Cantabil Retail IPO - Apply or Not ?

Investors may avoid subscribing to the initial public offer of retailer Cantabil Retail. The offer values the company at 15 times the per-share earnings of FY10 at the higher end of its price band of Rs 127-135, and 13 times estimated FY11 earnings.



Peers such as Koutons Retail and Kewal Kiran Clothing trade at valuations of 12-14 times. Value retail saw valuations revised down following poor performance, inventory build-up and doubts over scalability.

Valuations of Koutons Retail slipped to 11 times now from 20 times in January 2009 . Debt-funded growth has already crushed value retailers such as Vishal Retail and Subhiksha. In this backdrop, despite healthy revenue and margin growth and diversified offerings, execution risks dampen the promise of Cantabil. It faces challenges in the form of developing its regional brand into a national one, sluggish inventory turnover, identifying new store locations, and scaling up its regional operations to cover a national footprint .

Value retail play

Cantabil retails apparel and accessories for men, women and children in the value-for-money category. It has two brands, Cantabil and La Fanso, with a network of 411 stores. Even so, store network is concentrated; over half in the North and a third in the West. Any brand recall that Cantabil enjoys is restricted to these regions. Plans are to widen geographic footprint and grow revenues on the strength of its brands.

The apparel market is fragmented and peppered with trusted local players, national brands and private lines of established national retailers such as Pantaloon. Creating a sustainable national recall for Cantabil is thus fraught with challenges, requiring heavy investments in brand-building and a long time.

Expansion

Cantabil will utilise Rs 25 crore to open 180 stores across the country by end-2012. Plans to open 80 by March 2011 seems a tad tough with issue proceeds in only next month and locations for most stores not identified yet. With same-store sales growth at 10-12 per cent, much will hinge on new store openings.

Large-scale operations will help improve thin margins that are inherent in value retail. However, supply chains have to be effective and inventory turnover quick. Cantabil has a centralised distribution system which serves it well now with its concentrated network.. Geographic expansion may result in higher transportation costs, with significant in-house manufacture and plans to up contribution.

Inventory turnover increased from three to seven months from FY-07 to FY-10 even as working capital turnover dropped from 4.6 times to 2.6 times. Rs 30 crore of issue proceeds will fund working capital. Rs 32 crore will be used to set up a manufacturing plant, operational by end FY-12.

Financials

Revenues grew at a compounded annual rate of 66 per cent and net profits at 71 per cent over three years, attributable in part to a smaller base. Such exponential growth is unlikely to continue.

Operating margins hovered around a satisfactory 10-11 per cent FY-07 onwards. Rs 20-crore repayment of debt is planned from the offer proceeds; debt-funded expansion resulted in pre-issue debt:equity of 2.2 times and net margins of 6 per cent. Debt:equity will fall to 0.31 times post issue.

Still, risks of further debt to fund expansion outside issue objects and equity dilution from this offer remain; the issue doubles the equity of the company. Return on (pre-issue) equity drops from 49 per cent in FY-10 , to 13 per cent (estimated) in FY-11 post-issue equity. The issue is open from September 22 to 27, with SPA Merchant Bankers the lead managers.

via BL