Steep valuation for loss-making brands is the current fashion of Indian capital market!
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GO FASHION OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Offer Size | Rs 1014 Cr |
| Fresh Issue | Rs 125 Cr (18,11,564 equity shares) |
| Offer for Sale | 12878389 equity shares (Rs 889 Cr) |
| Face Value | Rs 10 |
| Price Band | Rs 655 – 690 |
| Mkt/Bid Lot | 21Nos. |
| Implied M-Cap | Rs 3727 Cr |
| Implied Equity Cap | Rs 54 Cr |
| Free Float | 47.21% |
| Lead Manager | JM Financial, DAM Capital and ICICI Sec |
| Registrar | KFin Technologies |
| Listing | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening :17-Nov-2021 | Closing :22-Nov-2021 |
| Allotment :25-Nov–2021 | Refunding :26-Nov-2021 |
| DematCredit :29-Nov-2021 | Trading :30-Nov-2021 |
The Offer
The Chennai-based Go Fashion (India) Ltd (GFIL) is entering the capital market with an equity offer that comprises of a fresh issue of Rs 125 Cr (about 18.11 lakh equity shares) and an offer for sale of 1,28,78,389 equity shares ( equivalent to Rs 889 Cr) from five existing shareholders, including two promoter-shareholders. The offer is being made through the book-building route with a price band of Rs 655-690 for Rs 10 paid-up share.
Applicants for the IPO should bid for a minimum lot of 21 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on Tuesday, November 30, 2021. JM Financial, DAM Capital Advisors and ICICI Securities are acting as managers to the offer. KFin Technologies has been roped in as registrar to the issue. The bidding opens on Wednesday, November 17, 2021 and closes on Monday, November 22, 2021.
The company proposes to utilize the net proceeds from the fresh issue towards setting up of 120 new exclusive brand outlets (Rs 33.73 Cr), funding working capital requirements (Rs 61.40 Cr) and general corporate purposes (balance amount).
Lineage
Though Rahul Saraogi and Gautam Saraogi were the initial subscribers to the Memorandum of the 2010-incorporated GFIL, the company presents Prakash Kumar Saraogi, Gautam Saraogi, Rahul Saraogi, PKS Family Trust and VKS Family Trust as its promoters.
Floated as an exclusive bottom wear brand for women, GFIL has wholly remained in the women’s bottom wear category and extended its portfolio within. The company reportedly opened its first Kiosk in Chennai in the year 2011 and opened its first store in Chennai in 2014.
GFIL’s `Go Colors’ has been the earliest brand focused exclusively on the women’s bottom wear industry. In fact, GFIL is termed as the first company to launch a brand exclusively dedicated to the women’s bottom wear category. Go Colors claims to offer one of the widest portfolios of bottom wear products among women’s apparel retailers in India in terms of colours and styles.
The promoters of the company seem to have extensive industry experience. Prakash Kumar Saraogi has over three decades of experience in the apparel industry while Gautam Saraogi has over 10 years of experience in garment manufacturing, sourcing, marketing and brand building.
With capital infusion from private equity funds managed or advised by Sequoia Capital and ICICI Venture in fiscals 2014 and 2018, GFIL has achieved impressive growth in operations in its first decade. In seven years the company has established more than 450 stores with presence across 100 cities.
Key Management
The promoters themselves hold the top management positions in the company. Prakash Kumar Saraogi (63), who holds a bachelor’s degree in chemical engineering, is the Managing Director. P K Saraogi’s son, Gautam Saraogi (33), who holds a bachelor’s degree in commerce, is the Executive Director and the Chief Executive Officer of the company. P K Sarogi’s nephew, Rahul Sarogi, has been designated as a non-executive director.
Ravi Shankar Ganapathy Agraharam Venkataraman, who has over 15 years of experience in private equity funds, is a non-executive nominee director on the board. Previously he was associated with McKinsey & Company and now he is with Sequoia Capital India LLP as managing partner.
Stakeholders
Of the pre-IPO equity capital of Rs 52.20 Cr, Prakash Kumar Saraogi Family Trust and Vinod Kumar Saraogi Family trust hold 28.7% each. The non-promoter stake of 42.53% is held by Sequoia Capital India Investments IV (28.73%), India Advantage Fund S4 I (12.69%) and Dynamic India Fund S4 US I (1.1%). Post-IPO, on the enlarged capital of Rs 54 Cr, the promoters’ family trusts will hold 26.39% each, Sequoia Capital will control 13.88% and India Advantage Fund will have 6.13%. Incidentally, the cost of holding of the four large shareholders, who will control 72.8% of the equity, will be negative as they would recover from the offer for sale more than what they had invested in the company.
Business Model
Go Fashion is a women’s bottom-wear brand in India, with a reported market share of about 8% in the branded women’s bottom wear market. The women’s apparel market is estimated to be approximately 36% of the total apparel market while the women’s bottom wear market contributed 8.3% of women’s apparel market in fiscal 2020. GFIL reportedly undertakes product development, design, sourcing, marketing and retailing of wide portfolio of women’s bottom wear apparel under its “Go Colors” brand of clothing. The company markets its products across India through multiple sales channels.
GFIL serves its customers primarily through its extensive network of 459 EBOs (including 12 kiosks operated on a “company owned and company operated” (COCO) model and 11 franchise stores) that are spread across 23 states and union territories in India, as of September 30, 2021. The EBOs are located in high streets, malls, residential market areas in major metros, large cities and other tier II and tier III cities and at airports.
