IPO Note | Textile
December 1, 2014
Monte Carlo Fashions
SUBSCRIBE
Issue Open: December 3, 2014
IPO Note - Subscribe from a two-year perspective
Issue Close: December 5, 2014
Monte Carlo Fashions Ltd. (MCFL) is one of the leading apparel brands in India
Issue Details
which primarily caters to the premium and mid-premium branded apparel
segment for men, women and kids. The company offers a comprehensive line of
Face Value: `10
woollen, cotton and cotton-blended knitted and woven apparel and home
Present Eq. Paid up Capital: `21.73cr
furnishings under the ‘Monte Carlo’ brand.
Offer Size: 0.54cr Shares
Well established brand and distribution network: Monte Carlo is the flagship
Post Eq. Paid up Capital: `21.73cr
brand of the company which is a market leader in the woollen knitted apparel
industry in India and has been recognized as a ‘Superbrand’ for woollen knitted
Issue size (amount)**: `342cr - `350cr
apparel in each edition of Consumer Superbrands India since its first edition in
Price Band**: `630-645
September 2004. Monte Carlo enjoys significant premium and brand recall on a
pan India basis. The company took the task of creating brand in a market largely
Post-issue implied mkt. cap**: `342cr-350cr
dominated by unbranded products and is reaping rewards as well. Also, it has a
Promoters holding Pre-Issue: 81.06%
strong distribution network comprising of 196 ‘Monte Carlo Exclusive Brand Outlets’
Promoters holding Post-Issue: 63.63%
and over 1,300 Multi Brand Outlet (MBOs) through which its products are sold.
Note:**at Lower and Upper price band respectively
Asset light business model; healthy balance sheet coupled with decent return
ratios: The company has an asset light business model as it operates largely
Book Building
through the franchise network (178 franchise outlets as compared to 18 outlets
owned by the company). Also, it outsources the manufacturing of cotton apparel,
QIBs
At least 50%
woollen woven apparel and home furnishing products to a network of job work
Non-Institutional
At least 15%
entities. As a result, it has a low Debt/Equity (D/E) of ~0.2x and has the lowest
employee cost as a percentage of sales in the industry. Further, the company has decent
Retail
At least 35%
return ratios with ROE and ROCE of 14.6% and 16.6%, respectively (in FY2014).
Outlook and Valuation: The company’s net sales have grown at a CAGR of
Post Issue Shareholding Pattern
16.3% over FY2012 to FY2014. Although, the EBIDTA margins have declined
Promoters Group
63.63
from 22% in FY2012 to 18.7% in FY2014, we believe they are at sustainable
MF/Banks/Indian
levels. The net profit has grown at a CAGR of 5.8% over FY2012-FY2014. At the
FIs/FIIs/Public & Others
36.37
lower end of the price band, the stock is valued at ~24.8x PE on FY2014
earnings which we believe is fair considering its i) strong brand image, ii) strong
distribution network, iii) healthy balance sheet and iv) widening product portfolio.
We recommend Subscribe to the issue at the lower end of the price band from a
two-year perspective. From a one-year perspective, we see limited upside
potential as valuations seem to be fair.
Key Financials
Y/E March (` cr)
FY2012
FY2013
FY2014
Net Sales
372
404
504
% chg
-
8.7
24.5
Net Profit
49
50
55
% chg
0
1.2
10.6
EBITDA (%)
22.0
17.5
18.7
EPS (`)
22.7
23.0
25.4
P/E (x)*
27.7
27.4
24.8
P/BV (x)*
19.7
9.2
7.8
RoE (%)
32.8
15.4
14.6
RoCE (%)
35.7
16.4
16.6
Bhavin Patadia
EV/Sales (x)*
3.8
3.2
2.6
+91 22 3935 7800 Ext: 6868
EV/EBITDA (x)*
17.5
18.2
14.1
[email protected]
Source: Company, Angel Research; Note: *The above numbers are considering subscription at the
lower end of the price band
Please refer to important disclosures at the end of this report
1
Monte Carlo | IPO Note
Company Background
Monte Carlo Fashions Ltd. (MCFL) is a leading apparel brand in India. It was
launched in 1984 as an exclusive woollen brand by Oswal Woollen Mills Ltd
(‘OWML’), one of its group companies. The company primarily caters to the
premium and mid-premium branded apparel segment for men, women and kids,
offering a comprehensive line of woollen, cotton and cotton-blended knitted and
woven apparel and home furnishings through its ‘Monte Carlo Exclusive Brand
Outlets’ and MBOs, including a network of national chain stores under the
Monte Carlo’ brand.
