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Monte Carlo Fashions IPO: Our view - Views on News from Equitymaster

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Monte Carlo Fashions IPO: Our view
Dec 4, 2014

The IPO of branded apparel maker Monte Carlo Fashions opens today. Let us see whether investors should consider investing in the same.

About the company

The Monte Carlo brand was launched in 1984 as an exclusive woolen brand by Oswal Woollen Mills Ltd (OWML). Monte Carlo Fashions was formed in 2011 after it was demerged from OWML. The company essentially caters to the premium and mid-premium branded apparel segment for men, women and kids. Its product line includes woollen, cotton and cotton blended knitted and woven apparel and home furnishings. Essentially, the company is promoted by the Ludhiana based Oswal family known for its presence in the textiles industry.

Issue details

As per the prospectus the company is offering 5.4 m shares (face value of Rs 10) in the price range of Rs 630-645 per share. At the upper end of the price range, this translates into an issue size of Rs 3.5 bn.

This is not a fresh issue of shares. Essentially the promoters and Samara Capital are cashing out. For instance, before the issue, the promoters had a stake of 81% which will reduce to 63% post the IPO. Hence, the main purpose of the issue is to have benefits of going public and the proceeds of the offer will not go to the company.

The number of shares before the issue stood at 21.73 m and because this is not a fresh issue, the number of shares will remain the same post issue.

The issue opens on 3rd December 2014 and closes on 5th December 2014.

Reasons to apply

Banking on a strong brand: 'Monte Carlo' is the flagship brand of the company and has established a strong presence in the premium and mid-premium segment. Having said that, the winter wear market has been growing at a lukewarm rate of 9% and so Monte Carlo Fashions has also been building on its cotton apparel range under the same brand. The company is looking to build a pan India presence, and is especially looking to promote its cotton apparel range in the Western and Southern markets where the winters are typically mild.

Healthy reach: The company distributes its apparel products through both exclusive Monte Carlo brand outlets as well as multi-brand outlets (MBOs). As far as the latter is concerned, the company has commissioned agents which procure orders from MBOs. Essentially they act as an interface between the company and the MBOs. Thus, as of FY14, the company retailed its products through more than 1,300 outlets on a pan India basis.

Reasons not to apply

Raw material pressures: Woollen yarn is a key raw material for the company and hence it is subject to the volatility in woollen yarn prices. Indeed, according to the prospectus, the average price of woollen yarn increased from Rs 822 per kg in FY12 to around Rs 1,044 per kg in FY14. Further, the woollen yarn that is procured from suppliers is manufactured from imported wool and hence the company also faces the risk of forex fluctuations to some extent. In the event that it is not able to pass on the raw material hikes to the consumers, profitability is bound to get impacted.

Rising competition: The apparel segment in India is characterized by intense competition. Not only does Monte Carlo Fashions have to compete with organized players but there is heavy competition from the unorganized segment as well. In the winter wear market, where Monte Carlo has a notable presence, the ratio between unbranded and branded players stands at a lopsided 70:30. This means that the company will have to keep reinventing itself through new product lines and stronger sales reach to be able to fend off competitors. In addition to this, since winters are typically severe mostly in the northern and eastern parts of India and not throughout the country, the winter wear market itself has only been growing in single digits. In the woollen wear segment specifically, Monte Carlo remains the preferred player but this could change should foreign players look to establish a presence.

Our view

(Rs m) FY12 FY13 FY14
Sales 3,722 4,044 5,037
Sales growth (%)   8.7% 24.5%
Operating profit 818 710 942
EBDITA margin (%) 22.0% 17.5% 18.7%
PAT 489 495 554
Net margins (%) 13.1% 12.2% 11.0%
RoE (%) 32.5% 15.2% 14.6%
D/E 0.4 0.2 0.2

Since there is no fresh issue of shares, the number of outstanding shares post the issue stands at 21.73 m. Thus, the EPS for FY14 comes to around Rs 25.5.

At the upper end of the price range, this translates into a price to earnings multiple of around 25 times, which is expensive. Although the company has a low debt equity ratio, the return on equity in the last couple of years has fallen to around 15%. In addition the company has contingent liabilities of Rs 279 m on its books. Further, given the volatility in sales and profit growth in the last couple of years and the fact that there exists competition in the branded apparel space, our view is that investors should 'Avoid' the issue.

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