By Geetanjali Kedia

Monte Carlo Fashions is entering the primary market on Wednesday 3^rd December 2014, with a public issue of 54.33 lakh equity shares of Rs.10 each, via an offer for sale, priced in the band of Rs. 630 to Rs. 645 per share. Promoters and PE investor Samara Capital are making a part exit through the IPO, which aims to raise Rs. 342 crore and Rs. 350 crore at the lower and upper end of the price band respectively. Representing 25% of the post issue paid-up capital, issue closes on Friday 5^th December.

Monte Carlo Fashions is an Indian apparel retailer selling woolen, cotton and cotton-blended, knitted and woven apparels and home furnishings under the ‘Monte Carlo’ brand. Its distribution network spans across 196 exclusive brand outlets (18 company owned and 178 franchisees) and over 1,300 multi-brand outlets in India which are served through 21 commission agents. Abroad, it has 3 exclusive brand outlets in Dubai and Kathmandu. Exclusive brand outlets contribute to nearly 30% of sales, indicating significance of multi-brand outlets.

Since it is an offer for sale, no proceeds from the IPO will go to the company. Instead, the IPO is only to facilitate a part-exit to PE fund Samara Capital, which acquired shares, being 18.51% stake at Rs. 435 per share, aggregating Rs. 125 crore in June 2012. Samara will own 10.94% post-issue. Promoter holding, currently at 81.06%, will decline to 63.63%, post IPO.

Promoters enjoy a track record of being one of the biggest wealth destroyers in Indian corporate history (stocks such as Oswal Sugar, Nahar Spinning, Nahar Capital, Punjab Con-Cast, Punjab Woolcombers etc. in the 90s, have either vanished or are now ruling at much less than that of its peak rate seen in 90s). Nahar Spinning was probably the only listed stock in the 1990s to have an EPS of about Rs. 100, but is now in a poor state, with pathetic financials. H1 FY15 EPS was negative Rs.6.47, as it has posted net loss of Rs. 23.33 crore for 6 months ending 30^th September 2014 on equity of Rs. 18.03 crore, due to poor management. Promoter track-record and corporate governance are key issues before the company. It gets almost two-thirds of the outsourcing manufacturing from group companies, which again raises red flags.

In FY14, Monte Carlo clocked revenue of Rs. 519 crore and earned net profit of Rs. 55.40 crore (10.7% net margin), leading to an EPS of Rs. 25.48 on equity of Rs. 21.73 crore.  What alarming is that, over 50% of revenue is from traded goods. Traded goods have a mark-up of nearly 50%. Hence, net profits which the company is earning can be attributed solely to trading. And a PE multiple of 24 times for trading business has no rational and seen to be highly risky. At the lower and upper band of Rs. 630 and Rs. 645, shares are being issued at PE multiple of 24.7x and 25.3x, respectively, on historic basis. Will any prospective investor be comfortable with such an expensive valuation? That too, when many other blue chips of those times have grown their bottomlines by 20 times, while group companies have their bottomline turning into red after 25 years.

For Q1FY15, company clocked revenue of Rs. 79 crore and earned net profit of Rs. 8.50 crore, leading to an EPS of Rs. 4. Thus, despite diversification into cotton and blended apparel, sales remain seasonal in nature to a great extent. A short or mild winter can strongly alter financial performance in a year. Geographically too, North and East India account for the major chunk of sales with nearly 58% and 25% respectively. 

As of 30^th June 2014, company’s net worth stood at Rs. 388 crore, resulting in BVPS of Rs. 179. Its balance sheet has debt of Rs. 113 crore and liquid investments of Rs. 167 crore, resulting in net cash per share of Rs. 24.50.

One may be attracted by the current grey market premium, but the fundamentals lack strength and are not comforting. At Rs. 645 per share, company’s market cap will be Rs. 1,400 crore, which is very aggressive given the trading nature of business, single brand, corporate governance including inter-group dealings, seasonality and geographic concentration of revenues and finally the promoter track-record.

Better peers are available in the market. Looking at the track record of the promoters, one gets shivers in the spine to even consider this issue. Even with blind folded eyes, one must not muster courage to look at this IPO. We feel that BRLMs also owe responsibility towards the prospective investors, as also to protect the capital market.

Due to all the above factors, the issue is a ‘clear avoid’.