Monte Carlo Fashions IPO: Buy :: Business Line

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Retailing woollen readymade garments is a niche segment as far as the listed market goes. And with a strong brand in the premium Monte Carlo, the eponymous Monte Carlo Fashions is a good bet.

The company cut down its dependence on the segment by branching into cotton wear. Home-furnishing is another new foray. The Initial Public Offer of Monte Carlo Fashions wholly involves stake sale (totalling 54.33 lakh shares) by promoters and a private equity investor.

No fresh money will flow to the company itself. Its offer price band of ₹630-645 pegs the previous fiscal’s price-earnings multiple at around 25 times, on the high side. While there is no directly comparable listed peer, specialised players such as Lovable Lingerie, Kewal Kiran Clothing, Indian Terrain, and Zodiac Clothing trade at trailing earnings multiples of over 34 times.

The market also shows a proclivity towards niche players with strong brands, such as Page Industries. Investors with a medium-term horizon and a higher risk appetite can subscribe to the offer at cut-off.

Brand power

The Monte Carlo brand is among the few strong national brands in the highly unorganised winter wear market. Over the years, the company has built a reputation for good quality and designs for knitted and woven woollen products. The brand was originally introduced by Oswal Woollen Mills back in 1984, before being hived off into a separate company in 2011.

But with woollen wear selling most only during the winter months and in the northern parts of the country, the company moved into retailing of cotton and cotton-blended apparel. Cotton and woollen wear are almost equally split in terms of revenue contribution over the past three years.

Hitherto into menswear alone in 2012 and 2013, the company expanded its cotton-wear range into the high-growth women’s wear segment. It also entered kidswear segment, an under-penetrated and high churn category. Revenue from kidswear jumped from ₹8 crore when it was introduced in the 2013 fiscal to ₹15 crore a year later, now accounting for 4 per cent of sales.

While the product range is priced towards premium and mid-premium, the company last year introduced an economy range for men, widening its consumer base. Also enlarging the product basket was a move into home furnishing last year, a segment that offers higher margins than apparel.

Retailing of products is done through a vast network of 196 exclusive stores and through 1,300 multi-brand outlets. The company targets opening 275 more exclusive brand outlets by the 2017 fiscal, besides improving the footprint in multi-brand outlets. Though Monte Carlo Fashions will not receive any funds through the public offer, it is comfortably placed on the funding side with a low debt-to-equity of 0.3 times and healthy operating margins.

The company plans to expand footprint in the southern markets, betting on its range of cottons besides demand for woollens from globe-trotting Indians.

Backward integration

Monte Carlo Fashions has two manufacturing centres for woollen knitted products; a section of cotton and thermals are manufactured here too. As a result, operating profit margins have been healthy at 17-20 per cent in the past three years. The tilt towards premium pricing also lends to better margins. Players such as Kewal Kiran and Page Industries, which also manufacture most of their product range, have similar operating profit margins.

Revenues grew 9 per cent and 25 per cent in the previous two fiscals to ₹404 crore and ₹503 crore respectively. With rising raw material prices, however, and wary consumers, operating and net profits in 2012-2013 dropped 13 per cent and 1 per cent.

The removal of excise duty on branded apparel and expansion into new product categories improved performance in the 2013-14 fiscal, when operating profits rose 33 per cent to ₹94 crore and net profits increased 13 per cent to ₹55 crore. Net profit margins have been at 11-12 per cent in the past three years.

There is, however, a related party overhang on Monte Carlo Fashions. Most raw material requirements — woollen yarn and cotton fabrics — are sourced from group companies. Manufacturing some cotton products is also outsourced to group companies. While this may ensure steady supply, it also lends a degree of opacity to transactions.

The offer opens on December 3 and closes on December 5. Lead managers to the issue are SBI Capital Markets, Axis Capital, Edelweiss Financial Services and Religare Capital Markets.