Lovable Lingerie IPO Review

Promoted by Vinay Reddy, Lovable Lingerie (LLL) is headquartered in Mumbai and was incorporated in 1987. Initially named as Hyno Knit Private Limited, the company was renamed as Lovable Lingerie in 1995 and was converted to public limited company in February 2010. With flagship brands "Lovable" and "Daisy Dee", LLL is one of the leading women Innerwear manufacturers in India, with product basket covering brassieres, panties, camisoles, home wear, shape wear, foundation garments and sleep wear products.



The directors of the company, L Vinay Reddy (Chairman and Managing Director), G Ashok Reddy (whole-time director), and L Jaipal Reddy (executive director), have earlier served in key positions of Maxwell Industries, which has been pioneer in creating brands in undergarment category like VIP, Frenchie, Feelings and Leader. The management of the company in 2006 had approved for scheme of amalgamation with Maxwell Industries but withdrew in 2007. The company in 2002 had entered in to a memorandum of understanding with Vanity Fair Inc to acquire the license for the brand. However, it has discontinued manufacturing the products under �Vanity Fair' brand in 2007.

While the "Lovable" brand caters to the premium segment market, "Daisy Dee" addresses the mid segment market, and "College Style" will cater to the young segment in India. The company has licensed the brand, "Lovable", from Lovable World Trading Company (LWTC), USA, and acquired the brand end of 2000 on exclusive basis for territories of India, Nepal, Sikkim and Bhutan. It also acquired "Daisy Dee" from Maxwell Industries in 2004 and "College style" from Levitus Trading (Hong Kong) in 2009.

The company has three manufacturing facilities of which two are situated in Bengaluru and one in Roorkee, Uttarkhand. The facilities in Bengaluru commenced operations in 1995 and 2005, respectively, and have installed capacity of 30 lakh pieces per annum to manufacture brassieres and panties. The manufacturing unit at Roorkee commenced operations in February 2010 with installed capacity of 7.5 lakh pieces per annum to manufacture brassieres and panties.

The company follows a concessionaire-retailing model for marketing its products. In this model, the company procures dedicated retail space in leading large format stores and makes arrangements for stocking, displays and visual merchandising of Lovable brand in form of "shop in shop" modules. Currently the company has 127 counters in leading large format stores across 21 cities. The network of the company constitutes 5 branches, 103 distributors, 1425 direct dealers and nearly 7500 multi brand outlets in 105 cities.

In 2010, it entered in to a JV agreement with Lifestyle Galleries of London (LGL) (UK) to establish a JV company, Lovable Lifestyle Pvt Ltd, with majority 90% of the stake vested with LLL. The company is proposing to infuse capital of Rs 25 crore as equity capital in the JV company. Lovable Lifestyle will carry on marketing, manufacturing, distribution and direct retail in the super premium segment in India and other contracted territories to be decided between the parties on the product lines of LGL in the categories of personality grooming/style, lifestyle enhancement and beauty, including but not limited to women's intimate apparels as well as men's undergarments under the �London Calling' brand in India.

The other group entities of the company include Federal Brands, Hype Integracomm Pvt Ltd, La Reine Fashions Pvt Ltd, Holstein Ecofoods Pvt Ltd, Strategy Games Pvt Ltd, Bellini Fashions Pvt Ltd, Lovable Lifestyles Pvt Ltd, Vinay Hosiery Pvt Ltd, Reddy, and Pathare Elastic Pvt Ltd.

T strengthen its business further in terms of expansion plans, brand building and development initiatives, foray into retail, and investments in JV, the company is tapping the primary markets with an Initial Public Offering. It is offering 4.55 million equity shares with face value of Rs 10 each at a price band of Rs 195-205 per share. Accordingly, the company will raise Rs 88.73 crore to Rs 93.28 crore, based on the lower and upper band of the offer price. In February 2011, the company had pre IPO placement with SCI Growth Investments II for 1 million shares of Rs 10 face value each at a premium of Rs 190 per share and had raised Rs 20 crore.

