First Global - Kouton Retail

First Global advises investors to subscribe to Koutons Retail's initial public offering for listing gains, as the company is susceptible to grave risks due to high inventory levels.

Koutons Retail India, an integrated apparel manufacturer and retailer, will enter the primary markets on September 18. The shares are priced Rs 370-415 per share. The issue closes September 21.

At the upper price band, Koutons commands a price-to-earnings ratio of 29.2 times 2006-07 (Apr-Mar) earnings per share of Rs 14.2 and 23 times 2007-08 EPS of Rs 18.2, which is at a discount to the other retail players.

The stock is available at an EV/EBIDTA of 21 times 2006-07 and 13 times 2007-08 estimate. First Global believes that the risks are high due to its high inventory level of 93 per cent of top line and 100 per cent of capital employed in FY07.

Although Koutons recorded a compounded annual growth rate of 163 per cent in the top line during 2005-2007 due to its fast paced expansion plans, the brokerage has some concerns on the inventory front.

Historically, Koutons has been recording very high inventory levels (almost 100% of its capital employed), which has resulted in negative operating free cash flows for the last four years, which is not a good sign as it results in high obsolescence losses.

According to brokerage estimates, Koutons is expected to record a top line growth of 60 per cent on a conservative basis, considering a CAGR of 163 per cent in the top line in FY05-07 and EBIDTA margin, net profit margin and debt to remain flat in FY08.