Risks galore!

Loose fundamentals, excessive related-party dealings, unconvincing profitability, restricted market, corporate governance and credibility issues, etc. etc. make Sai Silk a risky proposition. Such IPOs were seen in abundance during the mid-nineties’ primary market boom. Incidentally, Sai Silks is privately advised by consultants who were associated with many a vanishing company of the nineties-vintage!

OFFER AT A GLANCE
Name	Sai Silks (Kalamandir) Ltd
Public Offer	Fresh issue of 118 to 127 lakh  shares
Offer Price	Between Rs 70 and Rs 75
Offer Amount	Rs 89 cr
IPO% on Total Equity	37 to 38.6%
Post-IPO Free Float	37 to 38.6%
Application Quantity	200 & Multiples of 200
Bid/Offer Opens	February 11, 2013
Bid/Offer Closes	February 13, 2013
IPO Grading	ICRA
Grade	2 out of  5
Lead Managers	Ashika Capital, Vivro Financial
Registrars	Bigshare Services

 

The Offer

The Hyderabad-registered Sai Silks (Kalamandir) Ltd (SSKL) is floating its maiden public issue valued at Rs 89 cr. At the price band of Rs 70-75, the quantum of issue works out to between 118 and 127 lakh shares constituting 37 to 38.6% of the post-IPO equity.

 

Issue Object

Though the first object of the IPO reads as `setting up of retail outlets’, a significant portion (Rs 60 cr) of the issue proceeds (Rs 89 cr) is actually earmarked for long term working capital. Setting up of retail outlets amounted to only Rs 12.73 cr of which Rs 10.35 cr is meant for interiors and Rs 2.38 cr is to be distributed as Security/Lease Deposits. About Rs 8.50 cr is to be spent on promoting brands owned by promoters.

 

IPO Grading

ICRA has assigned an IPO Grade 2, indicating below-average fundamentals. The rating has factored in SSKL’s established presence of “Kalamandir” brand in Bangalore and Hyderabad; Favourable location of its stores with long term lease agreements; Expanded market with the recent launch of two new brands: ‘Mandir’ targeted at the premium segment and ‘Varamahalakshmi’ targeting the low to medium segment customers; Strong revenue growth at a CAGR of 27% over FY 09 – FY 12; Established relationship with weavers; Improving operating margins year-on-year, from 6.8% in FY 10 to 11.2% in FY 12; Buoyant market for women’s wear, especially branded ethnic wear, etc.

However, the rating was constrained by the following:

• SSKL’s growth is driven only by new store sales – sales from existing stores registered a marginal decline of 1%.
• Future growth would have to be driven by expansion in number of stores-thus incremental growth would come at a cost.
• Given the slow pace of expansion in the past (company had incurred around Rs. 22 crore over the last five years for setting up 12 stores).
• Company has limited geographical presence with stores located in Bangalore (64%) and Hyderabad (24%) contributing 88% of total revenue. Any disruption to business at these locations would have adverse impact on the turnover.
• Working capital intensive nature of the retail business.
• Inventory remains susceptible to markdowns.

 

Promoters and Management

SSKL is promoted by Chalavadi N K Durga Prasad and his wife Chalavadi Jhansi Rani. Earlier, Prasad has reportedly worked with SAP Labs in ERP domain as a consultant. The promoters are directly involved in the day-to-day operations of the company. Currently, the promoters and their relatives hold almost the entire capital of the company. The Board of Directors comprises of three whole time directors and three independent directors, thereby satisfying the Clause 49 of the Listing agreement on corporate governance. Nevertheless, none of the directors has a proven public company record to speak about.

 

Track Record

Founded in 2005 as a partnership firm and converted into a public limited company in 2009, SSKL is primarily a saree retailer with its presence in the states of Andhra Pradesh, Karnataka and Tamil Nadu. SSKL operates fifteen retail stores out of which six are in Bangalore, five in Hyderabad, one each in Guntur, Vijayawada, Hanamkonda and Kanchi. These fifteen showrooms are spread over more than 129,035 square feet. SSKL also has a 2MW wind mill unit located in Kurnool district of Andhra Pradesh which commenced operations during FY-11.

 

IPO Valuation 

SSKL has priced its IPO to get a valuation of more than Rs 230 cr. How does it compare with the peers in the textile retailing segment? Though the company claims that there is no comparable peer group, the other textile retailers in the listed domain indicate that Sai Silks has opted for a steep valuation. The most recent entrant to the market, Anshu’s Clothing is currently traded about 1.1 times of its net worth and 0.7 times of its current revenue. Anshu’s has an OPM of 6.7% and a P/E of 38.5x. SSKL has reported an OPM of more than 11% and its P/E at the upper end of the band works out to 13x.

