Peer comparison may look attractive though promoter-group record would advise caution.

Between 1989 and 1996 Ludhiana-based Oswals floated as many as thirteen capital issues worth Rs 638 cr (considered big amount in those days) under eight different banners. After various restructuring and re-arrangements, the number of companies has been reduced to four. None of the companies fulfilled the pre-issue promises. Even after 25 years, the market capitalization of the group is worth only1.4 times of the money raised from the shareholders. But, that does not deter the group from asking an exorbitant price of Rs 630-645 a share at a valuation of Rs 1400 cr for a non-dividend paying company!

OFFER AT A GLANCE
Name	Monte Carlo Fashions Ltd
Quantum	Offer for Sale of 54.33 lakh shares
Offer % on Total Equity	25% on Rs 21.73 cr
Post-IPO Promoter Stake	63.6%
Offer Price	Between Rs 630 and Rs 645
Offer Amount	Between Rs 342 cr and Rs 350 cr
Fresh Issue Amount	NIL
Application Quantity	23 & Multiples of 23
Bid/Offer Opens	December 3, 2014
Bid/Offer Closes	December 5, 2014
Book Running Lead Managers	SBI Cap, Axis Capital, Edelweiss & Religare
Registrars	Karvy Computershare

 

The IPO

The present IPO is an offer for sale of 54,33,016 equity shares of face value of Rs 10 each made through 100% book building process with a price band of Rs 630 to 645 per share aggregating to Rs 342 cr to Rs 350 cr. The group chairman, Jawahar Lal Oswal whose average cost was Rs 48.76, is offering 7,11,466 shares, promoter-director Dinesh Oswal whose cost is Rs 54.15 is selling 4,45,352, another promoter-director, Kamal Oswal whose cost is Rs 50.91 is offering 87,289 shares.

The largest chunk (16,46,420 shares) is offered by Kanchi Investments Ltd, a Mauritius subsidiary of Samara Capital which acquired the shares in June 2012 at a price of Rs 435. The promoters closely held companies viz Oswal Woollen Mills Ltd, Abhilash Growth Fund Pvt Ltd and Vanaik Investors Ltd, whose average cost is not available, are offering 9,10,570 shares, 11,77,168 shares and 4,54,751 shares respectively. Post-offer for sale, the promoters and their group propose to hold 63.63%. The offer is jointly lead-managed by SBI Capital, Axis Capital, Edelweiss Financial and Religare Capital.

 

Issue Objective

Being an `offer for sale’ the entire issue proceeds would go to the selling shareholders. As such the IPO will not make any impact in the operations of the company. In fact, the objects of the offer are to achieve the benefits of listing the shares on the stock exchanges and enable the selling shareholders to cash partial stake.

 

Background

Monte Carlo Fashions Ltd (MCFL) is a relatively new company, incorporated in 2008 as a subsidiary of Oswal Woollen Mills Ltd (OWM) – the `flagship’ of the Ludhiana-based Oswals. Launched in 1984 as an exclusive woollen brand by OWM, Monte Carlo is one of the leading Indian apparel brands based on revenue. It primarily caters to the premium and mid-premium branded apparel segment for men, women and kids, offering a comprehensive line of woollen, cotton and cotton-blended knitted and woven apparel and home furnishings through ‘Monte Carlo Exclusive Brand Outlets’ and MBOs, including a network of national chain stores under the ‘Monte Carlo’ brand.

The company operates two manufacturing facilities in Ludhiana (Punjab), one for woollen apparel products and another for cotton apparel products. The manufacturing facilities include product development, design studio and sampling infrastructure. Almost all its woollen knitted products are reportedly manufactured at the in-house facility. In June 2012, Samara Capital, a Mauritius based India focused private equity firm, through its affiliate, Kanchi Investments Ltd, acquired a stake in the Company which amounts to 18.51% of the pre-offer capital of the Company.

 

Financial Track 

Though floated in 2008, MCFL has reported operations only since fiscal 2012. Also, notwithstanding its two manufacturing facilities, the company’s operations are still dominated by trading. In fiscal 2012, trading turnover amounted to Rs 212 cr as compared to manufacturing sales of Rs 185 cr. In fiscal 2014, while manufacturing sales accounted for Rs 212 cr (42%), trading amounted to Rs 291 cr (58%). In the first quarter of current fiscal, manufacturing sales accounted for just 18% (Rs 13 cr) whereas trading amounted to 82% (Rs 61 cr).

