Monte Carlo Fashions Limited IPO Review by Angel One (Apply)

Review By Angel One on Dec 2, 2014

Issue Open: December 3, 2014
Issue Close: December 5, 2014

Issue Details

Face Value: 10
Present Eq. Paid up Capital: 21.73cr
Offer Size: 0.54cr Shares
Post Eq. Paid up Capital: 21.73cr
Issue size (amount)**: 342cr - 350cr
Price Band**: 630-645
Post-issue implied mkt cap**: 342cr-350cr
Promoters holding Pre-Issue: 81.06%
Promoters holding Post-Issue: 63.63%

Book Building

QIBs At least 50%
Non-Institutional At least 15%
Retail At least 35%

Post Issue Shareholding Pattern

Promoters Group 63.63
MF/Banks/Indian FIs/FIIs/Public & Others 36.37

Monte Carlo Fashions Ltd. (MCFL) is a leading apparel brand in India. It was launched in 1984 as an exclusive woollen brand by Oswal Woollen Mills Ltd ('OWML'), one of its group companies. The company 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 its 'Monte Carlo Exclusive Brand Outlets' and MBOs, including a network of national chain stores under the 'Monte Carlo' brand.

MCFL has introduced different ranges for different segments in the apparel industry under the umbrella 'Monte Carlo' brand. 'Platine' is its premium range for men, 'Denim' is the exclusive range for denim apparel, 'Alpha' is the exclusive range for women and 'Tweens' is the exclusive range for kids. The company continues to broaden its product range including premium and economy cotton knitted and woven apparel products to appeal to a diversified customer base across India. The woollen products include sweaters and cardigans, whereas, cotton knitted garments include t-shirts and track suits. The woven garments portfolio includes shirts, trousers, suits, jackets and denims.

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

Issue Details

The issue comprises an offer for sale by promoters group and private equity (PE) firm Samara Capital of 0.54cr equity shares of face value of `10 each. There is no fresh issue of equity. MCFL has fixed the price band of the issue at 630 to 645. The offer constitutes 25% of the post offer paid-up equity share capital of the company.

Objects of the Offer

The objects of the offer are to achieve the benefits of listing the equity shares on the stock exchanges and 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.

Investment Arguments

Well established brand to compliment network expansion: Monte Carlo is the flagship brand of the company with a portfolio of woollen apparel and cotton and cotton blended apparel. They are the leading woollen knitted apparel brand in India in the premium and mid-premium segment and enjoy significant premium and brand recall on a pan India basis. Monte Carlo brand has been built through advertising in print media, electronic advertising, television campaigns, fashion shows and through endorsement by famous Indian personalities (Bipasha Basu) and strategic associations with movies (Barfi, Bhaag Milkha Bhaag).

The company distributes its portfolio of products through 'Monte Carlo Exclusive Brand Outlets' and MBOs. As on June 30, 2014 there are 196 'Monte Carlo Exclusive Brand Outlets' in India, two in Dubai and one in Kathmandu, Nepal. The company plans to increase the outlets to 275 by fiscal FY2017 as a part of its growth strategy. While most of the outlets would be opened in North and Eastern India, the company would seek to penetrate further in the western and southern regions of India as well. Further, its products are supplied to over 1,300 MBOs (as of June, 2014) through its commissioned agents. Demographic and economic trends currently favour a fast growth of the organized branded industry. Moreover, MCFL has brands positioned to cater to different classes of customers. The company has also entered into distribution agreements with some of the leading Indian digital commerce platforms which would further aid growth.

Key risks/concerns

Fluctuations in the prices of woollen yarn and cotton fabric: The company is exposed to fluctuations in the prices of woollen yarn and cotton fabric as well as its unavailability, as it does not enter into any supply agreements and purchases them from spot market. High proportion of related party transactions: The company relies on certain group companies, including OWML and Nahar Spinning Mills Limited, for procurement of raw materials and outsourcing the manufacture of certain apparel. Hence any potential conflicts of interest pursuant to such related party transactions could have a material adverse effect on its business, financial condition and results of operations.

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.

Conclusion / Investment Strategy

The company's net sales have grown at a CAGR of 16.3% over FY2012 to FY2014. Although, the EBIDTA margins have declined from 22% in FY2012 to 18.7% in FY2014, we believe they are at sustainable levels. The net profit has grown at a CAGR of 5.8% over FY2012-FY2014. At the lower end of the price band, the stock is valued at ~24.8x PE on FY2014 earnings which we believe is fair considering its i) strong brand image, ii) strong distribution network, iii) healthy balance sheet and iv) widening product portfolio.

We recommend Subscribe to the issue at the lower end of the price band from a two-year perspective. From a one-year perspective, we see limited upside potential as valuations seem to be fair.

Reviewer recommends Subscribing to the issue.

Review By Angel One on Dec 2, 2014