IPO Analysis : S. P. Apparels

S.P. Apparels :

Indian equity market is in a sweet spot and the soring indices are clearly indicating towards the same. And as the secondary markets are soaring, there has been a lot of buzz being witnessed in the primary markets as well. With some of the IPOs getting a great response and amazing listing gains, there was expected to be a line of IPOs tapping the markets. One thing however is noticeable and that is most of the business were a bit different from old economy companies. In simple terms it is the different business model of companies that attracted the investors towards IPOs. In such situation, one company with a plain vanilla business of garment manufacturing and exports is tapping the primary market floor.

Company name is S. P. Apparels is engaged in manufacturing and selling of knitted garments for infants and children in India. Company's product range includes body suits, sleep suits, tops, and bottoms.

Company also manufactures range of menswear garments consisting of shirts, polo shirts, T-shirts, trousers, jeans, sweaters, jackets and men's innerwear consisting of vests, briefs, boxer shorts and socks under the brand 'Crocodile' which is subsidiaries through an agreement with Crocodile International Pte Limited, Singapore.

As regards the manufacturing facilities, it operates 21 manufacturing facilities in and around the region of Avinashi in Tamil Nadu. Company has 4,874 sewing machines, eight cutting machines, 79 embroidery machines, 17 printing machines, 16,896 spindles and 22 dyeing machines. The company has two subsidiaries Crocodile Products Pvt Ltd and S. P. Apparels (UK).

They mainly export their products to United Kingdom. During FY16, the company exported approximately 35.98 million pieces of knitted garments for infants and children directly to its international customers, including TESCO and Primark. As regards the exports, the company for FY16 earned 86.13 percent of revenues. For FY15 and FY14 the exports were 84.62 percent and 79.84 percent respectively.

Company’s business can be divided into two segments viz garment segment (exports of knitted garment) and retail division (Crocodile retail brands). While we have already mentioned about contribution of export revenues, the Crocodile brand contribution for FY16 stood at 6.43 percent and For FY15 it was 3.39 percent. The company currently has 40 exclusive brand outlets of which 37 are owned and rest three are franchises.

Objects of the Issue

The offer consists of offer for sale and fresh issue. While the offer for sale proceeds would be going directly to exiting Private equity firm, the fresh issue proceeds will be utilised as follows. While Rs. 63 Crore will be provided for repayment of Debt expansion of 5000 spindles would require Rs 70 crore. Opening of new stores for Crocodile exclusive outlets will require Rs 28 crore. Expansion of dyeing facility would require Rs 4.9 crore. As regards the exclusive brand outlets, another 70 outlets would be added in next three years.

Financials and Conclusion

As regards the financial performance the company has posted decent performance in FY15 and FY16. For FY16 the company posted a topline of Rs 532.82 crore and EBITDA of Rs 90.14 Crore. The restated PAT for the quarter stood at Rs 34.71 crore. For FY15 the topline was Rs 472.56 crore and EBITDA stood at Rs 96.60 crore. The PAT was at Rs 10.04 Crore (including a MAT credit of Rs 6.88 crore).

We have certain concerns about the company. In 2006 the company had allotted the shares to Private equity firm at Rs 200. And after ten years that company is exiting at Rs 258-268. This is a clear indication that the company has not provided any kind of returns in last ten years. Further the margins are already at higher levels and we do not expect any margin improvement in coming years. Though the management has stated that the expansion would help them improve margins, we expect margins to remain under pressure. Further majority of its exports are to United Kingdom and hence the Brexit issue will surely affect its business. Further we feel the valuations are a bit stretched.

At higher price band of Rs 268 the number of shares for fresh issue to raise Rs 215 Crore will be around 88.23 lakh shares. The offer for sale of 9 lakh shares will raise Rs 24.12 Crore. On the extended equity the company even if manages to post 15 percent growth on bottomline, the higher price band price of Rs 268 would Result in P/E of idkar 19x. Which is much higher than the existing and much larger players like Gokaldas Exports etc. 

We feel the issue is better avoided by the investors.

Issue Details 

By Prasanna Bidkar