Bang Overseas IPO Review

Investors can avoid the initial public offer of Bang Overseas Ltd (BOL). At the upper end of the price band of Rs 200-Rs 207, the offer is valued at close to 20 times the company’s annualised FY 08 per-share earnings, on a fully expanded equity base. The company is in its infancy, and with an insufficient track record in the branded retail business, there could be execution risks to its expansion plans. If it manages to execute its capacity addition and retail expansion plans successfully, the valuation is likely to be at more attractive levels on a forward basis. Given the turbulence in the markets, however, staying invested with better-established players may be a more appropriate strategy.
Focus on garments

BOL has a domestic market bias and is, therefore, relatively less exposed to rupee fluctuations and export slowdown, problems that are plaguing most other textile companies.

The company started its garments business in 2002. Till then, it was predominantly a trader in imported fabric. The company sells men’s clothing under the brand “Thomas Scott” through a network of multi-brand outlets, departmental stores such as Shoppers’ Stop and Globus and 12 exclusive outlets.

A growing share of garments in the revenue mix has significantly improved profitability. Revenues and profits have grown at a stupendous pace since 2005. The company ended fiscal 2007 with revenues of close to Rs 100 crore. Garments currently account for about 40 per cent of revenues.

Through the proceeds of the offer, the company will expand its garments capacity six-fold to more than 7 million pieces a year and expand its retail chain to 100 stores. The fresh capacity is expected to come on stream by September 2008. The company expects to add an additional 88 stores by June 2009; 41 will be company-operated and the remaining franchisee-run.

The additional garment capacity will likely feed its expanding retail operations. and will also help it cater to increasing demand from apparel retailers. BOL is also to foray into women’s wear with a line of clothing — Miss Scott.

Execution risks

While these moves can help boost margins and profits in the long-term, there are execution risks, especially when it comes to the retail business.

BOL has identified locations across different regions in the country, with focus on tier-two and tier-three cities. However, there has not been much progress in finalising properties for its retail operations. Agreements have been signed for only nine of the planned 41 stores. The company has not entered into further franchisee-agreements for running the remaining stores.

The offer document does not state whether the stores will be stand-alone or in malls, nor does it mention the size of these stores. Less than Rs 10 crore of this Rs 70 crore issue has been earmarked for retail expansion. Cost over-runs are likely, considering increasing real-estate rentals and higher competition from established retailers and other garment exporters in tier-two towns. There could also be considerable delays in store openings. The company’s lack of experience in the retail business also does not inspire confidence in its execution. At the same time, retail operations may be crucial to making a mark in the branded apparel business, considering that the company lacks the financial wherewithal to commit huge sums to brand-building. Several large garment exporters are also turning to the domestic market to combat the slowdown on in the export front, which is likely to heighten competition in this segment.

Considering the low visibility of prospects at this stage, investors may be better off following a wait-and-watch approach and revisit the stock once the company gains a firmer foothold in the domestic apparel market.

The offer opens on January 28 and closes on January 31, 2008.