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Monte Carlo Fashions Limited IPO Review By Hem Sec (Apply)

Review By Hem Securities on Nov 29, 2014

  • Issue Open Date: 3th December 2014
  • Issue Close Date: 5th December 2014
  • Price Band*: Rs.630-645 per Share
  • Face Value: Rs 10 per Share
  • Bid Lot: 23 Equity Shares
  • Offer For Sale: 5,433,016 Equity Shares
  • Pre Issue Equity Capital: Rs 217.32 Million
  • Post Issue Equity Capital: Rs 217.32 Million
  • Listing: BSE, NSE
  • Lead Manager: SBI Capital Markets Ltd, Axis Capital Ltd, Edelweiss Financial Services Ltd, Religare Capital Markets Ltd
    Registrar: Link Intime India Private Limited

Issue Structure:

  • QIB: 2,716,507 Equity Shares
  • Non Institutional: 814,953 Equity Shares
  • Retail: 1,901,556 Equity Shares

 

Business Details

Launched in 1984 as an exclusive woollen brand by OWML, one of the Group Companies, Monte Carlo Fashion Ltd. are one of the leading Indian apparel brands based on revenue (Source: Technopak Report, 2014). 'Monte Carlo' has been recognized as a 'Superbrand' for woollen knitted apparel in each edition of Consumer Superbrands India since its first edition in September 2004. It primarily caters to the premium and mid-premium branded apparel segment for men, women and kids, offering a comprehensive line of woollen, cotton and cotton-blended knitted and woven apparel and home furnishings through itsr 'Monte Carlo Exclusive Brand Outlets' and MBOs, including a network of national chain stores under the 'Monte Carlo' brand.

Our heritage of combining quality and style under the 'Monte Carlo' brand distinctly positions us to address the needs of consumers for premium and mid-premium winter-wear in the northern and eastern regions of India as well as a growing class of consumers who desire everyday formal and casual wear that is consistent with their urban lifestyles across India. We also continue to broaden our product range including premium and economy cotton knitted and woven apparel products to appeal to a diversified customer base across India.

MCFL distribute its portfolio of products through 'Monte Carlo Exclusive Brand Outlets' and MBOs, including a network of national chain stores that the compnay believes merchandise its products in an environment that reinforces and establishes its brand in the premium and mid-premium segment and that provides a superior and distinctive instore experience. This strategy has enabled the company to develop a strong brand loyalty of its 'Monte Carlo' brand. As on June 30, 2014 there were 196 'Monte Carlo Exclusive Brand Outlets' in India, two 'Monte Carlo Exclusive Brand Outlets' in Dubai and one 'Monte Carlo Exclusive Brand Outlets' in Kathmandu, Nepal. Out of the 196 'Monte Carlo Exclusive Brand Outlets' in India, 18 are owned and operated by the Company and the rest are operated by different franchisees. Most of 'Monte Carlo Exclusive Brand Outlets' are located in high street locations, lifestyle centers and malls that position the company as a premium and mid-premium segment brand in the branded apparel industry. It utilize the services of its exclusive commissioned agents who facilitate compilation of orders from various MBOs and collection of payment, and also act as the interface between the Company and the MBOs. As on June 30, 2014, it has supplied its products to over 1,300 MBOs through commissioned agents. The company has also entered into distribution agreements with some of the leading Indian digital commerce platforms.

The company operates two manufacturing facilities in Ludhiana, Punjab, one for woollen apparel products and one for cotton apparel products. The manufacturing facilities include facilities for product development, a design studio and sampling infrastructure. Almost all woollen knitted products are manufactured in-house at manufacturing facility. The company has also recently commenced in-house manufacturing of some of cotton t-shirts and thermals in April 2014. For the remaining cotton and cotton-blended products, it follows an asset-light model by outsourcing the production to a network of third-party manufacturers, also known as job work entities.

Rationales

Established player with strong brand image

'Monte Carlo' is the flagship brand of the Company with a portfolio of woollen apparel and cotton and cotton blended apparel. As per the Technopak Report, 2014, MCFL is the leading woollen knitted apparel brand in India in the premium and mid-premium segment. It is also one of the leading retailers of branded apparel in India in terms of revenue, according to the Technopak Report, 2014. It has introduced different ranges for different segments in the apparel industry under the umbrella 'Monte Carlo' brand. For example, 'Platine' is its premium range for men, 'Denim' is its exclusive range for denim apparel, 'Alpha' is our exclusive range for women and 'Tweens' is its exclusive range for kids. The company's brand image is enhanced by its integrated marketing, customer relations campaigns and retail and merchandising strategies which enables the company to identify and differentiate its 'Monte Carlo' brand. 'Monte Carlo' has been recognized as a 'Superbrand' for woollen knitted apparel.

