Cantabil Retail

Cantabil Retail is entering the capital market on 22^nd September 2010 to raise Rs. 105 crore via the public issue, comprising of a fresh issue of 78 to 83 lakh equity shares of Rs. 10 each (depending on the price at which the book is discovered). The issue, priced in the band of Rs. 127 to Rs. 135 per share, constitutes about 48% of post-issue paid-up capital of the company. The issue closes on 27^th September 2010.

Cantabil Retail is a Delhi-based apparel retailer, having 411 exclusive retail outlets aggregating to 3.2 lakh sq feet of retail space, across India. Its stores are located in North India (230 stores) and West (113 store), with South and Central India having barely 24 and 6 stores respectively. Of the total, 65% are franchise owned stores while balance are company owned.

The company sells ready-made garments and accessories under the brands 'Cantabil' (270 stores / 2.4 lakh sq feet) and 'La Fanso' (141 stores / 80,000 sq feet). The Cantabil brand (launched in Sep 2000) caters to middle and high income group while La Fanso (launched in Oct 2008) caters to low and middle income group.

Manufacturing of the products is undertaken both at in-house production facilities as well as through third-party fabricators. Company has 3 manufacturing facilities (13 lakh pieces manufacturing capacity and 26 lakh finishing capacity) and 4 warehouses, all in Delhi. It also has arrangement with 73 contractors for outsourcing of the manufacturing process. Presently, the company's dependence on the third party fabricators is quite high, as almost 70% of the products sold are procured from them. This is likely to reduce, once the company's new finishing facility of 4 lakh pieces, at Sonipat, Haryana become operational by Dec 2010.

Funds raised in the IPO will be utilized towards:

a)       Establishing new facility at Bahadurgarh, Haryana (manufacturing capacity of 43 lakh pieces) worth Rs. 32 crore, to be operational in FY13

b)       Working capital requirement of Rs. 30 crore

c)       Establishing 180 'Cantabil' stores with investment of Rs. 25 crore, 80 in FY11 and 100 in FY12

d)       Repayment of debt of Rs. 20 crore

Most of the company's growth has been in the last 2 years, due to expansion of new stores. Its net sales and EBITDA have grown at CAGR of 66% and 102% respectively from FY08-10. For FY10, the company reported net sales of Rs. 202 crore, of which, sale of manufactured goods accounted for Rs. 150 crore, and balance came from sale of traded goods. The EBITDA for the company was Rs. 30 crore, resulting in EBITDA margin of 14.7%.

Net profit in FY10 rose by 136% to Rs. 14.7 crore, from Rs. 6 crore in the previous year. Net profit margin of the company was 7.3% while EPS for FY10 was Rs. 17.4, on equity of Rs. 8.6 crore. Post issue, the company's equity will expand to Rs. 16.8 crore, although the existing promoters will continue to hold over 50% stake, despite the heavy dilution.  

The closing inventory balance as of 31^st March 2010, stood at Rs. 120 crore, representing 7.2 month sales. Also, inventory management worsened in FY10, since inventory levels represented only 5 months sales in FY09. This is very high for the company, given the fact that 82 new stores were added in FY10. Even for estimating working capital requirements for the future, the closing stock holding period is taken as 9.5 months, as against the present 13.5 months. This not only blocks a large amount of funds towards working capital, but also indicates pressure on sales / liquidation of stock.

The company's networth, as on 31^st March 2010, was Rs. 30 crore while debt stood at Rs. 63 crore, which will reduce to Rs. 43 crore, post-issue. Debt-equity ratio will also get reduced from over 2 times presently, to about 0.3:1, post-issue.

At the upper end of the price band at 135, the company is seeking a market cap of Rs. 220 crore, and enterprise value of Rs.262 core, post repayment of part-debt. This works out to PE multiples of 7.3 and 7.8 times on the lower and upper price band, respectively.

The company, which mainly caters to the middle income segment, can be compared to Koutons Retail, which had come out with its IPO in October 2007. The company, then with 999 stores, topline of Rs. 404 crore, net profit of Rs. 34.5 crore (8.5% margin) was valued at close to Rs. 1,250 crore, on equity basis. At present, although Koutons' store count has risen to about 1,400 with FY10 topline and net profit rising sharply to Rs. 1,206 crore and Rs. 80 crore respectively, its market cap is just about Rs. 900 crore, having recorded a fall of 30% in 3 years since its IPO, ruling at PE multiple of over 11 times FY10 earnings, presently.

The company is recording good growth due to addition of new stores. However, inventory management at the company level and sluggish profit growth for the retail sector, are two concerning points, in the long run.

Issue seems to be fairly priced. Although retail is far from being the flavor of the season, those keen on taking an exposure in the sector, can go for it for short term gains.