IPO Size: Rs. 550 cr, Entirely Offer for Sale (OFS)  

• 56% OFS by financial investors, completely exiting their 15+year old 17% combined stake (including ad agency Concept Communication’s 3% stake)
• 44% OFS by the promoters (69% to drop to 55%)

Price band: Rs. 266-280 per share

M cap: Rs. 1,800 cr, implying 31% dilution

IPO Date: Tue 19^th Dec to Thu 21^st Dec 2023, Listing Wed 27^th Dec 2023

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Menswear under ‘Mufti’ Brand

Credo Brands sells men’s casual western wear under ‘Mufti’ brand, having 1,807 pan-India touch points, comprising 404 exclusive brand outlets (EBOs), 1,332 multi-brand outlets (MBO) and 71 large format stores (LFS). Over half of Rs. 498 cr revenue of FY23 was generated through EBOs and 30% from MBOs.

High Double-Digit Margins

Between FY21-23, revenue doubled from Rs. 245 cr in FY21 to Rs. 498 cr in FY23, leading to revenue CAGR of 43% as covid restrictions eased.

Company gets manufacturing done from third-parties, yet annual depreciation was at Rs. 54 cr in FY23, on fixed asset and right to use assets of Rs. 235 cr, due to high depreciation of lease improvement and furniture. Thus, business is asset light, yet depreciation charge is not low. Despite this, being a branded retailer, company’s net margins were healthy at 15.6%, on PAT of Rs. 78 cr in FY23.

Q1FY24 Spoils the Show

However, in Q1FY24, sales suffered, with revenue dropping to just Rs.119 cr, due to poor revenue from MBOs of mere Rs. 21 cr vis-a-vis Rs. 151 cr in FY23. Company has neither published Q1FY23 nor Q2FY24 financials, to helped understand if the fall is temporary or FY23 performance was a one-off. Thus, Q1FY24 PAT dropped to Rs. 9 cr, translating to an EPS of just Rs. 1.3, against Rs. 12 in FY23.

Valuation Not Vital Now

On FY23 earnings, share is being offered at a PE multiple of 23x of historic earnings, which is seen quite attractive for company’s margin. Based on annualized Q1FY24 earnings of about Rs. 5.5, shares are being offered at current year PE of almost 50x, making it almost fully valued, for company’s scale of operations and in relation to other clothing retailers like Kewal Kiran (34x) and Go Fashion (80x). Thus, Credo’s Q1FY24 performance has been a huge dampener and overshadows the issue pricing.