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Monte Carlo Fashions Limited IPO Review by ICICI Direct (Apply)

Review By ICICI Direct on Dec 2, 2014

Issue Opens: 3-Dec-14
Issue Closes: 5-Dec-14
Issue Size: Rs 342- Rs 350 crore
Price Band: Rs 630 - Rs 645
No of Shares on Offer: 5433016
QIB (%): 50
Non-Institutional (%): 15
Retail (%): 35
Minimum lot size: 23 shares and in multiple of thereof

Monte Carlo Fashion Ltd (MCFL) was launched in 1984 as an exclusive woollen brand by Oswal Woollen Mills Ltd (OWML). The 'Monte Carlo' brand has been awarded 'Superbrand' in the woollen knitted apparel segment since 2004. The domestic winter wear market of nearly $2.3 billion is growing at 9% CAGR. Going ahead, the segment is expected to grow at 7% and 12% in terms of volume and value, respectively, over 2012-17. MCFL being a leading player in the largely unorganised Indian winter wear segment is well poised to capture the growth. Revenues grew at a CAGR of ~16% in FY12-14 whereas earnings grew at 6% CAGR over the same period. Buoyed by a diversified product range along with strong in-house design & raw material sourcing, we expect MCFL to register revenue, PAT CAGR of 16%, 18%, respectively, in FY14-17.

Investment rationale

Strong brand, diversified product portfolio create competitive advantage

'Monte Carlo', since its inception, has created a strong brand recognition for itself in the northern and eastern part of the country, which forms nearly 85% of the winter wear market. 'Monte Carlo', being the flagship brand of the company, has a diverse product portfolio in the high and mid-premium woollen apparel segment. The company extends the brand to the cotton apparel segment as well, thereby leading to an increase in the product offering. The company has a presence in men's, women's and kids apparel. Going ahead, cotton garments along with fabric and home furnishing segment are expected show significant scope of growth.

In-house sourcing, asset light model provide comfort

MCFL sources ~95% of its woollen yarn from its sister concern OWML, thereby eliminating the risk of supply/price shock for the company. Further, for its cotton garment segment, MCFL follows an asset light model, whereby it sources the fabric from outsourced players. Further, with 196 EBOs and more than 1300 MBOs MCFL plans to provide nationwide distribution & coverage for both woollen and cotton apparel.

Nascent branded apparel segment offers ample scope for growth

At the IPO price band of | 630-645, MCFL trades at 25x FY14 EPS of Rs 25.4. However, given lack of branded apparel in woollen segment and possibility of a shift from unorganised to organised in apparel segment, we envisage earnings CAGR of 18% in FY14-17E, making valuations attractive for MCFL. Hence, we recommend SUBSCRIBE to the IPO.

Key risks and concerns

Seasonality of the business

A significant portion of the revenue is generated during the third quarter of each fiscal year. Any change in duration of winter, may impact the sales of the company considerably.

Limited brand recognition in new market, inability to strengthen network

Inability to spruce up the brand in new markets like west and south India may hamper growth in future. Further, a longer than anticipated timeframe to open new EBOs/MBOs may dampen sales growth.

Volatility in raw material prices, limited manufacturing capacity

A severe fluctuation in woollen yarn and cotton fabric prices may impact the business considerably as both yarn and fabric are bought at spot prices. Further, as woollen garments are manufactured at an in-house facility in Ludhiana, higher-than-anticipated demand may impact the growth due to limited capacity. Also, any disruption in the factory would impact the business significantly.

Failure to anticipate competition, changes in fashion trend

As the company forays into a new geography and more into the garmenting segment, which has higher competition; failure on part of the company to align itself strategically against competition may impact the business. Also, inability on part of the design team to capitalise upon upcoming trends and fashion may impact the business of the company.

Strategic acquisitions not augmenting significantly

The company plans to undertake strategic investments and acquisition in the industry. Any inability on part of the company to successfully integrate the business or align it according to the company's requirement may impact the business of the company.

Significant third party reliance to impact overall business

The company has significant third party exposure right from acquiring raw materials to sales and distribution to logistics and transportation requirements. Any significant conflict with any of the players would impact the business considerably.


Conclusion / Investment Strategy

Valuations

At the IPO price band of 630-645, MCFL is trading at 25xs FY14 EPS of Rs 25.4. Revenue growth for MCFL over FY12-14 was registered at a CAGR of 16% whereas EBITDA and PAT grew at a CAGR of ~7% and 6%, respectively. Also, in terms of capex, the company has not planned any significant capex as the current capacity is expected to cater to growth for the next couple of years. Further, debt levels are expected to remain stable as capex and working capital cycle remain steady. Return ratios remained fairly stable in the past couple of years in the range of 15-16%. Going ahead, we expect return ratios to remain at comparable levels as the company is expected to maintain similar growth.

Finally, the superior brand recall that Monte Carlo enjoys coupled with strong distribution network and focus on non-sweater segment to new geographies is expected to provide much anticipated revenue growth for MCFL. Further, stable return ratios and net of debt cash on the book is expected to provide cushion to the company. Also, the company has indicated inorganic growth through acquisition for which it plans to utilise the excess cash on its books. Driven by expansion to new territories and focus on the upcoming apparel market, we recommend SUBSCRIBE to the IPO.

Reviewer recommends Subscribing to the issue.

Review By ICICI Direct on Dec 2, 2014