MCFL has introduced different ranges for different segments in the apparel
industry under the umbrella ‘Monte Carlo’ brand. ‘Platine’ is its premium range for
men, ‘Denim’ is the exclusive range for denim apparel, ‘Alpha’ is the exclusive
range for women and ‘Tweens’ is the exclusive range for kids. The company
continues to broaden its product range including premium and economy cotton
knitted and woven apparel products to appeal to a diversified customer base
across India. The woollen products include sweaters and cardigans, whereas,
cotton knitted garments include t-shirts and track suits. The woven garments
portfolio includes shirts, trousers, suits, jackets and denims.
It has two manufacturing facilities in Ludhiana, Punjab, one for woollen apparel
products and one for cotton apparel products. The manufacturing facilities include
facilities for product development, a design studio and sampling infrastructure.
Almost all woollen knitted products are manufactured in-house at its
manufacturing facility. Also, it recently commenced in-house manufacturing of
some of its cotton t-shirts and thermals in April 2014. For the remaining cotton
and cotton-blended products, the company follows an asset-light model by
outsourcing the production to a network of third-party manufacturers, also known
as job work entities.
December 1, 2014
2
Monte Carlo | IPO Note
Issue Details
The issue comprises an offer for sale by promoters group and private equity (PE)
firm Samara Capital of 0.54cr equity shares of face value of `10 each. There is no
fresh issue of equity. MCFL has fixed the price band of the issue at `630 to `645.
The offer constitutes 25% of the post offer paid-up equity share capital of the
company.
Exhibit 1: Share Holding pattern
Particulars
Pre-Issue
Post-Issue
No. of shares
(%)
No. of shares
(%)
Promoter and promoter group
1,76,15,304
81.1%
1,38,28,708
63.6%
Total public holding
41,16,760
18.9%
79,03,356
36.4%
Total
2,17,32,064
100.0%
2,17,32,064
100.0%
Source: Company, Angel Research
Objects of the Offer
The objects of the offer are to achieve the benefits of listing the equity shares on
the stock exchanges and the sale of 5,433,016 equity shares by the Selling
Shareholders. Further, the company expects that the listing of the equity shares will
enhance its visibility and brand image among its existing and potential customers
and provide liquidity to the existing shareholders. The company will not receive any
proceeds of the offer and all the proceeds will go to the Selling Shareholders.
December 1, 2014
3
Monte Carlo | IPO Note
Investment Arguments
Well established brand to compliment network expansion: Monte Carlo is the
flagship brand of the company with a portfolio of woollen apparel and cotton and
cotton blended apparel. They are the leading woollen knitted apparel brand in
India in the premium and mid-premium segment and enjoy significant premium
and brand recall on a pan India basis. Monte Carlo brand has been built through
advertising in print media, electronic advertising, television campaigns, fashion
shows and through endorsement by famous Indian personalities (Bipasha Basu)
and strategic associations with movies (Barfi, Bhaag Milkha Bhaag).
Exhibit 2: Products distribution model
Monte Carlo
Fashions Ltd.
(MCFL)
Monte Carlo
Multi Brand
Exclusive
Outlets
Brand Outlets
(1,300)
Own Stores
Franchisee
(18)
(178)
Source: Company, Angel Research
The company distributes its portfolio of products through ‘Monte Carlo Exclusive
Brand Outlets’ and MBOs. As on June 30, 2014 there are 196 ‘Monte Carlo
Exclusive Brand Outlets’ in India, two in Dubai and one in Kathmandu, Nepal. The
company plans to increase the outlets to 275 by fiscal FY2017 as a part of its
growth strategy. While most of the outlets would be opened in North and Eastern
India, the company would seek to penetrate further in the western and southern
regions of India as well. Further, its products are supplied to over 1,300 MBOs (as
of June, 2014) through its commissioned agents. Demographic and economic
trends currently favour a fast growth of the organized branded industry. Moreover,
MCFL has brands positioned to cater to different classes of customers. The
company has also entered into distribution agreements with some of the leading
Indian digital commerce platforms which would further aid growth.
