Sudar Garments has entered the capital market on 21^st February 2011 with a public issue of 90.88 lakh equity shares of Rs.10 each, in the price band of Rs. 72 to Rs.77 per share, aiming to raise Rs. 65-70 crore. The issue, comprising 49% of the company's post issue paid-up capital, closes on 24^th February 2011.

The company, mainly a contract manufacturer of ready-made garments, has annual manufacturing capacity of 20 lakh garments at Raigad, Maharashtra. It has traditionally been purchasing fabrics from third-parties and manufacturing apparel for export market and now plans to completely revamp its business positioning and increase focus on domestic retail market.

However, there exists serious doubt on its managerial and execution capabilities due to sheer inexperience in the field of retail and brand building. Although it has a brand named 'Glory to Glory' presently under its belt and proposes to launch two new brands 'St. Paul' and 'Majesty' with a brand building budget of about Rs. 3.5 crore (to be funded by IPO proceeds), it had historically spent only Rs. 0.036 crore (yes, just under Rs. 4 lakh) on the advertising! Also, given its almost nil experience in retail operations, plans of opening 25 retail outlets in South India for Rs. 2.4 crore seem a little too ambitious.

The key objects of the IPO include:

• Expansion of manufacturing capability on existing facility for Rs. 26 crore
• Working capital requirement worth Rs. 27 crore
• Retail outlets and brand building exercise with investment of Rs. 5.9 crore

The company has very high dependence on contract labour as 610 of 645 employees were on contract basis in its manufacturing facility. Besides challenges in manufacturing schedule, this also leads to weak pricing power for the company. Moreover, its entire business is dependent on handful customers, with top 4 constituting a whopping 90.5% of FY10 turnover.

In FY10, company clocked net profit of Rs. 4 crore on turnover of Rs. 53 crore and in H1FY11, its turnover jumped to Rs. 49 crore while net profit was Rs. 4 crore. On equity of Rs. 9.46 crore, company has a very high debt burden of over Rs. 36 crore, leading to high debt-equity ratio of 1.6:1.

Discomfort on the company does not end at its poor fundamentals and lack of strong business operations. It has invested Rs. 3.24 crore in unrelated business of a pharmaceutical company named Aasda Lifecare. This goes beyond logic - a tiny textile manufacturer, hitting public doors to fund its expansion, investing a significant sum in non-related business. Or is the company a vehicle for the promoter to route personal investments?

CRISIL has assigned an IPO grading of 1, indicating poor fundamentals, to the company, mainly due to concern on corporate governance as an independent director seems to be influential to the promoter.

At the upper price band of 77, share is being issued at pre-money PE multiple of 9x, based on estimated FY11 EPS of Rs. 8.6, given Rs. 4.3 has been earned on per share basis in first six months of FY11. This is grossly aggressive when other more established and integrated textile companies are quoting at PE multiples of 4-6x. Also, fate of Koutons and Cantabil Retail is recent in the minds of the investors.

With pre-issue networh of Rs. 23 crore, very high debt levels, customer concentration and heavy dilution of 49% undertaken in the IPO, company does not deserve a market cap (at Rs. 77) of Rs. 143 crore and EV of Rs. 154 crore, on listing.

Thus, the issue is a clear avoid.