All about the Monte Carlo IPO: Should you invest?

Monte Carlo Fashion Limited, a 30-year-old retailer and manufacturer of woollen and cotton apparels, and home furnishing products, is planning to raise around Rs 350 crore by selling 54.33 lakh shares through an initial public offer (IPO), which open for subscription on 3 December, 2014. The shares are issued at a price band of Rs 630-Rs 645. Subscription will close on 5 December 2014. Money Today gives you a low down on the IPO.

All about the Monte Carlo IPO

COMPANY DETAILS

The 30-year-old company is a retailer and manufacturer of Monte Carlo brands of woollen and cotton apparels and home furnishing products.  Woollen (excluding woven) and cotton apparels contributed 40% and 38% of its total revenue during 2013-14. Home furnishing products (mink blankets, quilts and bed sheets), a segment in which the company entered in 2012-13, accounted for 7% of the total revenue in 2013-14.

The company has two manufacturing units in Ludhiana-one for woollen and one for cotton apparels. However, most of manufacturing work is outsourced to third parties.

The company distributes its products through 'Monte Carlo Exclusive Brand Outlets' and a network of multi-brand outlets (MBOs). As on June 30, 2014 there were 196 'Monte Carlo Exclusive Brand Outlets' in India, two 'MonteCarlo Exclusive Brand Outlets' in Dubai and one 'Monte Carlo Exclusive Brand Outlets' in Kathmandu, Nepal.

Out of the 196 'Monte Carlo Exclusive Brand Outlets' in India, 18 are owned and operated by our Company and the rest are operated by different franchisees. It also sells its products through over 1,300 MBOs. Of late, it has also entered into distribution agreements with some of the leading online retailers.

PROMOTERS

Promoters Jawahar Lal Oswal, Kamal Oswal, Dinesh Oswal, Monica Oswal, Ruchika Oswal, SMCL and SSCL, and other promoter groups together hold 81% of the issued, subscribed and paid-up equity share capital. Samara Capital, a Mauritius-based private equity firm, through its affiliate KIL, holds 18.51% of the pre-offer capital in the company.

Through the IPO, promoters and promoter groups will offload 17.42% of their holding and KIL would offload 7.58%. Post-issue, the promoters and promoter group will own 63.63% stake in the company.

The proceeds of the issue will not be utilised by the company for business expansion but will go to the selling shareholders.

FINANCIALS AND VALUATIONS

The company posted sales revenue of Rs 519 crore in 2013-14, a 25% jump from the previous year. It made a profit (after tax) of Rs 55 crore during the year, an increase of 12% over the previous year. Since 2011-12, the company has seen its profit margin falling from 13% to 10.6%.

In terms of debt, the company is comfortably placed with debt/equity ratio of 0.22. In the past three financial years, the debt/equity ratio has remained below 0.5.

Based on the price band of the issue (Rs 630-645) and the March 31, 2014 earnings per share of Rs 25.45, the issue is valued at a Price-Earnings multiple of around 25. Going by the current valuation of some of similar stocks-- Kewal Kiran Clothing (PE of 34, based on December 2, 2014 price), Zodiac Clothing (49), Kitex Garments (38) and Page Industries (62)-the issue has been fairly valued.

POSITIVES

The Monte Carlo brand has a good brand recall value. It mostly operates in the premium category, though it has diversified into economy segment through Cloak and Decker brand.

The company has also entered into the high growth kids segment and popular home furnishing segment.

The company has an asset-light model, under which it outsource most of the products from third party. This model helps it keep costs low and margins relatively higher.

The company has a strong distribution network-exclusive outlets and multiple brand outlets. With the popularity of online retail outlets, the company can further leverage their network to boost sales.

NEGATIVES

The company operates in a very competitive segment with many foreign as well as domestic brands vying for consumer interest. Besides, it is virtually non-existent in the overseas market.

It is a family-run company with members Oswal family holding 63% stake post-IPO. As in any family-run business, corporate governance can be an issue.

OUR VERDICT

Purely on valuation basis, the IPO looks like a decent short- and medium-term buy. Though, in the long run, the company will have to prove it can consistently generate good profit margins and post higher (above 20%) return on equity.