Exhibit 3: Region wise Exclusive Brand Outlets
Exhibit 4: Region wise revenue contribution (FY2014)
3%
9
4
5%
9%
79
56
25%
58%
48
North
East
Central
West
South
North
East
Central
West
South
Source: Company, Angel Research
Source: Company, Angel Research
December 1, 2014
4
Monte Carlo | IPO Note
Asset light model to ensure healthy balance sheet going ahead: The company
manufactures woollen knitted products and some of its cotton t-shirts and thermals
at its own manufacturing facilities. For woollen woven apparel, cotton & cotton-
blended products and home furnishing products, the company follows an asset
light model by outsourcing the production to a network of third-party
manufacturers, also known as job work entities with which it enjoys a long term
relationship. The company sells the raw materials which include fabrics and/or
yarns to the job worker entities who further sell the finished products back to the
company. The company has 196 ‘Monte Carlo Exclusive Brand Outlets’, of which
178 are owned and operated by different franchisees in India (including
21
discount stores or factory outlets). The franchisees lease the locations where they
operate and staff costs and other operating expenses are borne by the franchisees.
As a result, the company’s employee cost as a percentage of sales is one of the
lowest in the industry and its D/E is low at ~0.2x. Further it has around `175cr in
cash and that has been set aside for future acquisitions which will ensure that
balance sheet continues to be healthy.
Broadening of product portfolio to address seasonality concerns: The ‘Monte
Carlo’ brand has historically been associated with winter-wear for its woollen
knitted apparel. In order to position ‘Monte Carlo’ as an all-season pan-Indian
brand, the company introduced cotton and cotton-blended apparel to the ‘Monte
Carlo’ portfolio of products in 2006. The company is expanding its product range
in the cotton and cotton-blended apparel segments and focusing on the
production of cotton and cotton-blended shirts, trousers, t-shirts and denims to
expand the all-season product range and increase penetration in the metros and
expand presence in tier I and tier II cities in India.
The portfolio of products under ‘Monte Carlo’ has primarily catered to the
premium and mid-premium segments. The company recently launched an
economy range ‘Cloak & Decker’ of cotton apparel products under the ‘Monte
Carlo’ brand. It has also entered the high growth kids apparel segment under
Tweens’ range and has become a one-stop shop for the entire family. Further, it
has entered into the niche home furnishing category with the product portfolio
including mink blankets, bed sheets and quilts. Additionally, it sells thermal wear
and other winter accessories including scarves, mufflers and woollen caps.
Exhibit 5: Revenue break-up products wise
Exhibit 6: Sweater and non-sweater break-up
22%
40%
Woollen products
32%
38%
Sweater
Cotton and cotton-
68%
blended products
Non-Sweater
Others
Source: Company, Angel Research
Source: Company, Angel Research
December 1, 2014
5
Monte Carlo | IPO Note
Exploiting additional opportunity through acquisitions and focus on
expansion of kids wear: The Management has guided at utilizing the available
cash for inorganic acquisitions or strategic investments. The company is looking at
opportunities in areas in which it is not present, ie in shoes, ethnic wears, suiting
and women’s western wear. The company also aims 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. The branded kids wear
segment in India is under-penetrated and offers a compelling opportunity for
growth. According to the Technopak Report, 2014, the kids apparel market
contributes 20% to the total fashion market and is the fastest growing segment in
the Indian market. The US$8,222mn kids apparel market in India is expected to
grow at a CAGR of 10.50% to reach US$22,369mn in 2023. Branded kids’ wear
retail in itself is a high growth opportunity area as the market is dominated by
local and unorganized players. The absence of a significant player in the mid-tier
segment presents a huge prospect.
December 1, 2014
6
Monte Carlo | IPO Note
Industry Overview
According to the Technopak Report, 2014, the Indian branded apparel industry is
estimated to be approximately US$13,131mn in 2015 and is projected to grow to
US$34,182mn by fiscal 2020, driven by an increase in per capita income and
increased penetration of organized retail across India. Though organized retail
accounted for only 17% of the total apparel market in 2010, and is estimated to
account for 25% of the total apparel market by the year 2015, its share is poised
to grow sharply over the coming years and account for ~40% share of the total
apparel market by 2020. The increased presence of multiple retail formats across
speciality retail formats, hypermarkets and cash and carry is expected to drive this
growth.
