Sudar Garments Limited is tapping the capital markets with its IPO in a price band of Rs 72-77. The company would issue 90.88 lakh shares and raise Rs 69.97 crs at the top end of the band. The issue opens on Monday the 21st of February and closes on Thursday the 24th of February.
| Price Band | Rs 72 – Rs 77 |
| Offer size in shares | 90,88,000 Equity Shares |
| Issue Size | Rs 65.43 crs at Rs 72 to Rs 69.97 crs at Rs 77 |
| QIB’s | 45,44,000 Equity Shares |
| Non Institutional Investors | 13,63,200 Equity Shares |
| Retail Investors | 31,80,800 Equity Shares |
| Marketcap Post Listing | Rs 133.54 crs at lower band and Rs 142.81 crs at higher band |
| Book Running Lead Manager | Ashika Capital Limited |
| Isssue Opening Date | Monday 21st February |
| Isssue closing date | Thursday 24th February |
| IPO Grade | CRISIL grade 1/5 indicating poor fundamentals |
| Paid -up Capital Post IPO | 1,85,46,975 Equity Shares |
| Bid Lot | 81 shares |
| Bidding Amount for Retail | 2592 shares at Rs 77 or Rs 1,99,584 per application |
Business
Sudar Garments as the name suggests is in the business of manufacturing garments and specialises in the manufacture of shirts, trousers and other apparels. It is an integrated apparel manufacturer with capability of designing and manufacturing. The company has grown from a job work unit to its own manufacturing and is now a manufacturer for garment merchant exporters and also manufacturing uniforms and value added apparel for customers within and outside India. The company currently has about 480 sewing machines and other allied machines. One of the objects of the issue is to increase this capacity by setting up additional 200 sewing machines and increase the capacity. Besides the sewing machines which would be added, a large number of ancillary machines and finishing machines would also be added.
Objects of the Issue
The objects of the issue are as follows:
| 1 | Expansion of the existing apparel manufacturing unit | Rs 2628.93 lacs |
| 2 | Meeting working capital requirements | Rs 2730.00 lacs |
| 3 | Setting up retail outlets and brand building | Rs 590.00 lacs |
| 4 | Meeting General Corporate expenses | Rs 600.00 lacs |
| 5 | Meeting the issue expenses | XXX |
| 6 | Total | XXX |
Financials
Sudar reported net sales of Rs 2,067.44 lakhs for the year ended March 2009, and Rs 5,275.89 lakhs for the year ended March 2010. In the six months ended September 2010, the sales have improved to Rs 4,925.70 lakhs. Its net profit after tax has also improved with rising sales and from a mere Rs 58.81 lakhs in March 09, rose to Rs 411.26 lakhs in March 10 and to Rs 407.69 lakhs in the half year ended September 2010. On a fully diluted post issue capital of 185.46 lakh shares the EPS is Rs 2.2 for the year ended March 2010 and on a six month profit annualised for September 2010 is Rs 4.39.
Valuations
The company has chosen to compare itself with players like Kewal Kiran Clothing, Bang Overseas and Mandhana Industries. These companies are strictly not comparable as Kewal Kiran has established itself as a leading player in the retail segment and has a large number of outlets. It has sales which are on a six monthly basis almost three times the sales of Sudar and the net profit is not only significantly higher in absolute terms, its net margins are more than double that of Sudar. In the case of Mandhana Industries, the turnover is more than 7 to 8 times that of Sudar and the company is an integrated player having weaving, processing and designing as it core strength. It enjoys healthy margins and cannot be compared with Sudar.
The company has shown tremendous growth and has in the last four years grown from a turnover of Rs 868 lakhs to almost Rs 10,000 lakhs based on first half annualised sales for September 2010. Going forward the company needs to stabilise its sales and ensure that the margins remain sustainable and that the company is able to feed its machines as the capacity is also increasing significantly.
Based on the EPS that the company has earned for the year ending March 2010, the shares which are being offered in a price band of Rs 72-77 would trade at a price earnings multiple of between 32.73 times to 35 times. If however we were to consider the PE multiple based on the current half year on an annualised basis the valuations improve significantly to 16.40 times at the lower end and 17.54 times at the upper band.
Concerns
The company is tapping the capital markets to raise money for expansion and working capital requirements, yet at the same time has invested in Aasda Lifecare Limited, a pharma company which is in no way connected with the company. Secondly the company has allotted shares in March 2010 at a price of Rs 20 to a company Finaventure India Limited and is now asking investors to invest at roughly four times the price in less than 12 months. Thirdly the foray into retail is highly risky and expensive and could affect the growth prospects of the company if it fails to take off as expected. The company is raising money for brand promotion and also intends to hire a brand ambassador for the same purpose.
In recent times there have been a few well established players in the garment segment who have taken a beating. Also investors would recall the IPO of Cantabil Retail India Limited which had come to the markets in September 2010 and raised Rs 105 crs in a price band of Rs 127-135. The valuation of that company was between 14.5 and 15 times. The share closed for the week on Friday the 18th of February at Rs 40.45 or less than 1/3rd its value.
Conclusion
The promoter has come a long way since he set up shop in Mumbai over 19 years ago. Considering all facts and the growth, I believe that the issue is expensive and leaves nothing on the table for the investor. It makes better sense to skip the issue currently and take a look on listing or a month after listing. The current market scenario is not conducive to applying in the primary market when the secondary markets are in such turmoil.
SEBI Disclaimer: – I do not intend to subscribe to the above issue.
