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Lovable Lingeries Ltd IPO Review (Apply)

Review By MLR Securities Private Ltd on Mar 8, 2011

  • Issue Size: Rs 87.8-92.3 Cr;
  • Price Band: Rs 195-205;
  • Issue Date: Mar 8-Mar 11;
  • Grey Market Premium: Rs 35-40;
  • Market Cap - Rs 328-344 Cr,
  • BRLM – Anand Rathi Advisors ltd

Issue objects

  1. Investment in Joint Venture with Lifestyle Gallaries of London ltd – Rs 25 Cr
  2. To set up a manufacturing facility – Rs 23 Cr
  3. Expenses to be incurred for brand building – Rs 18 Cr
  4. To set up exclusive brand outlets (EBOs) – Rs 14 Cr
  5. To upgrade design studios – Rs 8 Cr
  6. Brand Development Expenses for 'College Style' brand – Rs 6 Cr
  7. To set up retail stores modules for shop in shop – Rs 4 Cr

Lovable Lingerie ltd (LLL) incorporated in 1987, is one of India's leading women's innerwear manufacturers. The company's products include brassieres, panties, slips / camisoles, homewear, shapewear, foundation garments and sleepwear products. The company acquired the brand Lovable from US-based Lovable World Trading Company for the territories in India, Nepal and Bhutan, 'Daisy Dee' from Maxwell Industries and 'College Style' from Levitus Trading, Hong Kong. Lovable is a premium brand while Daisy Dee is mid-segment brand.

The company has three manufacturing plants, of which two are situated in Bangalore and one is in Roorkee, Uttarakhand, with a total manufacturing capacity of 67.5 lakh pieces per annum. The company proposes to set up a manufacturing facility of 25 lakh pieces per annum in Hubli which will commence operation by January 2012.

In February 2011, the company has done a pre-IPO placement of Rs 20 Cr representing 6.33% post issue stake at Rs 200/share to private equity fund Sequoia Capital. Anchor investor portion of 0.7 Mn equity shares is fully subscribed at 205/share. HDFC Mutual Fund, SBI MF, DSP Blackrock, HSBC Equity Fund, Birla Sun Life are the anchor investors.

The company’s topline grew at a CAGR of 23% in the last five years to Rs 87 Cr in FY10. Profit after tax grew at a CAGR of 28% in the same period to Rs 10 Cr. The increase in revenues is attributable to the increase in volume, inclusion of new products in existing range and increase of distribution network and retail outlets.

The company is able to maintain EBITDA margins of 14% on an average while the PAT margins are quite subdued on an average of 8% in the last five years. In 9MFY11 the company has posted good set of numbers with sales of Rs 88 Cr and a PAT of Rs 12.6 Cr the growth was on account of commissioning of manufacturing facility in Uttarakhand in February 2010. One concern here is the steep increase in the receivables by 30% against 1.2% increase in net sales in the first nine months of FY11 against FY10 data.

The return ratios of the company are impressive. In FY10, its return on capital employed was 66.9% and return on networth was 54.8% while return on equity was at 50.2%. The company has a low debt to equity ratio of 0.1.

Valuations

Peer Comparison (9mFY11) Net Sales (Rs Cr) PAT (Rs Cr) EPS* (Rs) EBITDAM (%) PATM(%) Mcap (Rs Cr) Price P/E
Maxwell Industries 176.7 3.9 0.8 7.8 2.2 98.1 15.6 19.0
Page Industries 380.2 45.7 54.6 20.0 12.0 1,710.3 1,550.7 28.4
Lovable Lingerie 88.1 12.6 10.0 20.0 14.0 328-344 195-205 19.5-20.5

 *Annualised EPS

The company's market cap is coming to Rs 328-344 Cr on a price band of Rs 195-205. The company is asking for a price earnings multiple of 19.5-20.5 times its annualized FY11 EPS which is at a discount to Page Industries though the company is not directly comparable considering its large size of operations while the multiple is almost at par with Maxwell Industries despite Lovable commanding higher margins.

