IPO review: Scotts Garments

The IPO price band of Rs 130-132 leaves little room for appreciation

Incorporated in 1992, Scotts Garments (Scotts) manufactures and exports readymade garments. Currently, it has 24 manufacturing units in Karnataka and Tamil Nadu. Scotts is coming up with an initial public issue (IPO) to raise between Rs 137 crore and Rs 139 crore to fund the setting up of two units — a trouser manufacturing unit in Doddaballapur, Karnataka and a knitting and fabric processing unit at Kagal - Kolhapur, Maharashtra. Scotts has done a pre-IPO placement to Canbank Venture Capital Fund and raised Rs 20 crore at Rs 105 per share in December 2012. Its key customers include Best Seller, S.Oliver, C&A, H&M Hennes & Mauritz, Carrefour, United Colors of Benetton, GAP, Nautica and Vero Moda, among others.

The company has a strong management team with an average experience of 20 years in the textile industry. While Scotts caters to some well-known clients in the industry and its long-standing relationship with Best Seller is a positive, the key risk is the high revenue concentration (56 per cent of revenues from Best Seller alone). The top five clients formed 78 per cent of its revenues in FY12. Also, the company derives 76 per cent of its revenues from Europe and hence may get impacted by the slow macro growth in the region. While Scotts is likely to get the benefit of backward integration post commissioning of its unit in Kolhapur, any delay in this will adversely impact Scotts’ financials.

The company’s trouser manufacturing unit, delayed by about a year, is undergoing trial runs. Amidst challenges, such as slowing demand growth, volatile raw material prices and higher operating costs, the near term looks stressed for textile players. As far as Scotts is concerned, its ability to diversify revenues across clients and geographies and timely implementation of expansion plans will be key for its future growth.

The company had reported net sales of Rs 500 crore and net profit of Rs 84 crore in FY12. However, adjusting the one-time gain on sale of investment (of Rs 59.5 crore), the adjusted net profit stood at Rs 25 crore, a fall of 29.7 per cent compared to FY11. Further, the net profit growth has been pretty lumpy since FY08, which limits earnings visibility.

At the price band of Rs 130-132 and after annualising net profit for seven months ended October 2012, the fully diluted price/earnings ratio works out to 14.5-14.7 times. Its larger and more profitable peers (PAT margins of over 7.5 per cent & revenues of Rs 1,000 crore and above) such as Bombay Rayons Fashion and Mandhana Industries trade at 11-17 times earnings. Even if one assumes a 20 per cent growth in FY14, the valuations are not cheap, leaving little room for appreciation.

Avoid.