S P Apparels

By Geetanjali Kedia

S P Apparels is entering the primary market on Tuesday 2nd Aug, 2016, to raise Rs. 215 crore via fresh issue of equity shares of Rs. 10 each and an offer for sale (OFS) of upto 9 lakh equity shares, by New York Life Investment, both in the price band of Rs. 258-268 per share. Issue size aggregates to Rs. 239 crore at the upper end of the price band, of which, OFS portion is of Rs. 24 crore. Representing 35.45% of the post issue paid up equity share capital at the upper end, issue closes on Thursday 4th August, 2016.

S P Apparels is an integrated manufacturer and exporter of knitted garments for infants and children (garments division) and retails mens wear under ‘Crocodile’ brand, through 40 outlets in India (retail division), with garments division accounting for 86% of FY16’s Rs. 533 core revenue. Operating 21 manufacturing facilities, the company, as a step towards backward integration, is expanding manufacturing facility in Tamil Nadu, for which, Rs. 70 crore will be utilised from the IPO proceeds. Rs. 63 crore from funds raised via IPO will partly retire debt of Rs. 230 crore, while Rs. 28 crore is planned to open 70 new Crocodile stores over FY17-19. Another Rs. 5 crore will set-up dyeing machines at existing plant.

Company owns exclusive right to manufacture and market ‘Crocodile’ brand products in India till July 2021. However, any adverse outcome of the pending legal proceeding against the company for potential infringement of copyright owned by Lacoste may play spoilsport. Nevertheless, just 6% of FY16 revenues came from retail division, although company does plan to increase its grip from this segment. For the garments division, while most of its clients are based in UK, potential negative effects of Brexit remain. Moreover, client concentration risk is high, as over 80% of revenue is generated from top 5 customers.

Company has delivered steady growth with 4 year revenue CAGR of 7.4% between FY12-FY16 and EBITDA CAGR of 10.2%, over the same period. FY16 consolidated revenue was up 13% YoY to Rs. 533 crore and EBITDA was 19% higher YoY at Rs. 90 crore. Despite rising costs, margins expanded to 16.9% in FY16 vis-à-vis 15.0% in FY15. Thanks to gradual debt reduction, finance costs have also declined from Rs. 40 crore in FY12 to Rs. 36 crore in FY14 to Rs. 25 crore in FY16, which has propelled bottomline, resulting in FY16 PAT of Rs. 35 crore, net margin of 6.5% and EPS (diluted) of Rs. 17.15.

As on 31-03-2016, equity stood at Rs. 17.15 crore while networth was Rs. 113 crore, excluding outstanding redeemable cumulative preference shares worth Rs. 20 crore, issued to promoters. Company has been focussing on deleveraging its balance-sheet consistently, and as a result, consolidated debt has come down from Rs. 306 crore in FY11 to Rs. 230 crore as on 31-03-2016, which will further reduce to Rs. 167 crore post IPO, as Rs. 63 crore will be utilised for retiring debts. Promoter holding, currently at 87.49%, will reduce to 59.6% post IPO.

New York Life Investment (holding 10.5% stake) entered the company in Nov 2006 at Rs. 200 per share. After 10 years, it is looking to exit half its holding at Rs. 268 per share – which translates into a pathetic IRR of less than 3% over the past 10 years. Forget Sensex, this return does not even beat the risk-free savings bank interest rate! Even the Rs. 7.25 crore investment of Euro Asia Agencies Hong Kong in July 2013, at effective price of Rs. 210 per share, translates into IRR of 8.5% so far, over the past 3 years, which is barely adequate for an equity investor!

At upper end of the price band, company will have market cap of Rs. 675 crore and EV of Rs. 894 crore, which leads to EV/EBITDA multiple of 10x and 9x for FY16 and FY17 respectively, and PE multiple of 19x and 16x for FY16 and FY17 respectively. 

Kitex Garments, a closely listed peer with vertically integrated knitting and processing facility and annual revenue of Rs. 550 crore, is currently trading at historic PE of 19x and EV/EBITDA multiple of 11x, which is comparable to SP Apparels’ FY16 multiples. Kitex not only earns net margin of over 20%, but is a debt free company, having surplus cash of over Rs. 150 crore. These are the positives which help Kitex command a premium value, whereas S P Apparels issue must be priced lower, being a primary market offering. Since S P Apparels’ dilution representing the fresh issue component of 32% is quite large, its post issue equity of Rs. 25 crore, is also on the higher side, while Kitex has tiny equity of just Rs. 4.75 crore (FV Re. 1 each). Thus, on peer comparison too, issue is expensively priced.

Although the company is widening its product portfolio with women’s essential wear under ‘Natalia’ brand, retail business is highly competitive, as can been seen that company has not aggressively scaled up the ‘Crocodile’ brand business. Moreover, the garments export segment also has cut-throat competition.

Although net margins have strengthened due to declining debt levels, there are better peers available in the secondary market. Client concentration risk and going by the historic return which the company has delivered to its shareholders, or rather failed to deliver, the issue is as avoid.

Disclosure: No Interest.