Bella Casa Fashion: Profitability unlikely to support price

By VS Fernando

The IPOThe present IPO is a fresh issue of 24.5 lakh shares of Rs 10 each at price of Rs 14 a share of which 1.3 lakh shares are reserved for the market maker. The equity capital, which was at Rs 2.05 cr at the end of fiscal 2015, was enlarged to Rs 6.76 cr through a bumper 23:10 bonus in July 2015. The IPO, constituting 26.59%, will further increase the equity capital to Rs 9.22 cr.  Investors will have to apply for a minimum of 10000 shares (Rs 1.4 lakh). The entire issue is underwritten by the lead manager, Hem Securities, who has also been appointed as `market maker’.   Issue ObjectThe company proposes to utilize the issue proceeds (Rs 3.03 cr net of issue expenses Rs 40 lakh) for working capital. The management believes that the IPO would enhance the company’s image and visibility of its brand name besides bringing the other benefits of listing.Lineage The Jaipur-based Bella Casa Fashion & Retail Ltd (BCFRL) is almost two decades old. The company, until recently known as Gupta Fabtex Pvt Ltd, was promoted in 1996 by the Gupta brothers Harish Kumar (58) and Pawan Kumar (54) who are commerce graduates by qualification. While the elder brother claims to have 41 years of experience in textile industry, the younger one reportedly has 23 years of experience in textile trading and 16 years in textile manufacturing. The Gupta brothers are ably assisted by their sons Gaurav Gupta (34), who has a diploma in textile design besides a post-graduate diploma in International Trade from Bhartiya Vidya Bhawan, and Saurav Gupta (34), who holds a post-graduate diploma in apparel marketing and merchandising from NIFT. The company’s name was changed to the present one only in July 2015.      Business ProfileCurrently BCFRL is engaged in manufacturing of bed sheets, quilts, home furnishing textile items, printed/dyed furnishing fabrics and garments. According to the management, home textiles account for nearly 60% of the current turnover. The production unit of the company is located at Sitapura Industrial Area, Jaipur. In fiscal 2015, the company’s revenue comprised of 92% from domestic sales and 8% from exports – largely to the Middle East. BCFRL’s operations are divided into three segments: Home Furnishing Textile - OE manufacturing; Ready Made Garments - OE Manufacturing and Home Furnishing Textile - Own Brand. In Home Textiles - Own Brand the company reportedly competes with big names like Bombay Dyeing, Spaces, Portico, Raymond, etc. In Home Textiles - OE Manufacturing it considers GHCL, Shri Laxmi Cotsyn, Indo Count, etc, as its competitors. In Apparels business BCFRL faces competition from hordes manufacturing and export firms operating in Jaipur, Delhi, Mumbai and Bangalore.The company’s customer base comprises of organized and traditional wholesale markets. It has also started online sales through various portals. BCFRL clientele in fiscal 2015 included well known names like Lifestyle International (Rs 11 cr or 13% of sales), Bombay Dyeing (Rs 9.74 cr – 12%), Pantaloons Fashion (Rs 9.74 cr – 12%), RNA Resources (Rs 6.61 cr – 8%), Reliance Retail (Rs 4.82 cr – 6%), etc.Financial TrackThe company’s production capacity has increased from 9500 pieces per day in FY13 to 14300 pcs in FY15. Its capacity utilisation significantly improved in FY14 to 70% from 50% in the previous year. However, it dropped to 65% in FY15. The company’s top line, which grew steadily from Rs 43 cr in FY11 to Rs 84 cr in FY14, slipped to Rs 79 cr in FY15.  Operating margin which was at 9.7% in FY12 shrunk to 5.5% in FY15. In last two years the company has had unusual write offs which have depressed the bottom line. In FY14 it debited Rs 25.82 lakh on account of “loss due to theft” which flattened bottom line to Rs 88 lakh. In FY15 the company’s bottom line plummeted to Rs 38 lakh due to loss on sale of old power looms of Rs 68.48 cr. Thus, after two consecutive years of positive cash flows from operations, FY15 witnessed negative cash flow.At the end of last fiscal the company’s net worth stood at Rs 7.13 cr against which its borrowings amounted to more than Rs 22 cr! Notably, more than Rs 20 cr of loan fund came from HDFC bank which speaks of the company’s relationship with the bank. The company’s equity base, which was at only Rs 2.05 cr at the end of last year, has more than tripled in July 2015 through a bumper bonus issue. Post-bonus, whereas the capital has enlarged to Rs 6.77 cr, reserves has been reduced to Rs 36 lakh. Another noteworthy aspect of BCFRL is its productive assets. The company’s net block, which was at more than Rs 11 cr in 2013 has become half in 2015 due to sale of outdated power looms. Valuation In the textile sector, home textiles segment is currently witnessing upswing which is well reflected in the valuation of large players like Welspun and Indo Count. BCFRL has projected its capacity to go up to 16250, 18400 and 21000 pcs/per Day in the next three years on which it hopes to achieve a capacity utilization of 80%, 85% and 90% respectively. On reaching such scale, the company may perhaps be in a position to net adequate profit to service its large capital base of Rs 9.22 cr. Nonetheless, in the near term, the company’s profitability is unlikely to support the price. Moreover, for a company which has a lean asset base, the discounting is expected to be lower than its peers who have large productive assets. It is worth noting here that, whereas the public is asked to shell out Rs 14 per share, the promoters’ cost of holding is only Rs 3.03 a share! Lead Manager’s TrackThe IPO of BCFRL will be the sixteenth SME managed by Hem Securities. Of the 15 IPOs already listed, five are currently quoting below the offer price. While Samruddhi Realty, Atishay Infotech and Dhabriya Poly have fetched handsome returns, R&B Denims and Tentiwal Wire have fared poorly. A disappointing aspect of Hem-managed IPOs is liquidity. Nearly a half of Hem’s IPOs have failed to find quotes at least once in three days.