Lovable

Lovable Lingerie is entering the capital market on 8^th March 2011 with a fresh issue of 45.5 lakh equity shares of Rs.10 each, in the price band of Rs. 195 to Rs. 205 per share, looking to raise Rs. 89-93 crore. The issue, comprising of 27.08% of the company's post issue paid-up capital, closes on 10^th March for QIB bidders and on 11^th March for HNI and retail investors.

Women's innerwear manufacturer Lovable Lingerie has 3 manufacturing facilities in Bangalore and Uttarkhand with aggregate installed capacity of 67.5 lakh pieces per annum. It has a retailing reach through 121 'shop-in-shop' counters in Shoppers Stop, Westside, Lifestyle etc., besides 1,425 dealers and 7,500 retail outlets in 105 Indian cities.

The company's products are sold under brands Lovable (premium segment), Daisy Dee (mass market) and College Style, all of which have been acquired by the company from third-parties. Loveable was acquired from Lovable World, US in Dec 2000 for Rs. 2 crore for use in India, Nepal, Bhutan, excluding other geographies. Daisy Dee was acquired from Maxwell Industries, India in Mar 2004 while College Style was acquired in Mar 2009 from Levitus, Hong Kong for Rs. 8.9 crore. Thus, the company does not have any history of creating any home-grown brands.

While Lovable plans to diversify its product offerings by expanding its women-wear offerings and foraying into men's innerwear, it has entered into non-compete agreement with promoter group companies (operating in the same industry) as recently as 2^nd Nov 2010 which is restricted only to women's innerwear. Thus, conflict of interest may arise in future with these promoter group companies.

The company lacks strong internal operations and effective compliance. Lease documents for two manufacturing facilities, registered office and 3 branch offices have irregularities indicating lack of legal compliance. Also, statutory approvals for water and air pollution for two manufacturing facilities at Bangalore (forming major chunk of its capacity) are not in place.

To meet the objects of the issue, company will also be availing term loan of Rs. 16.3 crore, thus letting-go its current debt-free status. Also, in a Rs. 20 crore pre-IPO placement in February 2011, company allotted 10 lakh equity shares, representing 8.16% pre-issue and 6.33% post-issue stake, at Rs. 200 per share, to PE fund Sequoia.

The objects of the issue cover multiple areas of business, such as:

1. Manufacturing: Modernisation and capacity addition in Bangalore by 25 lakh pieces with investment of Rs. 23 crore, expected to come on stream by Jan 2012. However present capacity utilization for 9mFY11 itself is quite low, at less than 75%, which has also being only gradually ramped up from 71.57% in FY09. Thus, utilizing additional capacity will be a challenge for the company.
2. Joint Venture: Investment of Rs. 25 crore for acquiring 90% stake in a domestic joint venture with Lifestyle Galleries, UK for launching women's lifestyle products and men's undergarments under the brand 'London Calling' in India. This is direct competition to company's existing brands and will also shift management bandwidth, vital for growth and development of the existing 3 brands.
3. Marketing: Brand building of Lovable and Daisy Dee of Rs. 18 crore and brand development of College Style of Rs. 6 crore. However, page 70 of the RHP states company plans to spend Rs. 2 crore of the Rs. 18 crore in FY11 itself, which is definitely not feasible given only 4 weeks remain in the current fiscal.
4. Retailing: Establish 60 exclusive brand outlets in next 15 months for Rs. 14 crore and 110 shop-in-shops in next 12 months for Rs. 3.6 crore
5. Upgradation of design studio for Rs. 7.6 crore

For FY10, company reported turnover of Rs. 87 crore and earned PAT of Rs. 10.6 crore. For nine months ended 31^st December 2010, turnover grew to Rs. 88 crore while PAT rose to Rs. 12.6 crore. On equity of Rs. 11.25 crore, this leads to 9mFY11 EPS of Rs. 11.21. Post IPO, equity will expand to Rs. 15.8 crore while promoter holding will decline to 66.96% from present 91.84%. At upper price band of Rs. 205 per share, company is issuing shares at a pre-issue PE multiple of 13.8x based on expected FY11 earnings and seeking a market cap of Rs. 324 crore post-listing at Rs. 205 per share.

While investment by leading PE Sequoia Capital at Rs. 200 per share less than a month ago may appear tempting enough reason to invest into the IPO, we do not advise subscription, given the weak and fragile secondary market conditions. It is advisable to look at larger and more established players in the listed space and even in the textile space in particular, front-liners with much higher scale and size are trading at very attractive valuations of single-digit PE multiples. Textile space, including readymade segment, is ruling at lower PE multiples, barring company like Page Industries.

Thus, we are not very excited by the issue and investors can look at secondary markets for better opportunities.