Koutons Retail India (Koutons) designs, manufactures and retails apparels. Products are market under the Kouton" and Charlie Outlaw brands through 999 exclusive brand outlets (EBOs), on 20 August 2007, across India.
With 18 in-house manufacturing / finishing units and 14 warehouses spread across various locations in and around Gurgaon, Koutons had an annual finishing and manufacturing capacity of 22.92 million and 12.36 million pieces of apparel, respectively, end March 2007. The company’s brands are marketed through three outlet models (a) company owned / leased and company operated (COCO); (b) company owned / leased and franchisee operated (COFO); and (c) franchisee owned / leased and franchisee operated (FOFO). The company had 17 outlets, 124 outlets and 858 outlets under COCO, COFO and FOFO models, respectively, on 20 August 2007. The Koutons brand had annual sales of Rs 372.69 crore in the year ending March 2007 (FY 2007).
Recognising the vast untapped potential in organised apparel retailing, Koutons plans to utilise Rs 41.22 crore from the IPO to opening 140 new EBOs by FY2009. The company has already opened 3 EBOs and signed MOUs for another 78 EBOs. The new stores would either be under COCO or COFO model. It is currently scouting for locations for the remaining 59 planned EBOs. About 13,000 sq meters of land has been acquired in Gurgaon where an integrated manufacturing facility at a cost of Rs 30.19 crore is to be set up. Koutons also proposes to infuse Rs 10 crore to increase its finishing and manufacturing capacity and Rs 5.58 crore to improve its IT infrastructure.
Promoters DPS Kohli, BS Sawhney and GS Sawhney are also selling their 9,16,542 equity shares (3% of post-IPO equity) through the open offer along with the present IPO.
Strengths
A semi-integrated player with capabilities across a large part of the value chain: manufacturing and retailing. In–house manufacturing and finishing have helped to improve operating profit margin on a sustainable basis: from 1.4% in FY 2003 to 17.5% in FY 2007.
Enjoys a strong brand-presence in north and north-west India. Of the 999 EBOs, 531 EBOs were present in northern on 20 August 2007. As a result, this region accounts for around 65-70% of the total revenue. To reduce the risk arising from geographic concentration, operations are being expanded in other parts of India. West and east India had 29 and 38 stores, respectively, and none in southern and central India end March 2006. However, EBOs in these regions were 178 (west), 193 (east) and 97 (south and central India) on 20 August 2007.
Weaknesses
Seems to keep inflated price for its products for most part of the year and then resort to large end-of-the-season discounts to generate annual sales. Recorded 48% and 43% of total sales in FY 2006 and FY 2007 in the last quarter of the fiscal year on end-of-the-season sales and on recording sales only after the receipt of sales report from respective consignee agent.
Bears the risk of inventories and keeps inventories on its books till sales to retail customer. This not only increases risks of large-scale returns in future/ major write-down of unsold inventories, but also locks up huge working capital. Though sales stood at Rs 402.40 core, inventories increased Rs 276.11 crore (to Rs 373.84 crore) end FY 2007. As a result, cash flow from operating activities was a negative Rs 201.25 crore!
Franchisees contributed 99% of the total sales in FY-2007. However, off late, has started building own COCO network of EBOs. Had 17 such outlets on 20 August 2007. Going forward, intends to increase the number of such EBOs. This may give rise to conflict of interest with franchisees, hampering growth.
Valuation
Recorded 154% increase in net sales to Rs 402.40 crore and 161% increase in net profit to Rs 34.49 crore in FY 2007. On post- issue equity of Rs 30.55 crore, EPS works out at Rs 11.30.
At the offer price band of Rs 370 – Rs 415 and on FY 2007 earning, P/E is 32.8 (on the lower band) and 36.8 (on the upper band). P/E of other comparable listed players are: Raymond (12), Kewal Kiran Clothing (16), Zodiac Clothing (14), and Provogue (63, the high P/E is due to its subsidiary developing malls).