Saturday, 29 November 2014
 

Monte Carlo Fashions

A play on winter season

Capitalizing on its premium brand position and asset-light model, the company has set a stiff price for its IPO

CM RATING 42/100

Launched in 1984, Monte Carlo Fashions is one of the leading Indian Apparel players. Its brand Monte Carlo has been recognized as a super brand for woolen knitted apparel in each edition of Consumer Super brands India since its inception in 2004. The company primarily caters to the premium and mid premium branded apparel segment for men, women and kids, offering a comprehensive range of woolen, cotton and cotton blended knitted and woven apparel and home furnishings through 196 exclusive Monte Carlo brand outlets and more than 1,300 multi-brand outlets (MBOs).

Around 40% of total sales comprise woolen products, around 38% cotton and cotton blended products, and 3% kids apparel forms. Rest is sale of other products including home furnishings. The entire woolen knitted products are manufactured at facilities in Ludhiana, Punjab, while most of the cotton and cotton-blended products are outsourced to a network of third-party manufacturers.

In June 2012, Samara Capital, a Mauritius-based India focused private equity firm, through its affiliate, Kanchi Investments ltd, Mauritius (KIL), acquired 18.51% stake at Rs 435 per share.

The company is promoted by the Oswal Group. Mr. Kamal Oswal and Mr Jawaharlal Oswal being the founder-promoters and generators of the brand Monte Carlo. Group companies include Nahar Spinning Mills, Nahar Industrial Enterprise, Nahar Capital and Financial Service and Nahar Poly films ltd.

Objects of the Issue

The issue of 54 lakh equity shares of face value of Rs 10 each, i.e., 25% of the share capital, is an offer for sale by the promoters and members of the promoter group (offering 17.42% of the share capital) and by KIL (offering 7.58% of the share capital). Post offer, KIL will hold 10.94% and the promoter and promoter group around 63.63% of the total share capital of Rs 21.73 crore.

The object of the issue is to achieve the benefits of listing the equity shares on the stock exchanges and to further enhance the visibility and brand image among the existing and potential customers and provide liquidity to the existing shareholders.

Strengths

Indian branded apparel industry is expected to reach US $ 34 billion by 2020 from current US $ 13 billion, which will be driven by increase in per capital consumption and increase in penetration of organized retail in India. The current size of India's winter wear market is around US $ 2.3 billion. About 70% is unorganised. There is good scope for increased penetration by organised players.

The company operates with an asset-light model. For its manufacturing business of woolen products, it requires regular capex of about Rs 10-15 crore every year with the necessary infrastructure ready for the next three years. For non-woolen products, it gets the manufacturing done from dedicated vendors.

Weaknesses

The company's financial growth track-record, over the past few years, has been lack luster.

Products cater to the requirement of Tier-1 consumers in India, with discretionary spending. In the event of an economic slowdown, this segment feels more pain than others.

Company's business is very seasonal. Sales in the four months of winter season equal sales in eight months of summer. Thus, extended winter helps and vice versa. In FY 2012-13, the company was affected due to shorter winter and general economic slowdown in India. There was negative cash flow from operating activities in FY 2012-13.

The company has targeted 275 Monte Carlo exclusive brand outlets by end FY 2017. The focus will be on Tier 2 cities in North, East and Central India and Tier 1 cities in West and South India. North India constitutes around 59% of the sales, while South and West India put together less than 7%. The company has limited brand recognition in new markets like Southern and Western India regions, where company intends to expand its footprints. Given the tropical climate of Western and Southern regions, the focus will be on cotton and cotton blended products, which fetch lower margins compared to woolen products. The company's brand is not strong in cotton and cotton-blended products. Competition in this segment is already high. Further additional expenditure in terms of branding, space and advertisements will affect the overall margins of the company in future. Moreover, Tier 2 markets can also fetch lower margins and involve higher risk for a premium brand player like Monte Carlo.

The company procures its entire woolen yarn requirements from group company OWML, which in turn imports the wool from Australia. OWML passes the entire risk of forex and volatility in prices of wool to the company.

Valuation

Net sales and PAT for the June 2014 quarter stood at Rs 74.77 crore and Rs 8.52 crore. However, due to the seasonality of business, the same cannot be annualized. Net sales were Rs 503.73 crore and PAT Rs 55.31 crore in FY 2014. On a post issue equity share capital of Rs 21.73 crore, EPS for FY 2014 was Rs 25.5. At the lower price band of Rs 630 and higher price band of Rs 645, the offer price discounts FY 2014 earning 24.8 times and 25.3 times, respectively. Raymond, the largest player in woolen segment, trades at around 22 times consolidated FY14 EPS. Domestic-focused denim wear player Kewal Kiran Clothing trades at around 33 times FY 2014 EPS.

Monte Carlo Fashions: Issue highlights

Offer size (in Rs crore)
- On lower price band 340.20
- On upper price band 348.30
Offer size (in no. of shares ) 0.54 crore
Price band (Rs)* 630-645
Post-issue capital (Rs crore) 21.73
Post-issue promoter shareholding (%) 63.63
Issue open date 3/12/2014
Issue closed date 5/12/2014
Listing BSE,NSE
Rating  42/100

Monte Carlo Fashions: Financials

1203(12) 1303(12) 1403(12) 1406(03)
Net Sales 372.17 404.44 503.73 74.77
OPM (%) 22.0 17.5 18.7 24.1
OP 81.86 70.95 94.13 18.03
Other in. 3.20 12.02 15.16 4.46
PBDIT 85.06 82.97 109.29 22.49
Interest 6.54 3.69 9.32 3.10
PBDT 78.52 79.28 99.97 19.39
Dep. 5.95 6.82 16.21 6.59
PBT 72.57 72.46 83.76 12.80
Tax (including Deferred Tax) 23.12 23.56 28.45 4.28
PAT 49.45 48.90 55.31 8.52
EPS* 22.8 22.5 25.5 #
*EPS is on post-issue equity capital of Rs 21.73 crore of face value of Rs 10 each
# EPS not annualised due to seasonality in business
Figures in Rs crore
Source: Capitaline Database