Costly fashion
Aiming to push up exports as well as domestic retail sales
Celebrity Fashions (CFL) designs, manufactures and sells men's garments, catering to leading international brands and also to the domestic market through own brand, Indian Terrain. Set up in 1988 as a small 50-machine factory with 72 people in Chennai, the company has grown to eight factories (4,283 machines), housed over 300,000 square feet, employing over 5,000 employees.
The IPO will raise Rs 72.8 crore to Rs 81.9 crore. CFL proposes to spend Rs 46.26 crore to finance the acquisition of Ambattur Clothing, with a capacity of 6 million trousers per annum, and Rs 9.34 crore to set 20 exclusive Indian Terrain stores over the next three years. Moreover, the company will set up a new factory at Irrutgattukottai to manufacture tops with a capacity of 920 machines at a cost of Rs 23 crore. The company will utilise Rs 18 crore for working capital.
Strengths
- The abolition of the quota regime has opened new growth avenues for export-oriented garment companies such as CFL.
- The Indian retailing industry is set to grow and CFL, which has built its brand,is well positioned to ride the boom.
Weakness
- CFL’s revenues are highly dependent on a limited number of buyers. For example, its top most customer contributes nearly 32% of its export revenue. The loss of business from any one of its major buyers may adversely affect the top line and bottom line.
- CFL’s Indian operations, consisting of sales from Indian Terrain, were making losses till FY 2005 due to the high advertising expenses. They have started making profit from the current year.
- Bennet, Coleman and Company has been allotted 7.34% of the post-issue equity at Rs 110 (post-bonus), for which CFL would receive benefit over the next three years.
- CFL plans to spend huge amount on advertising.
- There are no plans to enter new segments like women’s wear or kids’ wear.
Valuation
In FY 2005, CFL reported a profit of Rs 5.80 crore with an EPS of Rs 3.2 on diluted equity. The PE ratio stands 50 times at the lower end of the offer price (Rs 160) and 56 times at the higher end (Rs 180). Gokaldas Exports and Zodiac Clothing, much better placed than CFL, are trading at PE of 19 and 31 times, respectively.
The first half results of FY 2006 give an annualised EPS of Rs 5.8. Considering this EPS, PE will be 27 to 31 times. On the same basis, PE on an annualised EPS of Gokaldas Exports and Zodiac Clothing is 15 and 33 times, respectively. As recently as October 2005, CFL allotted equity shares at Rs 110 to private equity investors.