According to the Technopak Report, 2014, the current size of India’s winter wear
market is approximately US$2,341mn and is growing at a CAGR of 9%. Between
men, women and kids segment, men contribute as high as 51% of the entire
segment. Most segments in winter wear, such as shawls, men’s suits, jackets,
blazers and sweaters are registering a double digit growth. Hence, winter wear is
seen as a lucrative business proposition, despite facing various issues like
infrastructure and labor costs to name a few. In India, the winter wear market is
clearly segmented between branded and unbranded players. The ratio is 70:30
with 70% players being from the unbranded sector. The share of branded wool
industry is about 12% of the total industry.
Outlook and Valuation
The company’s net sales have grown at a CAGR of 16.3% over FY2012 to
FY2014. Although, the EBIDTA margins have declined from 22% in FY2012 to
18.7% in FY2014, we believe they are at sustainable levels. The net profit has
grown at a CAGR of 5.8% over FY2012-FY2014. At the lower end of the price
band, the stock is valued at ~24.8x PE on FY2014 earnings which we believe is
fair considering its i) strong brand image, ii) strong distribution network,
iii) healthy balance sheet and iv) widening product portfolio. We recommend
Subscribe to the issue at the lower end of the price band from a two-year
perspective. From a one-year perspective, we see limited upside potential as
valuations seem to be fair.
December 1, 2014
7
Monte Carlo | IPO Note
Key risks/concerns
Fluctuations in the prices of woollen yarn and cotton fabric: The company is
exposed to fluctuations in the prices of woollen yarn and cotton fabric as well as its
unavailability, as it does not enter into any supply agreements and purchases them
from spot market.
High proportion of related party transactions: The company relies on certain group
companies, including OWML and Nahar Spinning Mills Limited, for procurement
of raw materials and outsourcing the manufacture of certain apparel. Hence any
potential conflicts of interest pursuant to such related party transactions could have
a material adverse effect on its business, financial condition and results of
operations.
Credit risk of franchisees and MBOs: The company is exposed to payment delays
and/or defaults by its franchisees who operate the company’s ‘Monte Carlo
Exclusive Brand Outlets’ and MBOs. MCFLs financial position and profitability
therefore depend on the credit-worthiness of its franchisees and MBOs. In the past,
for example, certain franchisees did not pay sales proceeds due to it, resulting in
the termination of arrangements with such franchisees and to the closure of the
exclusive brand outlets that they operated.
December 1, 2014
8
Monte Carlo | IPO Note
Profit & Loss (Standalone)
Y/E March (` cr)
FY2012
FY2013
FY2014
Gross sales
399
424
504
Less: Excise duty
26
20
0
Net Sales
372
404
504
% chg
0.0
13.3
25.8
Net Raw Materials
183
207
261
% chg
0.0
13.3
25.8
Power
5
6
8
% chg
-
15.2
45.9
Other Mfg costs
30
33
41
% chg
-
10.2
25.8
Personnel
14
19
27
% chg
-
37.6
43.0
Other
6
6
7
% chg
-
2.5
27.1
Total Expenditure
290
333
410
EBITDA
82
71
94
% chg
-
(13.3)
32.7
(% of Net Sales)
22.0
17.5
18.7
Depreciation & Amortisation
6
7
16
EBIT
76
64
78
% chg
-
(15.5)
21.5
(% of Net Sales)
20.4
15.9
15.5
Interest & other Charges
7
4
9
Other Income
3
12
15
(% of Net Sales)
0.9
3.0
3.0
PBT
73
72
84
Tax
23
22
28
(% of PBT)
31.9
31.0
34.0
PAT (reported)
49
50
55
Extraordinary Expense/(Inc.)
0
0
0
ADJ. PAT
49
50
55
% chg
-
1.2
10.6
(% of Net Sales)
13.3
12.4
11.0
Basic EPS (`)
22.7
23.0
25.4
Fully Diluted EPS (`)
22.7
23.0
25.4
% chg
-
1.2
10.6
December 1, 2014
9
Monte Carlo | IPO Note
Balance sheet (Standalone)
Y/E March (` cr)
FY2012
FY2013
FY2014
SOURCES OF FUNDS
Equity Share Capital
19
22
22
Reserves & Surplus
132
303
358
Shareholders’ Funds
151
325
380
Total Loans
62
67
89
Long term Provision
0
0
0
Other long term liabilities
6
8
9
Net Deferred Tax Liability
0
1
3
Total Liabilities
219
400
482
APPLICATION OF FUNDS
Gross Block
100
163
241
Less: Acc. Depreciation
51
58
74
Net Block
49
105
167
Capital Work-in-Progress
19
23
20
Lease adjustment
0
0
0
Goodwill
0
0
0
Investments
0
40
50
Long term loans and adv.