The company intends to set up manufacturing facility to create additional capacity at Bengaluru with capex of Rs 28.85 crore and invest Rs 25 crore in JV. In order to expand its retail presence, it plans to invest Rs 3.61 crore in setting up retail store modules for �shop in shop' and Rs 14.12 crore to set up exclusive brand outlets (EBO's). The company proposes to open 60 EBO's and 110 new shop-in-shop outlets by June 2012. In keeping with the evolution of consumer taste and rapid fashion cycles of women innerwear industry, it plans to utilize Rs 7.60 crore towards up-gradation of design hardware and software of design studio. It also plans to spend Rs 18 crore and Rs 6 crore for brand building and brand development of college style brand, respectively. The whole objects of the issue will be met by the IPO capital (fresh and pre-IPO placement) and term loan of Rs 16.33 crore.

Strengths:

* "Lovable" is an 85-year-old brand with global presence. It is also one of the established and key brands in the women premium and super premium segment. On the other hand, "Daisy Dee" is a leading brands in the mid market segment.
* The company has in-house design studio for developing innerwear products and creating styles to meet global standards.
* The concessionaire-retailing model as shop in shop modules in large format stores helps it in displaying its complete range of products. Brisk expansion of organized retail is positive for the branded innerwear segment on the back of improving disposable income.
* The promoters of the company have vast experience in branding and developing of undergarments.

Weaknesses:

* The company operates in an industry characterized by constant product innovation due to changing consumer preferences, brand loyalty and evolving fashion trends.
* Although the group companies of the company agreed to not to carry on the business of the company, the agreement doesn't apply to production, distribution, supply and retail of men's innerwear products and outer wear apparel products in which the company plans to foray. This is an added risk at a time when LLL will use Rs 25 crore of IPO proceeds for investing in the JV that will venture into men's wear, too. This may have conflicts of interest arising in future with the company's business.
* The trademark of the "Lovable" acquired by the company bears names of cities New York, Milan and Tokyo, in which the company doesn't have operations.
* The company's margins have been coming down from 16.7% in FY 2005-06 to about 12.3% in FY 2008-09, but just before the IPO have rebounded to 18.6% in FY 2009-10 and to 18.9% in the nine months ended December 2010.
* The company is into a highly competitive and labor-intensive sector of the textile Industry. In the current context of spike in yarn and fabric prices and the Union Budget 2011 slapping 6% (10% with 40% abatement) excise duty on branded apparels, it remains to be seen whether the margins achieved in the 9 months ended December 2010 are sustainable. Also, part of the IPO money will go for brand building (Rs 24 crore), most of which has to be written off through the P & L account over the next couple of years and, hence, can depress the profitability, if they are not able to step up volumes.

Outlook:

LLL has reported strong performance in the financials for FY 2010 with 26% increase in the top line at Rs 86.95 crore and more than threefold rise in net profit at Rs 10.55 crore. This was on the back of whopping 630-bp jump in operating margins to 18.6%. For the nine months ended December 2010, the company has reported improved OPM at 18.9% and surpassed the full year numbers in respect of the top line and bottom line.

The annualized EPS for the nine months ended December 2010 stood at Rs 10.0, resulting in a price to earnings (PE) multiple of 19.5 to 20.5 times at the lower and upper band of Rs 195 to Rs 205. While the textile sector is attracting low PEs, the comparable listed company Maxwell Industries and Page Industries trade at a P/E of around 19.3 and 28.1 times, respectively, on annualized nine months ended December 2010 EPS. While Page Industries and Maxwell Industries cater to the men, women and kids undergarments, LLL is asking for similar premium for its women undergarment business in mid and premium market segments. As about 26-27% of IPO proceeds are planned for brand building, much depends on the company's ability to significantly increase volumes and maintain margins, amidst rising yarn and fabric prices, and intensifying competition from organized and unorganized players.

via CM