Key Positives

Concessionaire Retailing Model – To market the product and to increase the sales the company operates a concessionaire model in which the company procures dedicated retail space in leading high traffic outlets like Westside, Shoppers Stop, Lifestyle etc.

In this dedicated space, the company’s brand “Lovable” makes the arrangement for stocking, displays and visual merchandising in the form of its “shop-in-shop” modules and its display fixtures. Currently, it has 127 shop-in-shop counters in stores in 21 cities across India. This model helps in displaying the entire range of products manufactured by the company which helps in garnering more sales for the company.

At present, the company’s network comprises of 5 branches, 103 distributors, 1,425 direct dealers and approximately 7,500 multi brands outlets in 105 cities.

Design Library of approximately 1000 designs – The company has a design library of approximately 1000 designs which holds a knowledge bank of styles, innovations, customer salience, raw materials performance, fits and fits trials data, reasons for under-performance, etc. which is very valuable in the development of the innerwear products. New designs are developed on a regular basis to add to the library of designs, concepts, features, fit patterns, material specifications and product specifications.

Robust library of 1000 designs will help company to adapt itself with the changing style and preferences of women and will also help in competing with other brands like Enamor and Triumph.

'Lovable' – An established brand – 'Lovable' is an 85 years old brand with global presence. It is one of the few women's innerwear brands that has presence across continents. The company has introduced the international 'lovable' brand in the Indian Market making it amongst the top three most preferred brands in women's innerwear in India according to CARE report.

Concerns

Fragmented Nature of the Industry - The lingerie industry in India is characterized by a high degree of fragmentation with almost two-third of the market controlled by the unbranded and unorganized regional players and the balance one-third share goes to the few big organized and branded players. The advent of some international brands in the Indian market place has brought about some realignment in the fragmented lingerie market. The companies have started advertising boldly through advertisements, fashion shows etc., to catch up with the consumers to understand their preferences.

Fluctuations in the prices of raw material – The major raw material required is fabric, lace and elastic. The company procures raw material from the domestic as well as international market. Any wild fluctuations in the prices of the raw material would have an impact on the margins of the company if the company is not able to pass on the increase in cost to the customers.

Labour Intensive Industry - As the company is proposing a new manufacturing plant in Bengaluru, which will result into increase in the number of employees thereby increasing the employee cost of the company which will have an impact on the operating margins.

Promoter

Lovable Lingerie is promoted by Mr L Vinay Reddy, CMD of the company has over 20 years of experience in the innerwear manufacturing industry and has a vast experience in the areas of management, marketing strategies and overall administration control and supervision, and was previously a director in Maxwell Industries ltd.

Details of the Anchor Investors (At 205/share)

Anchor Investor No of Equity Shares Allocated % of Anchor Investor Portion
HDFC Trustee Co ltd HDFC MF MIP, Long Term Plan 292,683 42.9%
SBI MF - Magnum Sector Funds - -
Umbrella - Emerging Businesses Fund 97,561 14.3%
DSP Blackrock Micro Cap Fund 97,561 14.3%
HSBC Equity Fund 72,743 10.7%
Birla Sun Life Trustee Co Pvt ltd A/C - -
Birla Sun life 95 Fund 121,952 17.9%
Total 682,500 100.0%

Conclusion / Investment Strategy

The issue looks attractive as the company has created a niche in women’s innerwear market with an established brand name catering to the premium and mid-market segment. The company is almost debt free and the valuations are quite reasonable compared to peers.

Few concerns remain on the sustainability of the margins going forward with low pricing power on account of fragmented nature of the industry makes the issue a tad risky. We recommend investors with high risk appetite to SUBSCRIBE to the issue the for a long term time frame.

Reviewer recommends Subscribing to the issue.

Review By MLR Securities Private Ltd on Mar 8, 2011