Update: Due to poor response (subscription of only 25% till 29th April evening), closing of the IPO has been extended from 29th April to 3rd May. Price band has also been reduced from 130-132 to 118-120. However, our recommendation remains unchanged. Avoid the issue.
Scotts Garments has entered the capital market on 25th April 2013 with a fresh issue of 1.05 crore equity shares of Rs.10 each, in the price band of Rs. 130 to Rs. 132 per share. The issue will raise Rs. 137 crore and Rs. 139 crore at the lower and upper end of the price band, respectively, representing 26.95% of the fully diluted post issue paid-up capital. Issue closes on 29th April with Keynote Corporate being the book running lead manager (BRLM). The last phrase should help one guess the nature and quality of this public issue!
Another manager to the issue, being the co-BRLM, is Canara Bank’s merchant banking unit, probably as it has other business interest with the company. Canara Bank’s PE fund Emerging India Growth Fund CVCF (attention drawn to the nomenclature, sounding similar to some foreign PE fund) has invested Rs. 20 crore in the company in December 2012 via a pre-IPO placement, acquiring 17.39 lakh equity shares at Rs 115 per share (structured pricing to facilitate IPO band?). Also, Canara Bank extends banking relations with the company and will provide substantial term loans for the latter’s expansion plans. Wonder if SEBI has turned a blind eye on non-existence of Chinese walls within Canara Bank’s business units!
The timing of the IPO is interesting as its on the eve of 6 month expiry deadline (30th April) from date of presentation of financials in the RHP. Thus, it indicates the desperation on the company’s part to raise funds.
Scotts Garments manufactures and exports ready-made garments through its 21 manufacturing units in Karnataka (Bangalore and Bagepalli) and Tamil Nadu (Tirupur). It supplies to various global brands like GAP, United Colors of Benetton, Jack & Jones, Walmart, Vero Moda and Tom Tailor among others. Exports account for over 90% of its annual sales. However, its top customer Best Seller - Denmark accounted for 62% of FY12 sales, which only shows company’s vulnerability and lack of negotiating power towards its key client.
The company is now investing Rs 309 crore towards greenfield expansion – (i) 25,000 pieces per day denim trousers manufacturing factory in Doddaballapur near Bangalore in Karnataka, for which 15 acres land has been acquired and (ii) 40 tonnes per day knitting unit at Kagal in Maharashtra’s Kolhapur district. In addition to this, Rs 11 crore will go towards margin money for working capital. Thus, company has a huge capex lined up of over Rs. 320 crore, of which, IPO and pre-IPO funds will aggregate close to Rs. 160 crore while Rs. 150 crore is / will be funded via term loans from Canara Bank / SBI, leading to a very high debt level, rising close to Rs. 375 crore, from current Rs. 275 crore.
For FY12, it reported revenue of Rs. 500 crore, flat in relation to FY11’s Rs. 495 crore revenue. Adjusting for gain on sale of investments of close to Rs. 60 crore, PAT actually declined YoY from Rs. 35 crore in FY11 to about Rs. 25 crore in FY12. For 7 months ended 31th October 2012, company reported revenues of Rs. 329 crore with EBITDA margin of 16% while net profit was Rs. 20 crore, resulting in EPS of Rs. 7.63, on equity of Rs. 26.74 crore.
As of 30th September 2012, company’s networth stood at Rs. 243 crore, resulting in BVPS of Rs. 91. Accounting for the pre-IPO placement, the current BVPS works out to Rs. 92.4. Post-IPO, promoter shareholding will fall from 71.43% to 52.18%. Inventory of Rs. 223 crore, as of 31st October 2012, represents close to 5 months of sales, which shows low inventory turnover.
Listed rival Bombay Rayon Fashions holds 20 lakh shares representing 7.48% of pre-IPO shareholding in Scotts Garments, acquired in 2009, whereas Scotts holds 0.94% stake in the former. This cross-holding between peers is noteworthy, as Bombay Rayon also accounted for 7.8% of Scotts’ FY12 turnover.
Estimating Rs. 35 crore as net profit for FY13 (annualized 7 month profit), leads to an EPS of close to Rs. 12.5, implying that shares are being issued to the public at a PE multiple of 10.6x and 10.7x, at lower and upper end of the price band respectively. Post-listing, it is seeking a market cap of Rs. 515 crore at Rs 132 per share.
On valuation front, Mandhana Industries, with annual sales of Rs. 1,100 crore i.e. 2 times that of Scotts, is ruling at PE multiple of 11 times, which shows that there is not much left on the table in the current IPO. Bombay Rayon with market cap of Rs. 3,150 crore, is trading at PE multiple of 17 times, which is purely due to low float. On the other hand, Alok Industries is ruling at a PE of less than 1 time.
Although the company manufactures premium brands and its topline will improve with expanded capacities coming on board, large dependence on single customer and poor track record of merchant banker are two big drags on the issue, besides global slowdown negatively affecting textile industry growth. Thus, it is a big avoid!