IPO Size: Rs. 1,201 cr

• Rs. 600 cr fresh issue for working capital (Rs. 280 cr), expansion (Rs. 150 cr for 30 new stores and 2 warehouses), debt repayment (Rs. 50 cr)
• Rs. 601 cr offer for sale (OFS) by the promoters (95% to drop to 63%)

Price band: Rs. 210-222 per share

M cap: Rs. 3,271 cr, implying 37% dilution

IPO Date: Wed 20^th Sep to Fri 22^nd Sep 2023, Listing Wed 4^th Oct 2023

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

South Indian Ethnic Wear Retailer

Sai Silks (Kalamandir) has 54 stores, spanning 6 lakh sq. ft. of retail space, in southern states of Telangana, Andhra, Karnataka, Tamil Nadu, with Telangana and Andhra accounting for 75% of Rs. 1,350 cr revenue in FY23. Company operates under 4 formats from value fashion to premium, under brand names KLM Fashion Mall, Kalamandir, VaraMahalaxmi Silks and Mandir. Sarees account for 2/3^rd revenue.

Fresh Issue to Expand Reach

Sai Silks plans to use fresh issue proceeds to add 30 new stores over the next 2 years, 25 of which under the higher-margin Vara Mahalaxmi format, mainly in Tamil Nadu, a large silk-saree consuming geography. 5 stores are planned under Kalamandir and another 5 under franchise route, for KLM Fashion. This can help grow topline and bottomline in healthy double digits for the next 3 years.

Low Inventory Turnover

Company’s inventory turnover of 2x is one of the lowest among listed Indian retailers (3x to 8x), and also reduced from around 3x in FY20 (not considering FY21 and FY22 data due to covid). Holding nearly 6 months of sales in stocks increases holding costs and risk of change in trend. Inventory turn is a make-or-break for any retailer, with Vedant Fashion at 8x despite presence in the similar sub-segment of ethnic wear.

Hence, while Sai Silks’ RoE of 24.6% trails Vedant’s 34%, it is healthier than Go Fashion’s, clocking 17% RoE despite ~3x inventory turn ratio. Thus, despite a lower inventory turn, Sai Silks has a healthy RoE.  

Improving Margins

Since FY20, company’s revenue rose at 5% CAGR to Rs. 1,351 cr in FY23, with gross profit growth stronger, up at 17% CAGR to Rs. 528 cr, translating into a gross margin of 39%. During the same period, PAT rose at 32% CAGR to Rs. 98 cr in FY23, leading to 7.2% net margin (up from 3.6% in FY20) and an EPS of Rs. 8.1.

Discounted Pricing

Accounting for Sai Silks’ lower gross and net margin vis-à-vis other branded retailers like Vedant, Go Fashion, TCNS and even Metro Brands and Campus (net margin ranging between 8-32%), Sai Silk shares are being offered at FY24E PE multiple of 23x, which is at quite a discount to peer average of over 55x. Even factoring in the regional presence, the risk-reward is favourable, with scope for expansion in PE multiple.