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Monday, May 30, 2011

Timbor Home IPO Analysis


Timbor Home, a manufacturer- retailer in the door and furniture business, was originally incorporated as Inside Outside India Dot Com Private Limited on May 11, 2000, as an Internet portal for furniture and interiors. However, the concept did not take off properly, and the company was converted to public limited in June 13, 2009, and renamed as Timbor Home. Started by first generation promoters Anant Sureshchandra Maloo, Manan Vidyapati Patel and Abhijeet Dwarkadas Daga, the company is into manufacturing of door and door frames and kitchen baskets and accessories; and also operates as a manufacturer–retailer with pan India presence with 84 exclusive stores. More than 80 of its stores are operating on franchise model.



All the company's manufacturing units are in Gujarat. Its kitchen and furniture products are manufactured at the Changodar unit, stainless steel kitchen baskets and accessories at the Vatva unit and doors, wood treatments and storage at Umreth, Anand district. The total manufacturing facility is spread across 2 lakh sqft.

The products of the company include modular kitchen, home furniture, doors and treated & kiln dried lumbers. Being one of the largest retailers and manufacturers of modular kitchen, the company brands its products under flagship brand name, Timbor Cucine, in this space. Equipped with its own software for the customized modular kitchens, the company has its range of products from affordable range of Rs 25000. It has also introduced IKI Kitchens, high end modular kitchens with customized solutions, world class cabinetry, storage and shutters for high end markets. It has also launched a kitchen design institute (first of its kind in India) at its registered office. The company is also looking at corporate sale model under which it makes arrangements with builders and architects to supply interiors for their premises. Although it seems to be logical strategy, so far the progress on this front is limited. Further, home furniture range is marketed under the brand, Timbor Home. It has 5 Timbor Home Furniture showrooms on company lease and revenue sharing basis.

The share of revenues from modular kitchen increased to 60% for the nine months ended December 2010 against 22% in FY 2010 and 24% in FY 2009. On the other hand, the share of treated & kiln lumber has declined from 45% in FY 2010 to 11% in 9MFY 2011. Door & joinery constituted 17% of total revenues and home furniture 13% in 9MFY 2011. In January 2011, the company signed agreement with Reliance Digital Media for carrying out the business of modular kitchen and furniture in Reliance Fresh stores at Jaipur and Surat. Pursuant to agreement the company has opened store in Reliance Fresh on April 20, 11.

The company is coming out with an IPO to raise capital to facilitate purchase of new machinery, Establishment of new stores and for working capital requirements. It is offering 3.69 million equity shares of face value Rs 10 each at a price band of Rs 54 – Rs 63 per share. Accordingly, the company will raise Rs 19.93 crore to Rs 23.25 crore, based on the lower and upper band of the offer price. Major portion of the issue proceeds is skewed towards (a) working capital requirement at Rs 13.18 crore followed by (b) establishment of 20 new stores (COCO – company owned and company operated) in an average area of 5000 Sqft per store at Rs 4 crore and (c) plant and machinery Rs 2.60 crore. The commercial operations for the machines will be completed by Q4FY 2012 while that of establishment of stores will be done by end of FY 2013.

As a part of becoming largest player in modular kitchen and door industry in India, the company plans to increase production capacity of modular kitchens to 30 per day, door production to 700 doors per day and door frames to 1,000 sets per day. Backward integration into plantation of timber in 300 acres is also expected to guarantee supply for quality of raw materials at economical price in future. It also plans to increase retail outlets to 300 and no of distributors and dealers for doors to 200 at national level; and increase spend on brand promotion.

Strengths:

Being one of the largest retailer and manufacturer of modular kitchens with 84 exclusive Timbor Cucine Stores in more than 17 states; gives widespread network particularly in rapidly growing semi-urban market.
It also manufacturers almost 75% of the components that go into making of modular kitchen. Thus sourcing of major proportion of raw materials for modular kitchen should not be a problem.

Weakness:

The furniture market is low entry barrier business and is dominated by the unorganized sector. Moreover, the company has to face severe competition with European brands like Veneta Cucine, Aran Cucine, Poggen Pohl, Nolte, Hacker and Indian brands like Godrej, Zuari, Sleek, Reliance, Home Town in the modular kitchen business; Godrej, Style Spa, Durian, @home, Tangent in the home furniture business; and more regional players like Kutty, Kalpatru, Niki, Century, Green in the door and door frames business.
81 out of 84 stores of the retail stores of the company are franchise owned. Thus, the company has very high reliance on franchise revenues. The business becomes more risky as the current norms for franchise do not include any strict clause for termination and default to ensure against franchise stickiness. Further, the average size of franchise stores is 400 sq ft, which could restrict company from offering a variety of products.
Small player in organized furniture market with low brand recall.
As per the agreement with Brand Equity Treaties (BETL), the company has allotted 2,73,470 shares of Rs 10 each at premium of Rs 88 per share on 30 April 10. If the issue price is lower than Rs 98 at which the shares were issued to BETL, the promoters are liable to transfer such number of shares from their shareholding after the completion of the lock-in period so that Rs 98 match with issue price. As the issue price is now below Rs 98, the company promoters have to pay out around 0.84 – 1.54 lakh shares to BETL. Resultantly, the promoter's stake will decline to 46.4%-46.9%.
A sizeable portion of the issue proceeds will go to working capital. With intense competition from unorganized players on the one hand and better brand recall of some global and domestic players on the other, the company may be sandwiched between the two.

Valuation:

Timbor Home has posted Rs 54.83 crore of revenues and Rs 3.06 crore of net profit for the nine months ended December 2010, which is above FY 2010 numbers. The operating margins came down from 12.0% in FY 2008-09 to 10.6% in FY 2009-10, but could only inch up to 10.7% in the 9 months ended December 2010. The annualized EPS for the nine months on post issue equity of the company works out to Rs 2.8. At the offer price band of Rs 53- Rs 64 per share, PE works out to 19.1 – 23.1 times. There are no listed comparable companies. However, due to the highly competitive nature of company's business and little brand recall of company's products, the asking price is high.