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Mumbai/New Delhi: Analysts are expecting a mixed reaction to menswear manufacturing and retail company Koutons Retail India Ltd’s

Betting big: Chairman D.P.S. Kohli started Koutons Retail after an earlier television manufacturing venture, Apollo Television, was gutted during the 1984 anti-Sikh riots.

Koutons plans to raise 46 crore, through shares sold in a price band of 70 and 415 per share, to fund store expansion and build a new manufacturing unit. The company plans to offer 3.52 million shares and the price will be decided once the issue offering ends on 21 September. The company plans to open 140 stores in the next two years.

Some analysts are concerned that the company’s valuations are too high and its inventory pile-up may damp investor appetite.

“In line with the company’s widespread retail presence and expansion of its manufacturing facility, there was a significant increase of 283% (year-on-year) in its inventory level," in fiscal year 2007, said a report by Mumbai brokerage firm First Global.

Angel Broking Ltd and ICICI Direct have an “avoid" rating for the company’s offerings for this reason. “As a portfolio stock, this has too much risk," says Harendra Kumar, head of research at ICICI Direct. Angel Broking’s analyst Girish Solanki says that, at around Rs1,250 crore, the company’s valuation is too high because established competitors such as Raymond Ltd only have a market capitalization of Rs1,600 crore with the likes of Zodiac Clothing Co. Ltd at Rs350 crore.

The company’s inventory of Rs333 crore against sales of about Rs404 crore in 2006-2007 is raising serious concerns with analysts.

“We have reservations about the issue because of the large inventory base," said Hitesh Kuvelkar, associate director of research at First Global. First Global has said the issue has grave risk, but investors could get listing gains because of the current interest in the retail sector. Anand Rathi Securities, which gave the issue a “subscribe" rating, also raised the high inventory levels as a concern.

Koutons had revenues of Rs404 crore for the year ended March. The company, which started from a two-room office and an investment of Rs4 lakh in 1991, now has 999 outlets through which only Koutons or Charlie Outlaw, its lower priced menswear brands, are sold.

While both Koutons and Charlie Outlaw are discounted fashion brands, Charlie Outlaw is a deeply discounted youth brand. D.P.S. Kohli, the company’s chairman, started Koutons after an earlier television manufacturing venture, called Apollo Television, was gutted during the 1984 anti-Sikh riots. Kohli was forced to work as an insurance surveyor to pay off his loans before starting his jeans manufacturing business, called Charlie Creations, with his brother-in-law in 1991.

Kohli bet big and early on India’s nascent retail sector in 2004, deciding to sell only out of his own stores. Since then, the company has gone from having 27 stores to 999.

Its store network and countrywide presence is a key strength for the company because it “enables it focus its strategies on quality maintenance and customer satisfaction without interference from any external agency," says the Anand Rathi Securities report. But an already strong network would make it hard to add franchisees and grow at such a fast clip, Angel’s retail analyst, Solanki said. The company is currently adding a new store almost every day.

The company will use the proceeds of the issue to set up more stores, integrate manufacturing facilities and diversify into women’s and children’s wear.

Earlier this year, Vishal Retail Ltd raised money in a public share offer that was oversubscribed 69 times even though it opened on the same day as real estate giant DLF’s massive nearly Rs10,000 crore offering. A discount retailer, Vishal, raised Rs110 crore in that June IPO.

Last year, Gurgaon-based Koutons raised Rs122 crore selling 18% stake to UTI Venture Funds Management Co. Pvt. Ltd, Argonaut Ventures and other investors.

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