Nationwide sales and distribution network

The company distributes its apparel products through its 'Monte Carlo Exclusive Brand Outlets' and MBOs, including a network of national chain stores. As of June 30, 2014, the Company retailed its products through more than 1,300 outlets on a pan India basis. Out of the 196 'Monte Carlo Exclusive Brand Outlets' in India as of June 30, 2014, 18 are owned and operated by the Company and the rest are operated by different franchisees. The company has 79'Monte Carlo Exclusive Brand Outlets' in the northern region of India, 48 'Monte Carlo Exclusive Brand Outlets' in the eastern region, 56 'Monte Carlo Exclusive Brand Outlets' in the central region, 9 'Monte Carlo Exclusive Brand Outlets' in the western region and 4 'Monte Carlo Exclusive Brand Outlets' in the southern region of India. In addition, the company also has entered into distribution agreements with some of the leading Indian digital commerce platforms for sale of our products online.

Strong back-end with in-house design and manufacturing

The company enjoys a competitive advantage due to its strong in-house design team, its dedicated manufacturing facilities for r woollen and cotton apparel, and its long-term relationship with third-party manufacturers. It has a dedicated design team which travels and follows the emerging global fashion trends for creation of the designs for new collections. It has over 30 professionals in design, development and merchandising department dedicated to developing new products, improving existing ones and forecasting fashion trends.

Diversified product range

MCFL has a comprehensive portfolio of product offerings in the woollen, cotton and cotton-blended apparel. It has comprehensive range of products for men, women and kids with diverse price points for premium, mid-premium and economy segments. Its winter collection includes sweaters, cardigans, jackets, blazers, suits, shawls and stoles whereas non-winter collection includes shirts, trousers, t-shirts, cargos, linen apparel and denims. It has also launched a home furnishing range which includes mink blankets, bed sheets and quilts. Additionally, they sell thermal wear and other winter accessories including scarves, mufflers and woollen caps in 'Monte Carlo Exclusive Brand Outlets'.

Concerns

Seasonal nature of business

Company's business is seasonal in nature, with a significant portion of revenue generated primarily during the third quarter of each fiscal year. The seasonality of the business is substantially dependent upon the seasonality in the sales of winter products which primarily occurs in the third quarter of any particular fiscal year, as winter products are typically higher in value in terms of production cost as well as sales revenue, and accordingly generate higher revenue, in comparison with non-winter products. This increase in revenue is primarily driven by the sale of wollen apparel which includes sweaters, jackets, cardigans and sale of certain cotton and cotton-blended products such as cotton jackets, suits, sweat shirts, full sleeve t-shirts and shirts in the winter. Additionally, weather conditions also have a material impact on sales as a longer winter ensures higher sales while a mild and short winter adversely affects our results of operations.

Cost of production is exposed to fluctuations in the prices of woolen yarn and cotton fabric

The company is exposed to fluctuations in the prices of woollen yarn and cotton fabric as well as its unavailability, particularly as it typically do not enter into any supply agreements with suppliers and both yarn and fabric are bought by the Company either from the Group Companies at spot prices or from third parties in the spot market. The price of woollen yarn is subject to, in turn, fluctuations in the prices of wool in the international markets at which suppliers procure wool. Further, as the woollen yarn the company procures primarily from OWML is manufactured from imported wool procured from international markets, any fluctuations in the price of the wool in the international markets, due to fluctuations in foreign exchange rates, will impact the prices at which OWML procures wool which in turn will impact the prices at which the Company procures the woollen yarn from OWML. It also faces the risks associated with compensating for or passing on such increase in its cost of production on account of such fluctuations in prices to the customers.

Highly competitive market

The apparel industry and the woollen industry in particular, are highly and increasingly competitive. Competition may result in pricing pressures, reduced profit margins or lost market share or a failure to grow MCFL's market share, any of which could substantially harm itsr business and results of operations. The company competes directly against wholesalers and direct retailers of apparel, diversified apparel companies with substantial market share, established companies selling internationally renowned brands, as well as against domestic retailers and regional competitors. It competes primarily on the basis of brand image, style, performance and quality.

Credit risk of franchisees and MBOs

The company is exposed to payment delays and/or defaults by its franchisees who operate the company's 'Monte Carlo Exclusive Brand Outlets' and MBOs. MCFLs financial position and profitability therefore depend on the credit-worthiness of its franchisees and MBOs. In the past, for example, certain franchisees did not pay sales proceeds due to it, resulting in the termination of arrangements with such franchisees and to the closure of the exclusive brand outlets that they operated.

Object of the issue

The objects of the Offer are to achieve the benefits of listing the Equity Shares on the Stock Exchanges and for the sale of 5,433,016 Equity Shares by the Selling Shareholders. Further, the Company expects that the listing of the Equity Shares will enhance its visibility and brand image among its existing and potential customers and provide liquidity to the existing shareholders. The Company will not receive any proceeds of the Offer and all the proceeds will go to the Selling Shareholders.


Conclusion / Investment Strategy

The company is bringing the issue at price band of Rs.630-645 at price-earnings multiple of 24.75-25.35 on post issue EPS of Rs.25.45. 'Monte Carlo' has been recognized as a 'Superbrand' for woollen knitted apparel. Considering strong brand image, vast distribution network and firm fundamentals; the issue looks attractively priced.

Hence we recommend investor to SUBSCRIBE the issue.

Reviewer recommends Subscribing to the issue.

Review By Hem Securities on Nov 29, 2014