Lovable Lingerie IPO Analysis

With strong brands in its kitty, presence in both mid-market and premium segments, a wide network of dealers and low debt, lingerie maker Lovable Lingerie is a good, if high risk, bet on the niche textile space.

The company's future plans rely on heavy advertising spends, which will compress margins in the near-term. Capacity additions will fully come onboard only FY-13 onwards.



This, together with its relatively small-sized operations and low market capitalisation, makes the Initial Public Offer of Lovable a tad risky. Investors with a high-risk appetite and a long-term horizon can subscribe to the offer.

At the upper end of the price band of Rs 195-205, the offer values the company at 15.7 times estimated earnings for FY-12 on post-issue equity. The market capitalisation would stand at Rs 240 crore (at upper end of price band). Innerwear maker Page Industries trades at a much higher premium, but also has much larger operations.
Brands, stores and expansion

Lovable manufactures and retails women's innerwear brand Lovable, a premium offering, and Daisy Dee, a mid-market offering with a wider distribution presence.

While textile players usually have limited pricing power and operate at relatively low margins, makers of branded innerwear occupy an attractive niche in the market. The experience with listed innerwear maker Page Industries suggests that they benefit from the non-discretionary nature of their product offerings.

Operating margins for Lovable improved from 12 per cent in FY-08 to 19 per cent in FY-10 on efficiencies in manufacturing, employee and advertising costs. For the April-December '10 period, operating margins further improved to 20 per cent even as cotton prices, its key raw material, embarked on a steep uphill climb.

Lovable's premium product line addresses a market that is willing to fork out more for a better fit, style and comfort. However, this market is also small, and Lovable spars with brands such as Enamor and Triumph. The mid-market product line, therefore, serves to reduce segment concentration and broaden market reach.

Lovable currently caters to the women's segment alone, but this segment makes up over half the innerwear market. It plans on launching men's lines, but that may require transitioning a quintessentially women's brand into men's or building a new one from scratch.

The company also plans to extend its brand into sleep and home wear, since it already has presence in leisure wear. Such diversification allows it to tap new market segments to drive revenue growth. However, these new avenues will take a few quarters yet to make a significant contribution to revenues. The company already retails products through shop-in-shops in large-format stores such as Shoppers Stop besides multi-brand lingerie stores. It has a sizeable outlet reach at 1,425. Rs 17.7 crore from issue proceeds will fund setting up of 60 exclusive brand outlets (EBO), a first for this company, and 104 shop-in-shops, over the next two years.

The EBO format may help boost profit margins and innerwear sales growth as it allows wider and deeper stocking of products. It could also draw more customers who wish to exclusively shop for Lovable's brands.

Rs 22.85 crore will fund capacity ramp-up while Rs 7 crore will be used to develop its in-house design studio. Rs 25 crore will be used to invest in a joint venture with UK-based Lifestyle Galleries of London to bring in their premium brand ‘London Calling' for men and women's innerwear to India, besides manufacturing for export markets. With global consumption showing signs of recovery, exports could boost revenue growth.
Advertising and brand building

London Calling aside, Lovable acquired ‘College Style' an affordable innerwear brand aimed at young women, a fast-growing market segment. Towards taking this brand national, Lovable plans to use Rs 6 crore for advertising and promotion.

The affordable innerwear market is largely unorganised and fragmented, and already has brands such as Bodyline, and Lovable's own Daisy Dee. Creating a new national brand will, therefore, take a long time. A further Rs 18 crore will be utilised for building Lovable and Daisy Dee brands.

Advertisement as a proportion of revenues reduced from 26 to 18 per cent between 2008 and 2010, helping margin improvement. However, with renewed ad spend for its new and existing brands, the proportion is likely to rise, pressuring profit margins.
Revenue and profit growth

Lovable posted a three-year compounded annual growth of 28 per cent in revenues and 49 per cent in adjusted net profits to Rs 87 crore and Rs 11 crore in FY-10.

However, depreciation, currently accounting for about 2 per cent of revenues, may increase on capacity additions and store openings. Net margins for FY-10 stood at 15 per cent against the 7 per cent in FY-08. It also operates on very low debt, and improved working capital cycle from 4.2 to 8.8 times, and inventory turnover from 91 to 56 days, on par with peers between FY-08 and FY-10. .
Issue details

The issue is open March 8 to 11. On offer are 45.5 lakh shares. Anand Rathi is the lead manager to the issue. The company plans to raise Rs 93.28 crore at the upper end of the price band.

via BL