Monte Carlo IPO: Fairly priced

Strong brand and financials along with reasonable valuations make the offer attractive

Incorporated in 1984 as a subsidiary of Oswal Woollen Mills (OWML), Monte Carlo Fashion (MCFL) is into manufacturing and retailing of woollen and cotton garments. In 2011, MCFL was demerged from OWML.

Monte Carlo, MCFL's flagship brand, has been awarded 'Superbrand' in the woollen knitted apparel segment since 2004. Woollen garments form 45.6 per cent of its total sales, while cotton garments contribute 43.3 per cent to its topline. The company has a strong distribution network, comprising 196 Monte Carlo exclusive brand outlets (EBOs) in the domestic market, one in Nepal and two in Dubai and 1,300 multi-brand outlets (MBOs). MCFL also supplies its products to e-commerce websites such as Flipkart, Jabong and others. It has two manufacturing plants in Ludhiana, one each for woollen knitted garments and cotton T-shirts and thermals.

MCFL's initial public offering (IPO) opens on December 3 and offers 5,433,016 shares at a price band of Rs 630- Rs 645. Retail investors will own 25 per cent in the company post issue which is likely to garner anywhere between Rs 342- Rs 350 crore for MCFL. Notably, this is an offer for sale by promoters as well as  Mauritus-based PE firm Samara Capital, which will dilute 7.5 per cent stake in MCFL. Samara though will continue to hold about 11 per cent in MCFL post the issue.

The issue proceeds will thus go to Samara and the promoters and not flow into the company.

Strong brand equity of Monte Carlo, asset-light business model and strong return ratios are key positives of MCFL. The brand enjoys leadership position in India's woollen knitted apparel segment, which is largely dominated by the unorganised players. The brand has a strong recall across India. Of its 196 EBOs, only 18 are owned by MCFL with the rest being franchise outlets. The company outsources manufacturing of cotton apparel, woollen woven apparel and home furnishing products to third party job work firms. The asset-light business model has rubbed off favorably on return ratios (16.6 per cent RoCE in FY14) and balance sheet (debt/equity of 0.2 times).

The key risks are high seasonality of products (increasing volatility in its financials with strong growth in the second half of a financial year), exposure to volatility in prices of key raw materials namely wool and cotton yarn and increased competition in the cotton segment. MCFL has a strong presence in north and east India, which contribute 83 per cent to its total revenues. Company's presence in rest of India is miniscule and it plans to scale up the same going forward, albeit gradually. MCFL plans to increase to 275 EBOs by FY17 largely in the north and east markets and also scale up its kids wear segment. They operate in the high-margin premium and mid-premium segments. Rising competition in the cotton segment from both local and branded international products is another risk for MSFL.

MCFL's net sales and net profit have grown at a compounded annual rate of 16.3 per cent and 5.8 per cent, respectively, over FY12-14. The lower growth in net profit is a function of reduced Ebitda (earnings before interest, tax, depreciation and amoritisation) margin, which fell from 22 per cent in FY12 to 18.7 in FY14 and partly reflects the company's vulnerability to higher input prices.

At the price band of Rs 630-Rs 645, assuming 15 per cent growth in net profit and at fully diluted post issue share base, the issue is priced 22 times FY15 estimated earnings. These valuations appear to be fair when viewed in light with MCFL's strong balance sheet, brand and key risks. Even though there are no strictly comparable listed peers for MCFL given that no player operates in woollen garment segment, cotton companies such as Kewal Kiran Clothing and Zodiac are its peers in the cotton garments segment. Subscribe.