GFIL’s distribution channels also include large format stores (LFSs) including Reliance Retail, Central, Unlimited, Globus Stores, Spencer’s Retail, etc. The company’s number of LFSs grew from 925 in March 2019 to 1,270 as of September 30, 2021. In addition, the company sells its products through its own website and online marketplaces and through multi-brand outlets (MBOs).
Financial Track
GFIL posted a highly impressive performance in its tenth year of operations. It earned an operating profit of Rs 126.51 Cr (32.3% margin) on Rs 392 cr revenue in fiscal 2020. Nevertheless, the outbreak of the COVID-19 pandemic and its continuing impact, as well as government measures to reduce the spread of COVID, have had an adverse impact on the company’s operations since last week of March 2020.
In Q1FY21 revenue dropped down to meager Rs 10.31 cr on which the company incurred an operating loss of Rs 15.21 Cr. With the help of an exceptional gain of Rs 9.56 cr on account of COVID rent concession net loss was reduced to Rs 8.60 cr. For the whole fiscal 2021, the company could post Rs 250 Cr revenue but, operating margin slid from 32.3% in March 2020 to 18.5% in March 2021.
In the first quarter of current fiscal, on Rs 31 Cr revenue, operating loss stood at Rs 5.92 Cr. With a gain of Rs 8.27 Cr from COVID rent concession net loss was contained at Rs 19 Cr. As the COVID situation has vastly improved in the second half of 2022, GFIL’s working too should be far better than the first half. However, it is unlikely to overtake the peak performance of fiscal 2020.
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Go Fashion Financials (in Cr) |
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| Period Ended |
Jun-21 |
Mar-21 | Jun-20 | Mar-20 |
Mar-19 |
| Months |
3 |
12 | 3 | 12 |
12 |
| Revenue |
30.99 |
250.67 | 10.31 | 392.01 |
285.25 |
| Operating Profit* |
-5.92 |
46.35 | -15.21 | 126.51 |
79.99 |
| OPM % |
-19.1 |
18.5 | -147.6 | 32.3 |
28.0 |
| Other Income |
1.02 |
6.06 | 0.88 | 4.83 |
5.73 |
| EBIDTA* |
-4.88 |
52.42 | -14.32 | 131.33 |
85.72 |
| EBIDTA % |
-15.2 |
20.4 | -128.0 | 33.1 |
29.5 |
| Interest |
5.71 |
20.57 | 5.16 | 16.47 |
11.38 |
| Depreciation |
16.05 |
60.5 | 14.59 | 46.57 |
32.13 |
| Net Profit |
-18.99 |
-3.64 | -8.60 | 52.48 |
30.66 |
| Equity (Implied) |
54.01 |
30 | 30 | 30 |
30 |
| Reserves (Implied) |
334.89 |
203.94 | 198.72 | 207.31 |
149.34 |
| Fixed Assets |
271 |
267.6 | 273.4 | 263.1 |
187 |
| * excluding COVID Rent Concession |
8.27 |
25.52 | 9.56 | 0 |
0 |
Valuation
As GFIL has no positive bottom line it is very difficult to compare its pricing with its peers. As a matter of fact, barring Page industries, most of the branded garment retailers are currently incurring losses. A comparable peer in branded women’s garment retail space, TCNS Clothing, too is in red. TCNS is currently traded 8 times its book value as well as revenue. Compared to this, at the upper price band, GFIL is priced 9.6 times book value and 15 times revenue.
GFIL’s current working cannot justify the offer price of Rs 690. The price discounts the company’s peak earnings of fiscal 2020 about 70 times which may hold under boom conditions. Nevertheless, when the markets take a turn, such steep valuation is unlikely to sustain unless the company significantly improves its operational performance.
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HOW GO FASHION COMPARES WITH TCNS CLOTHING |
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Financials |
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| (Amount in Cr) |
Go Fashion |
TCNS Clothing |
| Market Cap |
3727 |
4929 |
| Borrowing |
10 |
18 |
| Fixed Assets |
268 |
300 |
| Revenue |
251 |
636 |
| Other Income |
32 |
49 |
| EBIDTA |
78 |
51 |
| Interest |
21 |
36 |
| Net Profit |
-4 |
-56 |
| Equity Cap |
54 |
12 |
| Reserves |
335 |
600 |
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Stock Features |
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| Current Price (Rs) |
690 |
801 |
| Face Value (Rs) |
10 |
2 |
| Book Value |
72.01 |
99.47 |
| Promoter Stake % |
52.79 |
32.31 |
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Profitability |
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| OPM % |
18.5 |
0.4 |
| Net Margin % |
-1.3 |
-8.2 |
| Cash EPS |
10.53 |
5.78 |
| Earnings Per Share |
-0.67 |
-9.16 |
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Discounting |
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| Price/Earnings |
– |
– |
| Price/Book Value |
9.58 |
8.1 |
| Price/Revenue |
14.9 |
8.0 |
Concern
- The company has taken a warehouse on a monthly rent of Rs 13.1 lakh (Rs 1.86 Cr annually) from one of the group companies, Meridian Global Ventures Private Ltd, where the promoters are directors.
- Barring Page Industries (EPS Rs 305.35), apparel retailers in the listed space (Trent, Aditya Birla Fashion, TCNS Clothing, etc.) are currently into losses.
- While the public company was into loss, promoters’ closely held company, Meridian Global, which is reportedly engaged in the business of manufacturing, dealing, importing, exporting, trading in all types of fabrics, garments, apparels, dresses, etc., has made profit in fiscal 2021.
- Since nearly 73% of the equity will be held by the promoters and private equity funds at free of cost (negative cost), after the lapse of the lock in period, the stock may encounter selling pressure.