Emkay's IPO note on Monte Carlo IPO
MCFL’s IPO size is of Rs 3.5bn, wherein promoters and a PE investors are cashing out. The main objective of the issue is to have benefits of being a public ltd. co. Post-IPO promoters holding will stand at 63.6%
MCFL has correct blend of factors to grow in highly competitive branded apparel industry. A brand with high recall, an asset light manufacturing & distribution model and zero net debt B/s sheet makes it an interesting investment proposition
Increase in wool prices, major raw material cost, and rising competition from international brands which will dilute MCFL’s dominance in woolen apparels are the key business risks
Valuations are immodest, although not very unreasonable. On FY14 core RoCEs of 24%, MFCL is demanding EV/EBITDA of 15x. We believe there is still room for higher multiple considering the growth capex for next 2-3 years is already incurred
30-year old apparel brand: Monte Carlo (MC) brand was launched in 1984 by Oswal Woolen Mills Ltd., which was demerged into– Monte Carlo Fashion Ltd. (MCFL) – in 2011. The brand Monte Carlo draws a strong recall for winter wear, where it enjoys dominant position, which is further leveraged in cotton & cotton-blend apparels, kids wear & home furnishing. The growth for MFCL will be driven by reach and category extension of MC brand across India and segments. The brand is fully owned by MCFL.
Asset-light and mediocre financials: MCFL’s business model is asset-light as it only manufactures woolen apparels in-house, while yarn manufacturing as well as manufacturing of cotton products is outsourced. Company has also outsourced its distribution channel as it sells through MBOs franchised EBOs. The same doesn’t get much reflected in its financials as low return yielding capex of Rs 2.1bn incurred over last 3 years has affected the return ratios. Zero net debt B/s is mainly due to equity capital of Rs 1.75bn raised over last 2 years.
Rising wool prices and competition: Woolen yarn is the major raw material cost of MCFL and the effect of the change in the same would affect the profitability. The prices of wool has seen an uptrend in last 3 years which the company was able to pass-on. But, any future increase may be growth detrimental. Competition from international apparel brands entering India possess another threat to woolen apparel business as its dominance gets diluted due to launch of similar products by these well-known brands.
Valuations on higher-side but not expensive: On upper-end of price range, MFCL is asking for an immodest valuations but we believe it is not very expensive. Considering the growth opportunity, brand positioning and controlled working capital, we believe there is still marginal room for re-rating gains from the issuance price. We assign Subscribe rating to this IPO for modest listing gains of 15-20%.
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