Promoted by the Seth family, House of Pearl Fashions (HOPF) is a ready-to-wear apparel company operating in three distinct business streams: manufacturing, marketing and distribution, and sourcing of garments. HOPF has 10 ready-to-wear apparel manufacturing facilities; six of them are in north India, one in south India, two in Bangladesh, and one in Indonesia.
The portfolio of HOPF’s products comprises knits, woven sweaters and bottoms in basic as well as complex designs. The company has marketing and distribution offices in the UK, the US and Hong Kong to oversee marketing and merchandising teams across Canada, Europe, Hong Kong, the UK and the US. It also owns warehousing and processing units in the UK and the US. HOPF has a sourcing business in Hong Kong with offices in China, Bangladesh and India. Besides design and product development teams in the UK, the US, India and Hong Kong, the company has fabric development centers in China and India.
The five distribution companies of HOPE in the US, the UK, Canada, Hong Kong and Spain get orders from these markets. Apart from its manufacturing facilities, over 150 third-party manufacturing units in China, Bangladesh and India cater to these orders. This constitutes around 70% of the company’s revenue. The company’s brands in the US, DCC and Kool Hearts, constitute around 8% of the revenue.
HOPF plans to double its manufacturing facilities in India and Bangladesh from the present 20 million pieces per annum to 40 million pieces per annum by 2010. The total cost of this expansion is around Rs 111.7 crore. Of this, Rs 57.5 crore will be raised through the issue, and the balance financed through debt. The company will spend Rs 14.30 crore for a design center and corporate office. Of this, Rs 3.80 crore will be diverted from the issue, and the remaining Rs 10.5 crore raised through debt. The Rs 14.30 crore required for setting up an integrated information technology system will be entirely met from the issue proceeds and so also pre-payment of a term loan of Rs 55.04 crore. An amount of Rs 51.07 crore, to be paid to subsidiary companies as part of group restructuring, will eventually to go to promoters. The retail foray of the company will cost Rs 73.33 crore. Of this, Rs 54.50 crore will be used from the issue. The acquisition of an existing brand in the UK or the USA for a retail thrust outside India will require Rs 40 crore. This, too, will be financed through the issue.
Strengths
- HOPF has a derisked and scalable business model.
- Unlike most Indian garment manufacturers, the company derives 70% of its revenue through sourcing tie-ups. This is not mere trading revenue, but from its own design. In the apparel business, design is critical. Its strong design development capability is being leveraged to supply to global chains and source from reliable low-cost locations.
Weaknesses
- The global textile trade is highly competitive and over dependent on the US market. Economic slowdown in the US and depreciation of the US dollar will intensify pressure on profit margin.
- The consolidated cash flow from operations was negative Rs 70 crore in the six months ended September 2006. HOPF seems to be extending large credits to buyers as well as suppliers.
- The Union government has reduced export incentives under the Target Plus scheme. These will reduce further in future, putting pressure on profit.
- In its present form, the company has come into existence after restructuring of group businesses and has only six months’ history of financial performance. Comparable proforma financials for the past are not provided and hence it’s impossible to assess how the HOPF has grown over the past.
Valuations
The consolidated annualised EPS in the period ended September 2006 will be Rs 22.9 if the green-shoe option is exercised, resulting in a price to earning (PE) multiple of 22.9 to 26.2 times at the lower and upper band of Rs 525 to Rs 600. HOPF has a listed subsidiary Pearl Global in the same business (but much smaller). In spite of the fall in profit and lackluster sales growth in the September 2006 quarter, the Pearl Global stock has shot up 30% in the past one month and now trades at Rs 147 (TTM PE: 14.5). The nearest comparable listed company is Gokaldas Exports (which focuses on exports of own-manufactured garments only), which trades at a TTM P/E of 16.