An investment with a one-year perspective can be considered in the initial public offer (IPO) of Koutons Retail India (KRIL). KRIL is a player in the menswear segment with a network of stores mainly in northern and western India. The offer proceeds will help the company expand its retail network.
The price band of Rs 370-Rs 415 values the company at 33-36 times its 2006-07 earnings per share, on an expanded equity base.
KRIL’s premium pricing appears to factor in higher growth rates compared to domestic apparel majors such as Raymond, Zodiac Clothing and Kewal Kiran Clothing. The latter trade at price-earnings multiples of 15-20 based on trailing earnings.
However, KRIL’s performance over the last couple of years and its proposed expansion plans provide some justification for the higher growth expectation.
The expensive valuation for the offer, however, does not provide a margin of safety in the event of disappointing performance. This makes it suitable only for investors with a high risk appetite.
Massive retail ramp upKRIL sells menswear under the brands “Koutons” and “Charlie Outlaw” targeted at customers in the 22-45 and 14-25 age groups respectively. The company has grown its brands by setting up a chain of exclusive outlets across the country. Opening exclusive outlets to improve brand visibility and enhance margins is a strategy that most branded retailers such as Raymond, Provogue and Madura Garments have pursued.
However, at their early stages, most players, particularly regional ones, prefer to distribute their products through national chain stores and multi-brand outlets. This practice allows branded players to improve their reach without bearing the risk of unsold inventory.
Going by its performance, however, KRIL’s strategy of relying mainly on exclusive branded outlets operated by franchisees, appears to have worked. From 75 stores in 2005, the chain of stores expanded to 687 by March 2007. Revenues have grown at a scorching pace from Rs 60 crore to Rs 400 crore over the same period. With operating margins also improving significantly over this period to about 17 per cent, profits have grown at an even faster pace.
Further expansionThe company plans to further expand its reach with the offer proceeds. About Rs 40 crore of the fresh issue proceeds will be deployed in setting up 140 stores over the next two years. The stores will be leased by the company but operated either by the company or franchisees.
The offer document does not mention the exact timeline for these stores to become operational. It has tied up retail space for 75 such outlets, most of them in malls, which is likely to add about 1 lakh square feet of retail space to the existing 8 lakh. Though the remaining proceeds will go towards setting up an integrated facility, this will not result in any capacity expansion.
However, a significant ramp up in revenues is likely this fiscal, given that KRIL has already added about 300 stores or 3 lakh square feet to its retail network since March 2007. Having significantly expanded its manufacturing facilities recently, it is also well-placed to feed the additional stores and introduce product lines. It proposes to introduce separate lines for women and children.
Risky modelDespite the high growth trajectory so far, the business model carries high risks. One, there is a high dependence on franchisees to expand the retail network.
Second, KRIL’s ability to transform its brands “Koutons” and “Charlie Outlaw” from regional- to national-level brands is yet to be demonstrated, despite its large retail network. The retailer tends to rely on heavy discounting to push products.
Seen in this light, the company’s ability to maintain its price-line and implement its stated strategy of targeting the premium segment, could face challenges. Selling expenses have been on a rising trend and now account for almost 25 per cent of sales, as the company increases expenditure towards brand-building.
The offer is open from September 18-21. About 35 lakh shares are on offer, of which 9 lakh shares are an offer for sale by the promoters. The lead manager is JM Financial.