17
13
12
Other non-current assets
0
0
45
Current Assets
191
305
331
Cash
1
107
82
Loans & Advances
7
13
17
Inventory
110
109
140
Debtor
72
74
89
Other current assets
0
1
3
Current liabilities
57
86
143
Net Current Assets
134
219
188
Misc. Exp. not written off
0
0
0
Total Assets
219
400
482
December 1, 2014
10
Monte Carlo | IPO Note
Cash flow statement (Standalone)
Y/E March (` cr)
FY2012
FY2013
FY2014
Profit Before Tax
73
72
84
Depreciation
6
7
16
Other Income
(3)
(12)
(15)
Change in Working Capital
-
21
6
Direct taxes paid
(23)
(22)
(28)
Cash Flow from Operations
52
65
63
(Incr)/ Decr in Fixed Assets
-
(60)
(35)
(Incr)/Decr In Investments
-
(44)
(11)
Other Income
-
12
15
Cash Flow from Investing
-
(91)
(32)
Issue of Equity/Preference
-
-
-
Incr/(Decr) in Debt
-
7
27
Dividend Paid (Incl. Tax)
-
-
-
Others
-
139
(29)
Cash Flow from Financing
-
(131)
56
Incr/(Decr) In Cash
52
106
(25)
Opening cash balance
-
1
107
Closing cash balance
-
107
82
December 1, 2014
11
Monte Carlo | IPO Note
Key Ratios
Y/E March
FY2012
FY2013
FY2014
Valuation Ratio (x)*
P/E (on FDEPS)
27.7
27.4
24.8
P/CEPS
27.0
8.7
10.0
P/BV
19.7
9.2
7.8
Dividend yield (%)
-
-
-
EV/Net sales
3.8
3.2
2.6
EV/EBITDA
17.5
18.2
14.1
EV / Total Assets
6.5
3.2
2.8
Per Share Data (`)
EPS (Basic)
22.7
23.0
25.4
EPS (fully diluted)
22.7
23.0
25.4
Cash EPS
23.3
72.3
63.2
DPS
-
-
-
Book Value
69.4
149.4
174.8
DuPont Analysis
EBIT margin
20.4
15.9
15.5
Tax retention ratio
0.7
0.7
0.7
Asset turnover (x)
1.9
1.8
1.5
ROIC (Post-tax)
26.1
19.2
15.6
Cost of Debt (Post Tax)
7.2
3.8
6.9
Leverage (x)
0.4
(0.2)
(0.1)
Operating ROE
33.6
15.4
14.6
Returns (%)
ROCE (Pre-tax)
35.7
16.4
16.6
Angel ROIC (Pre-tax)
38.3
27.8
23.6
ROE
32.8
15.4
14.6
Turnover ratios (x)
Asset TO (Gross Block)
3.7
2.5
2.1
Inventory / Net sales (days)
108
99
90
Receivables (days)
71
66
59
Payables (days)
17
27
37
WC cycle (ex-cash) (days)
130
141
115
Solvency ratios (x)
Net debt to equity
0.4
(0.2)
(0.1)
Net debt to EBITDA
0.7
(1.1)
(0.5)
Int. Coverage (EBIT/ Int.)
11.6
17.4
8.4
Note: *Valuation Ratio at the lower price band
December 1, 2014
12
Monte Carlo | IPO Note
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should
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companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine
the merits and risks of such an investment.
Angel Broking Pvt. Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make
investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this
document are those of the analyst, and the company may or may not subscribe to all the views expressed within.
Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
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sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
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have investment positions in the stocks recommended in this report.
Disclosure of Interest Statement
Monte Carlo
1. Analyst ownership of the stock
No
2. Angel and its Group companies ownership of the stock
No
3. Angel and its Group companies' Directors ownership of the stock
No
4. Broking relationship with company covered
No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
Reduce (-5% to -15%)
Sell (< -15%)
December 1, 2014
13