IPO Note :: Avoid Monte Carlo Fashions Ltd. - IndiaNivesh

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Issue Details
Monte Carlo Fashions Ltd (MCFL) is coming out with an initial public offering (IPO)
of 5.43 mn equity shares of face value of Rs 10 each.
Issue price of MCFL will be in the range of Rs 630-645 per share, as the company
intends to raise Rs 3504 mn (at upper end of the price band)
Object of the issue is to gain benefit of listing of shares. The issue is an offer for sale
by promoters (selling 17.42% stake) and private equity investor (Kanchi Investments
Ltd, Mauritius, an affiliate of Samara Capitals – selling 7.58% stake out of 18.51%
(their total stake). The company will not receive any proceeds from the offer.
Key Rationale
Apparel industry to grow at 9% CAGR
According to Technopak Report 2014, Indian apparel industry is likely to grow at a
CAGR of 9.3% over 2012-2023E period to reach USD 101 bn. This growth is likely to
be on account of higher spending from middle class segment. In 2013E, men’s wear
contributed highest to the apparel market at 42% followed by women’s wear at
38% and kids at 20%. Men’s wear, Women’s wear and kids wear are likely to grow at
a CAGR of 9%, 10% and 10.5% over 2012 – 2023E respectively. Consequently, in
2023E the share of men, women and kids to total apparel market is likely to be
39%, 39% and 22% respectively. The growth rate of women and kids wear is higher
due to current lower penetration and shift from unbranded to branded apparels.

Winter wear to grow at 12% CAGR to reach USD 4124 mn by 2017E
The current size of India’s winter wear market is approximately USD 2,341 mn and
has been growing at CAGR of 9%. According to the Technopak Report 2014, woollen
apparel industry in India is expected to witness high growth trajectory in the short
to medium term. Increasing discretionary income of Indian consumers, favourable
demographics with a large chunk of aspirational young population and increasing
exposure to fashion trends will contribute to this high growth of branded woollen
apparel segment in India. As per the latest data available, it is estimated that the
per capita apparel consumption of apparel grade wool in India will grow at a CAGR
of 5.6% from 2012 to 2017E. Due to the increase in per capita consumption of
apparel grade wool, woollen apparel market in India is expected to grow at a CAGR
of 12% over 2012-2017E to reach USD 4124 mn.
MCFL - Owner of ‘Monte Carlo’ Superbrand
 ‘Monte Carlo’ was launched in 1984 as an exclusive woollen brand by Oswal Woollen
Mills Ltd. It has been recognised as a superbrand for woollen knitted apparel in all
Winter wear to grow at 12% CAGR to reach USD 4124 mn by 2017E
The current size of India’s winter wear market is approximately USD 2,341 mn and
has been growing at CAGR of 9%. According to the Technopak Report 2014, woollen
apparel industry in India is expected to witness high growth trajectory in the short
to medium term. Increasing discretionary income of Indian consumers, favourable
demographics with a large chunk of aspirational young population and increasing
exposure to fashion trends will contribute to this high growth of branded woollen
apparel segment in India. As per the latest data available, it is estimated that the
per capita apparel consumption of apparel grade wool in India will grow at a CAGR
of 5.6% from 2012 to 2017E. Due to the increase in per capita consumption of
apparel grade wool, woollen apparel market in India is expected to grow at a CAGR
of 12% over 2012-2017E to reach USD 4124 mn.
MCFL - Owner of ‘Monte Carlo’ Superbrand
 ‘Monte Carlo’ was launched in 1984 as an exclusive woollen brand by Oswal Woollen
Mills Ltd. It has been recognised as a superbrand for woollen knitted apparel in all

Note: Q1FY15 revenue mix is tilted towards cotton and cotton blended products as
woollen products sale happens in third quarter of fiscal year; hence not depicting
true picture for fiscal full year.
‘Made to Order’ business model leading to better inventory
management
The company manufactures products based on orders received from commission
agents who in-turn supply to Multibrand Outlets. Exclusive commissioned agents
facilitate compilation of orders from various MBOs and collection of payment, and
also act as the interface between the Company and the MBOs. This enables the
company to manage its inventory in a better manner. Its inventory days have reduced
from 108.3 days in FY12 to 90.5 days in FY14.

