| Koutons Retail's public offer looks attractive based on FY09 earnings. |
| For the believers of the retail boom story, it is difficult to not have faith in the apparel business. This is because apparel retailing forms 40 per cent of the retail business, and is growing at an annual rate of 30 per cent a year. |
| Thus, it is worthwhile looking at companies focussed on this business. With its IPO, Koutons Retail India will be added to this list of apparel retailers. |
| Koutons, a Delhi-based integrated retail company, plans to raise Rs 95-106 crore with the issue of 2.6 million equity shares in the price band of Rs 370-415 besides an offer for sale of 0.92 million shares for expansion of stores and capacities. |
| In the past, the company has raised money from institutional investors such as UTI Ventures, Agronaut Ventures and Passport India Investments. Fidelity picked up 4.16 per cent stake at Rs 430 per share. |
| An aggressive retailer Koutons, by far, has the largest retail network among the organised apparel retailers with 999 exclusive brand outlets (EBOs), 8.4 lakh sq ft and a presence in 221 cities, concentrated in the North. |
| The company plans to open 140 additional stores in the next two years and expand its presence across the country. The company has two brands: Koutons (the flagship brand with 566 stores as on August 20) and “Charlie Outlaw” (with 433 stores). |
| The company also manufactures a wide range of apparel---shirts, trousers, denims, suits, blazers, T-shirts, cargos and sweaters catering especially to men. |
| The company has plans to introduce a new line of women’s wear (Les Femme brand) and kids’ wear (Koutons Junior). Its manufacturing and finishing capacity stands at 12.4 million pieces and 22.9 million pieces respectively at present with 18 in-house manufacturing or finishing units and 14 warehouses, in and around Gurgaon. |
| Koutons’s retail presence is wider than even the more established and renowned players like Raymond and Madura Garments (having brands like Allen Solly, Van Heusen and Louis Philippe). |
| However, it has ramped up its own retail operations in a short span of two years and its number of stores has multiplied from 74 in March 2005 to 999 now. This has also boosted its financial performance as its sales and profits have leapfrogged in the last three years. |
| Moreover its strategy of positioning its products as “Value for Money” and catering to the young and the middle class population augurs well as the target markets are growing at a robust pace. |
| Some risks but not alarming The risks involved in investing in Koutons outweigh its strengths though they are not alarming. The first risk is that 99 per cent of its stores, albeit exclusive, are owned and operated by franchisees. |
| Thus, Koutons does not sell directly to its end consumer but is involved in manufacturing, warehousing, advertising, branding and inventory control. The store-owner will seek the highest return on his investment, so the strength of the brand has to be maintained in terms of revenues. |
| The Koutons management says that it has managed to retain most of its franchisees over the past three years. The second risk is that brands like Raymond, Peter England and Allen Solly, have a better brand recall, while Koutons is an emerging brand, with not as much awareness. |
| Koutons records its sales when products are sold actually to the consumer. According to analysts, this is risky though they commend the conservative approach of valuing the sales. |
| The company has huge investments in inventory, which has led to negative cash flow from operations in the last two years, and its inventory turnover ratio has declined over the last three years, which is not a good sign for a retail player. |
| The company attributes this inventory pile-up to new stores, which are increasing briskly, but sales in the new stores will take some time till they get established. |
| Though the opportunities are aplenty in the Indian organised apparel retail industry, the sector is highly competitive, fragmented, working capital intensive and seasonal in nature. |
| Moreover, finding suitable locations at competitive costs is also a major challenge, but Koutons, which goes through the franchisee model, is not affected as much. |
| Lastly, the company’s expansion plans are going to materialise in the first quarter of FY10, which is a long period though the recent ramp up will support the sales and profit growth till that time. |
| Skyrocketing growth Koutons has reported the fastest growth in its sales and profits among its listed and closest peers partly due to a smaller base. Sales have grown by 135 per cent a year, while profits went up over 200 per cent every year in the last three years. |
| But, how far is this growth sustainable? Growth rate will be lower in terms of percentage as the base effect will have an impact though they will be good in absolute terms. This is because the stores were ramped up only in the last two years and are expected to contribute more aided by additional capacity. |
| A long term play The company had an 8.6 per cent net profit margin in FY07. However, they are still lower than its closest but a smaller peer–Kewal Kiran Clothing–which enjoys a higher net margin of 14 per cent. |
| At the given price band, Koutons is trading at 30 times and 33.5 times for FY07 earnings respectively. Assuming that the net profit grows 100 per cent in FY08 and 50 per cent in FY09, it trades at 16.4-18.3 times and 10.9-12.2 times respectively. |
| This is higher than Kewal Kiran which trades at 16.7 times, 13.7 times and 10.5 times respectively for FY07, FY08E and FY09E. However, it should be considered that despite being a late starter, Koutons has managed to achieve higher sales and profits than Kewal Kiran. |
| The offer looks attractive on FY09 basis. Long term investors can invest in the company. |
Issue closes: September 21