IPO Size: Rs. 160 cr 

• Rs. 104 cr is Fresh Issue for working capital (Rs. 81 cr)
• Rs. 56 cr is Offer for Sale (OFS) by the promoters (100% stake to reduce to 75% post listing)

Price band: Rs.152-160 per share

Market cap: Rs.634 cr, implying 25% dilution

IPO Date: Mon 12^th Aug to Wed 14^th Aug 2024, Listing: Tue 20^th Aug 2024

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

Saree Wholesaler

Saraswati Saree Depot is a Kolhapur head-quartered wholesaler of sarees and women ethnic wear, with sarees accounting for 90% of Rs. 611 cr revenue. Company is a B2B player, supplying to 13,000 retailers, mainly in Maharashtra (79% of revenue) and Karnataka (17%). It operates out of just 2 stores in Kolhapur and Ulhasnagar, Maharashtra.

Unorganised Market

Company seems to operate in the value segment, as average selling price stood at Rs. 380, based on 1.6 cr pieces of garments sold in FY24. This is an intensely competitive, unorganised and fragmented market, with no brand building. Saraswati Saree lacks any competitive moat, with business being high volume-low margin and company’s recording 2.4% YoY volume growth in FY24 and revenue up only 1.5% YoY. Also, small size of operations with presence limited to 2 stores increases concentration risk.

Related Party Transactions Inflate Profits?

Company’s flagship store at Kolhapur, taken on lease from related party, saw rental reduce from Rs. 4.4 cr in FY22 to Rs. 4.2 cr in FY24. Is a lower rental booked to inflate profit? Also, Rs. 37.8 cr loan taken from related party, bears only 7% pa interest rate. Given India’s repo rate is at 6.5%, this interest rate is abysmally low and may be difficult to get from any third-party bank/financial institution. Thus, profits appear higher, due to under-booking of expenses.

Financial Performance

On FY24 revenue of Rs. 611 cr, PAT stood at Rs. 30 cr, implying 5% net margin and an EPS of Rs. 8.9. Inventory turnover ratio, the most important matrix for any distribution business (whether wholesale or retail), has dropped from 7.2 times in FY22 to 5.7 times in FY24. Post dilution, current RoE of 45% will halve to around 20%.

It is adding men’s ethnic wear range, but kurtis vertical, started in 2017, accounted for only Rs. 32 cr of FY24 revenue, even after 7 years of operation. Hence, the new range does not make a very bullish case.

Valuation

On FY25E EPS of about Rs. 9.3, current year PE multiple is at 17x. While this is not high vis-a-vis apparel retailers like Go Fashion and Sai Silks, the comparison is incorrect, as Saraswati Saree Depot is only a regional trader, lacking any brand strength or pricing power and operating in a very competitive and fragmented market. Share may even be subject to additional surveillance mechanism of the stock exchanges, post listing.

Thus, fundamentals of Saraswati Saree are not appealing. 

Also, last IPO from saree sector, Sai Silks, though listed well, has been on a downward spiral for the past 6 months, keeping sector outlook also muted.