Interestingly, unlike other trading-dominated garment companies, MCFL has posted impressive operating margins (17% to 24%) in the last four years. The margin becomes all the more suspect as MCFL extensively deals through its parent company, OWML, with regard to purchase of goods and raw materials. The company reported a very impressive bottom line of around Rs 50 cr against a capital base of less than Rs 19 cr in the very first year. Within three months, it placed 2.87 million shares with Kanchi Investments at a hefty price of Rs 435. Strangely, next year, despite reduced interest cost and lower taxation, the company’s bottom line dipped marginally.

 

Valuation 

In the readymade garments space, leading players like Kitex Garments and Kewal Kiran Clothing are enjoying a P/E of more than 30 while a more popular brand Zodiac is commanding a P/E in excess of 40. As compared to the current discounting of Kitex and Kewal Kiran, MCFL’s offer price indeed gives a lower multiple on various parameters. But, OWM-Nahar group’s own discounting on the trading floor does not exude optimism for MCFL on the trading screen. None of the Nahar group companies is discounted by the market even equal to the book value. The most popular listed company of the group, Nahar Spinning, is currently valued at only 2.5 times its earnings, 0.5 time net worth, 0.4 time net block and just 0.2 time its sales! Nahar Industrial is priced 3.5 times its earnings, 0.4 time book value, 0.3 time net fixed assets and just 0.1 time sales. No wonder, the promoters have adopted a `phoren’ name instead of Nahar for their garment business.

HOW MONTE CARLO COMPARES WITH PEERS
CO_NAME	M-CAP	EQ	P/E	P/BV	P/R	P/NB	OPM	YLD	PRICE
	(Rs)		(x)				(%)		(Rs)
Kitex Garments	2,517	4.75	38.0	14.5	5.3	13.6	25.9	0.2	529.95
Kewal Kiran Clothing	2,263	12.33	34.4	7.8	5.7	54.0	23.2	1.1	1,835.55
Zodiac Clothing	763	19.41	44.8	2.9	1.9	5.8	5.5	1.1	393.00
Monte Carlo – Hi Band	1402	21.73	25.3	3.7	2.8	7.5	18.7	0	645.00
– Low Band	1369	21.73	24.8	3.6	2.7	7.3	18.7	0	630.00

 

Concern

Even though the promoters’ stake would be more than 63% in MCFL, their cost of holding is abysmally low. Also, the group’s past record is frightening. In fact, the reasons for the pathetic market discounting of the group companies are not far to fetch. The Nahar group (formerly known as OWM group) controlled by the Jawahar Lal Oswal family,  in the past, put up impressive shows posting fabulous earnings in some of its group companies. But that was only before raising funds from capital market. There was no consistency in the group companies’ performances. Moreover, the group never demonstrated their concern for the shareholders.

The common shareholders’ complaints against the group were: AGMs were invariably delayed; Annual reports reached shareholders after the AGM; Dividend warrants were posted almost towards the end of next accounting year. The attitude of the group clearly indicated that the management was least bothered about the public shareholders’ feelings. Whenever they wanted money, they lured the investors with incredible performances and rosy projections. But, once the fund-raising exercise was over, the incredible show simply disappeared!

Surprisingly, the Nahar group’s past dismal post-issue performance vis-à-vis their pre-issue promise does not get a mention in the group’s latest offer document. It is understandable, present-day merchant bankers do not want to remember the past record of their clients. But, how come the market regulator Sebi has turned a blind eye on Nahar’s past omissions and commissions? Has the `levy-mongering’ watch dog deliberately allowed the Oswals to suppress their past record in the present document so that it can levy a hefty penalty in future? Nothing can be ruled out in this country!   

FUND RAISED BY OWM-NAHAR GROUP DURING PREVIOUS BOOMS
YEAR/MONTH	COMPANY NAME	ISSUE	AMOUNT
		TYPE	RS (Cr)
1989	Nahar Spinning Mills	Rights	12.00
1989 February	Oswal Fats (now Nahar Industrial)	Public	7.20
1991 February	Nahar Exports (now Nahar Poly)	Public	10.20
1992 February	Nahar International (now Nahar Industrial)	Public	20.08
1992 May	Nahar Spinning Mills	Rights	46.13
1993 February	Nahar Industrial Enterprises	Public	57.00
1994 January	Nahar Sugar (now Nahar Industrial)	Public	22.00
1994 March	Nahar Spinning Mills	Rights	60.15
1994 April	Nahar International (now Nahar Industrial)	Public	23.60
1994 September	Nahar Exports (now Nahar Poly)	Rights	68.62
1995 January	Nahar Fibres (now Nahar Poly)	Rights	82.08
1995 May	Nahar Fabrics (now Nahar Industrial)	Rights	20.40
1996 January	Nahar Spinning Mills	Rights	209.00
		TOTAL	638.46