Focus on expansion of kids wear under the ‘Tweens’ range:
In order to capitalize on the growth opportunities in the kids wear segment (likely
to grow at 10.5% CAGR over 2012-2023E), MCFL recently launched kids wear range
‘Tweens’ under the ‘Monte Carlo’ brand. The kids wear collection includes sweaters,
cardigans, shirts, t-shirts and bottoms for kids within the age group of seven years
to 14 years. It plans to increase production and supply of apparel products in the
‘Tweens’ range and also launch a dedicated marketing and branding exercise for
kids wear products. In FY14, kidswear contribute 2.9% to sales of the company.
Expansion through acquisition of a brand or business in the apparel
industry:
The company intends to do strategic investments and acquisition of businesses in
the apparel industry and pursue inorganic growth opportunities. It may enter into
new segments of the branded apparel industry or into new domestic or international
markets. It is also looking to invest in business opportunities or making acquisitions
of existing brands or businesses with manufacturing facilities, market share or growth
potential, whose operations, resources, capabilities and strategies are
complementary to the company. Currently, the company has not identified any such
strategic investment or acquisition opportunity.
Financial Performance
Since the company was incorporated in 2008, and started major operations in 2012,
limited financial information is available. Net sales of the company increased at a
CAGR of 16.4% over FY12-FY14 to Rs 5023 mn in FY14 from Rs 3709 mn in FY12.
Sales in FY12 and FY13 were impacted by economic slowdown and mild winter in
FY12 which had an adverse effect on FY13 sales. Due to weak demand during the
period, EBITDA margin was also under pressure which declined to 18.5% in FY14
from 21.7% in FY12. EBITDA grew at a CAGR of 7.2% over FY12-FY14 to reach Rs 927
mn in FY14. Similarly PAT margin was also under pressure which reduced to 11% in
FY14 from 13.3% in FY11.
In FY13, Samara Capital Partners Fund I Ltd, through its subsidiary KIL Ltd, invested
Rs 1250 mn acquiring 18.51% stake in the company through private equity.
Consequently, net debt is negative as investment remains unutilised.
In Q1FY15, the net sales of the company stood at Rs 745 mn with EBITDA margin of
23.9% and PAT margin of 11.3%. However, it does not give a true picture of annual
sales of the company as significant portion of company sales accrue in third quarter.
Business and Promoter Background
Monte Carlo Fashions Ltd, part of the Nahar Group, owns premium woollen garment
brand ‘Monte Carlo’. Monte Carlo was initially launched by Oswal Woollen Mills
Ltd, its group company, in 1984. The company caters to premium and mid premium
branded apparel segment for men, women and kids. It offers both woollen and
cotton apparels including knitted and woven products. The company launched an
economy range as well to increase its target customer base. It operates two
manufacturing facilities in Ludhiana (Punjab) wherein it manufactures woollen
products in one facility and cotton apparel in another. While most of its woollen
apparel products are manufactured in-house, majority of cotton products are
outsourced. It also forayed in home furnishing segment in FY13. It sells its products
through a network of Multi-Brand outlets (~1300 stores), Exclusive Brand Outlets
(~194 stores) and Large Format Stores.
Key Risk
Economic Slowdown
Monte Carlo is a premium brand. Any economic slowdown or any adverse event on
macro front may affect the demand of the products. It has been observed in the
economic slowdown of FY12 that the inventory of the company started ageing due
to poor demand.

High risk of seasonality
Significant portion of MCFL’s sale accrues in third quarter of each fiscal year as
majority of its sales are from winter products. Weather conditions also have a
material impact on its sales as severe and longer winter ensures higher sales while
mild and shorter winter adversely affects its operations. A mild and short winter
may also impact its next year’s sales as most of its MBOs and EBOs may have unsold
stock from previous season and might place smaller orders compared to the last
season.
Reintroduction of excise duty on branded apparel
The levy of excise duty had been made optional subject to certain terms and
conditions in the union budget for fiscal 2014, by the Government of India. If the
excise duty is made mandatory on branded apparel, it may have a negative impact
on results of operations, if the company is not able to pass on the duty to the
consumers.
Increasing competition
Competition in Indian market is increasing both in woollen as well as cotton apparel
segment. Existing domestic players are expanding their product lines to include
more products. International players are entering India due to favourable
demographic profile and robust demand environment. Increasing competition from
domestic and international players may put pressure on its topline and margins.
Valuation and Outlook
At upper band of Rs 645, the issue is available at PE of 25.4x its FY14 earnings of Rs
25.5 per share. As there are no strict comparable listed players of MCFL on product
mix basis, we value MCFL on the basis of presence of strong branded apparel
portfolio. MCFL sales have been growing at CAGR of 16.4% CAGR over FY12-FY14.
‘Monte Carlo’ is a premium brand in winter products and has a strong brand recall.
However, the competition in winter wear has been increasing from domestic as
well as international players. The company is subject to seasonality and weather
fluctuations which impact the demand of the products. Though it is diversifying its
product portfolio, it is likely to take time to fructify. Taking into consideration the
peer valuation, the issue appears to be fairly valued. The investors can AVOID this
issue.


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