Though SSKL looks cheaper as compared to Anshu’s in terms of P/E multiple , SSKL’s profitability is suspect as the company is carrying heavy inventories whose marked-to-market loss is booked only once in five years. Whenever the valuation took place, the company’s margins have slumped. Another critical aspect is more than 90% of SSKL’s purchases are made from two group companies of the promoters whose profit margin is abysmally low. In other words, the public company’s margin may suffer as and when the promoters decide to shift the profits to their closely-held companies. 

How Sai Silks compares with listed textile retailers
CO NAME	COS	M-CAP	PE	P/BV	P/FV	P/R	OPM	PRICE
		(Rs Cr)	(x)					(Rs)
Provogue (India)		147	7.6	0.3	12.9	0.2	9.2	12.87
Brandhouse Retails		60	25.9	0.4	1.1	0.1	6.0	11.13
Anshu’s Clothing		19	38.5	1.1	3.1	0.7	6.7	30.90
Thomas Scott		3	–	0.3	1.0	0.3	–	10.16
Tex Retail Compo	4	230	14.1	0.3	3.1	0.2	6.9
Market Compo	2,923	6,783,597	15.7	2.2	30.7	1.3	22.7
Sai Silks	Hi-band	241	13.0	3.2	7.5	0.9	11.4	75.00
	Lo-band	231	12.1	3.0	7.0	0.9	11.4	70.00

 

Investment Banker’s Track

SSKL had originally planned to float the IPO in 2009. That time the issue was proposed to be managed by a little known investment banker, Vivro Financial Services. For reasons best known only to Sebi, it took more than a year to clear the offer document. It is high time Sebi reveals the reasons for the inordinate delay and throws some light on its observations in the interest of the prospective investors.  

The IPO is now lead-managed by Ashika Capital along with Vivro Financial. In the last five years, Ashika has associated with ten IPOs of which just two are quoting above the offer price. As many as seven IPOs have inflicted losses in excess of 85%! As regards Vivro’s record, SSKL is the first IPO handled by merchant banker in five years.  The last issue lead-managed by Vivro is currently quoting at 25% discount.  

Ashika Capital-associated IPOs
ISSUER	ISSUE	IPO	CURRENT	GAIN
	DATE	PRICE	PRICE	%
Resurgere Mines	8/11/2008	90	1.14	-98.7
Edserv Softsystems	2/5/2009	60	8.43	-86.0
Rishabhdev Technocab	6/4/2009	33	2.62	-92.1
Birla Shloka Educate	1/11/2010	50	5.01	-90.0
Tirupati Inks	9/14/2010	43	4.87	-88.7
Bedmutha Industries	9/28/2010	102	12.09	-88.1
Sudar Industries	2/21/2011	77	152.65	98.2
Vaswani Industries	4/29/2011	49	4.67	-90.5
VMS Industries	5/30/2011	40	34.05	-14.9
Olympic Cards	3/9/2012	30	61.45	104.8
Price adjusted to Bonus & Stock Splits

 

Vivro Financial-associated IPOs
ISSUER	IPO	IPO	CURRENT	GAIN
	DATE	PRICE	PRICE	%
Pratibha Industries	2/16/2006	24	46.80	95.0
Raj Television	2/14/2007	257	190.65	-25.8

 

Concerns

• Adjudication proceedings against the promoter, CNKD Prasad, for contravening the provisions of  FEMA by making rupee payments during 2002-03 to his friend in lieu of NRE cheques/US dollars.
• Substantially dependent on few suppliers which are promoter’s closely-held firms.
• Some of group entities are involved in a similar line of business thereby posing conflict of interest with the public company.
• Public company does not have a registered trademark of its own and pays promoter annual royalty of Rs1 lakh per retail outlet even while it spends on the promotion of the brands. In fact, about Rs 8.50 cr of the issue proceeds is to be spent on promoting brands which are owned by the promoters.
• Restricted geographical operations with Bangalore and Hyderabad contributing close to 90% of total sales. Incidentally, both Hyderabad and Bangalore are currently facing the Telengana agitation and Cauvery River Dispute respectively.
• Unsold inventory is written-off once in five years. The last inventory write-off happened in FY 10 to the extent of Rs. 6.7 crore which resulted in reduced operating margin from 8.7% in FY 09 to 6.8% in FY 10. The next inventory write-off is likely to happen in FY 15 which would have a significant material impact on the earnings.