Mudra Lifestyle

Mudra Lifestyle

Vijaya Bank, Mudra Lifestyle

Vijaya Bank, Mudra Lifestyle

Mudra Lifestyle: Buy

An investment can be considered in the stock of Mudra Lifestyle. This recently listed textile company continues to trade well below its offer price of Rs 90. The stock, on Friday, reacted sharply to the strong earnings reported by the company; Mudra reported a 57-per-cent increase in revenues and a 90-per-cent growth in profits for FY07.

With significant capacities likely to come on stream in the first half of FY08, revenue and earnings growth is likely to be robust for the current year as well. At the current market price, the stock trades at less than 10 times its likely FY08 per-share earnings, assuming its expansion plans are commissioned as per schedule.

Textile stocks have been under pressure as a competitive export market, scaling-up challenges, and an appreciating rupee continue to weigh on performance. In this context, we favour companies such as Mudra Lifestyle that have a domestic market focus. The stock could serve as an indirect play on the domestic consumption theme.

Mudra has been a supplier of finished fabrics to garment manufacturers. It recently forayed into garments with the aim of supplying to local branded garment outfits. It appears to have garnered some orders from leading garment manufacturers, judging by the early traction in the garments business.

Mudra, with the help of offer proceeds, is tripling its garment capacities to more than 10 million pieces a year. It is simultaneously ramping up its weaving and processing capacities as well. Its garments division is likely to be operational in June. The long-term prospects for this business model appear bright.

Local branded players such as Madura Garments (Aditya Birla Nuvo) and Raymond are focusing on expanding their retail presence and are likely to look to outsourcing production to players such as Mudra. The bigger story is the demand from retailers such as Reliance and Bharti Wal-Mart as they look to stock stores with private labels.

It might take a year or two for the company to ramp up utilisations, with the new entrants yet to foray into garment retailing. Competition from exporters looking to diversify into the domestic market is also a risk. Any cooling off in prices following the sharp movement on Friday could be used as an entry point. Buy with a two-year perspective.

Mudra Lifestyle: Invest at cut-off

Investors with an appetite for risk can consider subscribing to the initial public offer of Mudra Lifestyle. The price band of Rs 75-90 values the offer at 20-24 times its annualised FY-07 per- share earnings, on a fully expanded equity base. The pricing would be 10-12 times its likely FY-08 earnings, assuming that the capex plans proceed on schedule. Our estimates factor in a strong growth in revenues on the back of significant capacity expansion and robust demand from domestic garment retailers over a two/three-year period.

Growth prospects would hinge on Mudra Lifestyle's ability to transition from a fabric manufacturer to a garments supplier (for which it has ambitious expansion plans). This is a major risk to our recommendation. Investments can be considered with at least a two-year perspective, as the full benefits of the expansion are likely to flow in only in FY-09.

Background

Mudra Lifestyle is a manufacturer of fabrics and garments, with a predominant focus — unlike most textile players that hit the market recently — on the domestic market. Till now, the fabrics business has been the major driver of revenues, accounting for close to 90 per cent of its Rs 100-crore income in FY-06. The garments business, which caters to the demands of domestic branded players, has begun to make a stronger contribution. In the first half of thisfiscal, the segment recorded an income of Rs 16 crore or about 25 per cent of the overall revenue against Rs 9 crore in FY-06. The growth has come on the back of some capacity expansion, but indicates that orders are beginning to flow into this segment.

Mudra is slowly increasing its thrust on the garments business. It is embarking on a Rs 180-crore project that would substantially expand its weaving, processing and garments capacity and help set up a new yarn dyeing facility. Its garment capacity alone will more than triple to 10 million pieces a year. The weaving and garment capacities will go on stream by May, while processing capacities will become operational in October. The Rs 80-crore raised from the offer will help to partly fund this project; debt of Rs 100 crore has also been raised under the TUFS scheme, which offers an interest subsidy.

Investment rationale

We view Mudra's presence in the domestic market as a positive. Realisations are likely to be stable relative to the export market where competition would exert considerable pricing pressure. More significant is the strong demand that is likely to flow in from branded apparel outfits and retailers. Branded players such as Raymond and Madura Garments are rapidly expanding their retail presence through their own outlets and multi-brand stores. As they commit more funds towards retail expansion, they are likely to outsource more of their production to players such as Mudra. The likes of Reliance Retail and Bharti too are likely to be on the lookout for units that can produce private labels. Against such a backdrop, Mudra's scale and integrated facilities would be seen as an advantage.

Second, a growing contribution from garments could lead to better margins (currently at 17 per cent) and a higher return on capital. Mudra hopes to achieve a revenue mix of 50:50 for fabrics and garments by FY-08.

Risks

Mudra's garments business is still at a nascent stage and could encounter challenges of scaling up, including managing a larger workforce and contracting orders from branded players, most of which have their own manufacturing units.

There are not too many listed players that cater to the demand from domestic brand manufacturers. However, there could be new entrants that would want to capitalise on the opportunity; Gokaldas Exports recently announced plans to cater to the needs of domestic branded players and retailers.

As retailers would want to diversify their sourcing base, this may not be a constraint in the medium term. Mudra might, however, have to carve a niche for itself as it begins to compete with players with a presence in the export market.

Offer details: About 96 lakh shares are on offer, which will raise Rs 80 crore at the upper end of the price band.

A pre-IPO placement has been made to SIDBI Venture Capital and SBI at Rs 75 a share. The lead manager is SBI Capital Markets. The offer closes on February 8.