Sudar Garments IPO Analysis

Incorporated in January 2002 and promoted by Murugan Muthaih Thevar, Sudar Garments is engaged in the business of manufacture of garments for men's wear, women wear and kids wear. It has manufacturing facility at Khalapur Taluk, Raigad District, Maharashtra. The company is an apparel manufacturer with capability of designing and manufacturing involving cutting, body stitching, washing, Ironing and finishing.



Initially set up with capacity of 150 sewing machines and other supporting machines for manufacturing of 3.5 lakh garments per annum in FY 2006, the company has expanded its capacity in phased manner and introduced assembly line approach for producing garments there by taking its capacity to 5 lakh garments in FY 2008, 8 lakh in FY 2009 and 20 lakh garments in FY 2010. This manufacturing facility caters to requirement of whole-sellers as well as own brand products through retail distribution networks like MBOs (multi branded outlets).

The company is coming out with an IPO to raise capital to facilitate the expansion of existing capacity, setting up the retail stores and for working capital requirements. It is offering 9.09 million equity shares of face value Rs 10 each at a price band of Rs 72 -77 per share. Accordingly, the company will raise Rs 65.43 crore to Rs 69.98 crore, based on the lower and upper band of the offer price.

It plans to expand its existing manufacturing capacity of 20 lakh pieces per annum to 30 lakh pieces per annum by FY 2011 and 45 lakh pieces per annum in FY 2012; with capex of Rs 26.29 crore. It also proposes to use Rs 27.30 crore of proceeds for the working capital requirements and Rs 5.90 crore for setting up retail outlets and brand building. The company is presently manufacturing under its own brand name ‘Glory to Glory" and will be launching two more brands namely "St. Paul" and "Majesty". It intends to have 25 retail outlets in major cities in South India, of which 10 would be owned shops and the rest franchisee based. All the retail shops will be operated under brand names – "Glory to Glory", "Majesty" and "St. Paul". The company has already identified sites for 10 owned stores – all in Chennai. It also plans to use Rs 6 crore for meeting general corporate purposes. Thus the entire total outlay of Rs 65.49 crore is to be met by the IPO proceeds only.

Strengths:

* Capacity utilization has been in increasing trend from 64% in FY 2008 to 82% in FY 2009 and 94% in FY 2010.
* On the financial front, company has reported 155% jump in the net sales at Rs 52.76 crore and whopping 599% increase in net profit at Rs 4.11 crore in the year ended FY 2010. Operating margin expanded by 260 bps to 17% in the year ended FY 2010. The spike in turnover was powered by more than two fold increase in its capacity from 8 lakh garments to 20 lakh garments per annum.

Weaknesses:

* Limited experience in handling retail or franchise business and existence of already strong retail chains and various brands in the market is a major threat to the company to establish and strengthen its retail share. Highly competitive retail market and spike in yarn and fabric prices exert pressure on margins.
* Despite having own brand "Glory to Glory", major part of the sales were to wholesalers and Merchant exporters. The company also lacks long-term export contracts.
* The Operations are subjected to high working capital requirements. It is fully dependent on the external suppliers for fabrics, which constitute 90% of the total raw material cost. Any material shortage or interruption in supply of raw materials and volatility in the prices will impact the business.
* The company's manufacturing operations are labor intensive and depend on the availability of the personal. Nearly 95% of the company's employees are employed on contract basis.
* The company derives 99% its revenues from just 5 customers. So any loss of one or more customers or reduction in their demand could adversely impact the business of the company. On the other hand, significant portion of the company sales (more than 95%) were on cash credit. Delays associated with the collection of receivables from the customers or receivables turning bad will adversely impact the business operations.
* The company has negative cash flows from operating activities in FY 2006, FY 2007, FY 2010 and H1 FY 2011 due to increase in the trade debtors and Inventories.

Outlook:

Sudar Garments has posted Rs 49.26 crore of revenues and Rs 4.08 crore of net profit for the half year ended September 2010, which is almost reaching FY 2010 numbers. The Operating margins improved to 19.5% in H1 FY 2011 against 17% in FY 2010. The annualized EPS for the six months on post issue equity of the company works out to Rs 4.8. At the offer price band of Rs 72- Rs 77 per share, PE works out to 14.9 – 15.9 times. Meanwhile, strong retail player (with very well established brands) like Kewal Kiran clothing is trading at 13.7 times on annualized EPS for 9M FY 2011. A more comparable player Bang Overseas is quoting at P/E of 3.9. On the other hand, vertically integrated textile and garment company - Mandhana Industries is quoting at 12.9 times.

There are two basic issues! Relative to smaller scale of operations, the company has disproportionately higher equity. Secondly, non-integrated apparel players (without own yarn / fabric manufacture) are witnessing fall in margins.

via BL