Bangladesh is having too many issues with deliveries, human rights violations and some incidents of factory collapse and fire in manufacturing units. These incidents may seem isolated but are being viewed as serious by buyers of garments as they cannot afford delay in shipments at any cost. Secondly when retailing does enjoy high margins, a situation where the shop is stocked out is simply not affordable.
The capability of SGL in meeting short cycle delivery and a complete in-house manufacturing programme would help in garnering orders where just in time fashion is the need of the hour. This would help in improving margins. The new capacity being added is some time away and would not have any impact in the financials for the year ended March 2013. The first impact would be felt in the June quarter 2013-14 when the trouser unit in Karnataka has begun operations and would move to capacity utilisation in the second half of the current year 2013-14.
Conclusion
SGL is in a competitive business which is capital and people intensive. The company already employs over 12,500 people and this figure would rise to over 15,000 once the new capacities are partly in place and to 18,000 people when all capacities are fully in place. Margins have been under pressure and there is not much of pricing power available in the industry looking at its nature and competitiveness.
The expansion and new trouser plant would help in sales and profit going forward but the asking price currently leaves virtually no scope for appreciation as far as the valuations are concerned. The company has done a pre-IPO placement of 17.39 lac shares at a price of Rs 115 to a fund of Canara Bank. What has changed since then that the price being asked for is now higher at Rs 130-132?
One should not expect immediate gains from this company as on the valuation front there is little upside possible currently as the issue has been compared with retailers. The markets are in turbulent times and not much has happened to investors in the primary market in terms of gains. India rerating could be the game changer in the medium term.
SEBI Disclaimer: I do not intend to subscribe to the above issue.
