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Business News/ Money / Calculators/  Product Crack: Monte Carlo Fashions IPO
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Product Crack: Monte Carlo Fashions IPO

At the lower end of the price band, the stock trades at a P-E ratio of around 25 times

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Monte Carlo Fashions Ltd is planning to raise 342 crore-350 crore through the sale of 54 million shares via its initial public offering (IPO). Monte Carlo is a recognized winter clothing brand, and has branched out into cotton clothing and home furnishings.

The sale of shares is primarily to give an exit route to private equity (PE) investor, Samara Capital, which owns around 18.5% of Monte Carlo’s equity capital. After the issue, Samara Capital’s share will come down to around 11%. The rest of the shares are being sold to raise public shareholding to 25%, a requirement by the Securities and Exchange Board of India.

WHAT’S GOOD…

Monte Carlo operates through multi-brand stores and a large distribution network of exclusive stores (196). The management has indicated that nearly 80 more exclusive stores may be added by financial year (FY) 2017. Although margins from multi-brand stores are higher, a bulk of the exclusive stores are franchisee-run, which keeps costs low. The company gets over 50% of its revenue through multi-brand stores (1,300). It plans to have a mix of the two distribution channels.

In terms of financials, the company has very low debt, and the management indicated there was no immediate need to add more at this point. The debt to net worth ratio is a low 0.22 times despite steady growth. The company’s revenue grew at a compounded annual growth rate (CAGR) of around 17% over the past three years, coupled with an earnings before interest, tax, depreciation and amortization (Ebitda) margin of about 20%.

...WHAT’S NOT

Some analysts have raised concerns about the fact that the brand and logo of Monte Carlo hasn’t been registered yet, despite the company being in business since 1984.

Moreover, profit growth for the past three years has been 5.75% CAGR, which seems low. Return on equity, too, falls just short of 15%.

Also, the business being inherently seasonal is a risk. The company’s revenue generation in the new markets of southern and western India will depend on how well it is able to build and drive a multi-channel distribution system. Its franchise model can be both a strength and a liability if not driven in the right manner.

Added to this, analysts point out that the complex inter-company linkages within the group need to be studied carefully.

VALUATIONS

The IPO’s price band has been fixed at 630-645; at the lower end the stock trades at a price-to-earnings (P-E) ratio of around 25 times. Listed companies in the retail space are known to have high P-Es despite limited profitability, however, this being an unorganized sector profitability can be volatile. But the Monte Carlo brand recognition may support valuations.

Be mindful of the risks if you want to subscribe to this IPO. Investing in IPOs is always a risky proposition since there is limited information about a company available in the public domain. Moreover, high oversubscription might result in a very small allotment compared with your application amount.

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Published: 03 Dec 2014, 06:39 PM IST
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