Cantabil Retail India IPO Analysis

Capitalising on retail growth

IPO to fund expansion of retail presence, increase capacity and reduce dependence on third party manufacturers



Promoted by Vijay Bansal and Deepak Bansal, Cantabil Retail India, CRIL (formerly called as Kapish Products India), designs, manufactures and retails apparels under two brands: Cantabil and La FANSO. With a network of 411 exclusive retail outlets as on 31 July 2010, the company has its presence concentrated in the north and western region of India and caters to the demand of the domestic apparel market. About 343 stores of total 411 stores as on 31st July 2010 are in Northern and western regions of India.

The company has 2 manufacturing facilities and one finishing facility in Delhi with an in house installed capacity of manufacturing 1.3 million pieces of men wear and finishing capacity of 2.55 million pieces of men, women and kids wear per annum as on year ended FY 2010. Due to limited in-house production capacity it out-sources nearly 50-60% of total requirements from third party manufacturers. The manufacturing of woven garments such as trousers, shirts, and blazers are outsourced on a job work basis, where the company supplies fabric and accessories along with the garment sample to manufacturers who provide stitched garments, which is then finished at company's facilities.

CRIL operates retail outlets in two models: company owned and franchisee managed (COFM) and franchisee owned and franchisee operated (FOFO). As on 31 July 2010, the company had 143 outlets under COFM model and 268 outlets under FOFO model covering metros, large cities and Tier II cities. Nearly 65% of the stores of the company were under the FOFO model. The floor area of retail outlets of Cantabil and La FANSO brands was 2.38 lakh sq ft and 0.80 lakh sq ft, respectively. Cantabil constituted nearly 79.5% of the total sales of the company in FY 2010.

While flagship brand Cantabil offers a complete range of formal wear, party wear, casuals and ultracasual clothing for men, women and kids in the middle income group, the La Fanso brand (launched in October 2008) caters to men's segment in lower to middle income group and focuses on casual, ultra casual and formal wear. In addition to apparels, the company also retails various accessories such as ties, belts, socks, caps and handkerchief under its two brands.

CRIL has reported splendid results in the year ended March 2010, with 136% jump in net profit at Rs 14.68 crore on the back of 47% rise in the top line at Rs 201.83 crore and 400 bps expansion in the operating margin. The increase in its in-house manufacturing capacity of men apparel to 1.3 million pieces and in house finishing capacity to 2.55 million pieces boosted performance in FY 2010.

In order to expand its retail presence, increase its capacity and reduce its dependence on third party manufacturers, the company is coming out with Initial Public offer of Rs 105 crore through 100% book building process. The proceeds of IPO are expected to be spent as follows (a) setting up a new manufacturing facility for woven garments in Bahadurgarh (Haryana) with a capacity of approx 4.3 million pieces per annum at an estimated capex of Rs 32.02 crore. This project is to be completed by end of December 2011. The company has already spent Rs 1.70 crore towards payment of installment of land purchased in this project. Post expansion, total in-house manufacturing and finishing capacity of company would be increased to 5.62 million pieces per annum and finishing capacity to 7.32 million pieces per annum respectively. (b) Open 180 exclusive brand outlets for Cantabil by March 2012 with capex of Rs 24.97 crore. (c) Working capital of Rs 30 crore and (d) repayment of debt Rs 20 crore. The total funds required by the company are Rs 107 crore, of which Rs 105 crore will be raised through the IPO and the rest will be funded through internal accruals.

Strengths:

* Integrated manufacturing and retail business with in-house capabilities of designing will help to maintain the quality of the fabrics and change designs accordingly. It will also aid improvement in operating profit margin (OPM of CRIL improved from 9.6% in FY 2008 to 14.3% in FY 2010).
* The company plans to have at least 20% of the upcoming outlets in Tier II cities and towns. Enhancing its presence in Tier II cities will improve its brand presence.
* Major proportion (87%) of the apparels sold by the company is in the men's wear segment, which is most developed and organized compared to other categories in the domestic apparel market.

Weaknesses:

* The domestic apparel market is highly fragmented and dominated by large no of retailers both in the organized and unorganized sectors. With the presence of several Indian and international apparel brands in the market, the company has to face stiff competition.
* The company had very high inventory of Rs 119.96 crore as on end of FY 2010. Any diminution in value of inventory may have a material adverse effect on operating results and financial conditions.
* Increase in the reality cost will impact the company by way of pay higher fixed costs in the retail space.

Outlook:

At the lower price band of Rs 127 per equity share of Rs 10 face value, the P/E works out to 14.5 times the EPS of Rs 8.7 for FY 2010 on post-IPO equity. At the upper band of Rs 135, P/E works out to 15.0 times the EPS of Rs 9.0 for FY 2010. Listed companies in the readymade garments sector, Koutons Retail, Provogue and Kewal Kiran Clothing, have PE of 11.3, 26.1 and 15.2 times EPS of FY 2010; while the sector PE works out to be 13.7 times.

via CM