Sai Silks initial public offering (IPO): Concerns on promoter pledge, low ROCE

The company has almost 30 percent of promoter holdings pledged.

Sai Silks (Kalamandir), in its latest attempt at the primary market, opened for subscription on September 20, 2023, and received a lukewarm response with a subscription rate of just 0.07 times.

Notably, the company launched its initial public offering (IPO) in February 2013, hoping to raise Rs 89 crore at a price band of Rs 70-75 per share with a face value of Rs 10 each. Unfortunately, that offering was eventually withdrawn on subdued investor interest.

Through the follow-on offer this time, the company seeks to raise Rs 1,201 crore, pricing shares with a face value of Rs 2 in the price band of Rs 210-Rs 222 per share. This offer consists of a fresh equity issue worth Rs 600 crore and an Offer for Sale (OFS) worth Rs 601 crore.

Sai Silks Kalamandir has a network of 54 stores in Andhra Pradesh, Telangana, Karnataka, and Tamil Nadu, as of July 2023. The company offers a diverse range of products, like ultra-premium and premium sarees, lehengas, and men's & children’s ethnic wear.

In terms of financials, revenue increased by 19.7 percent to Rs 1,351.5 crore in FY23, compared to the previous year.

EBITDA (earnings before interest, tax, depreciation and amortisation) in FY23 jumped 60 percent to Rs 212.5 crore, with a margin expansion of 394 bps at 15.72 percent, compared to the previous year. The company's net profit rose 69.1 percent year-on-year in FY23 to Rs 97.6 crore

The company plans to utilise Rs 150 crore for expansion, Rs 280 crore for working capital requirement and Rs 50 crore to clear debt.

However, there are concerns around the intense competition in the industry it operates in, which condemns it to earn a low return on capital.  More importantly, half the issue size is an OFS by the promoter group, and  30 percent of the promoter holding is pledged.

Currently, the company has debt to the tune of Rs 340 crore on its books with a debt-equity ratio of 0.87 times. In a pre- IPO interview with Moneycontrol, Prasad Chalavadi, Founder and Managing Director, and Bharadwaj Rachamadugu, Senior Vice President, answer these key questions

Promoters’ pledged shares

The company has almost 30 percent of promoter holdings pledged.

Prasad Chalavadi did not explain why the shares were pledged – whether to deploy capital in the company or to fund other promoter interests.

“Since we are a small and first-generation company, banks, apart from their primary collateral, insist on a certain percentage of pledged shares to have a control on the company, so that no special resolutions are passed without their attention or intention. Also, since there is no specific value attached to it before listing, we always wanted to support the banks because they are supporting us. Moving forward, once we list, there would be considerable value and we have a strategy in place to get the shares de-pledged as early as possible, say in the next four quarters,” Chalavadi said.

The company’s issue price (Rs 210-Rs 222) is way higher, compared to the issue price in 2013 (Rs 70-75 per share). The cost of acquisition by promoters was in the range of Rs 5-19 per share almost 17 years ago.

Low return ratios compared to peers

The company's return on capital employed (ROCE) stands at 23.5 percent, which is lower than that of its peers, although the numbers are not exactly comparable because of the market segment they cater to.

Chalavadi said that the company intends to open approximately 30 stores in Tamil Nadu, which has been one of the high-yielding states, historically. Out of these 30 stores, 25 will adopt the Varamahalakshmi silks format (the company has never conducted end-of-season sales, discount sales, or bargaining. This is attributed to its pricing strategy, which consistently offers products at a value-for-money rate. This approach eliminates the need for large profit margins that would require clearance sales).

A combination of these two factors – more presence in a high-yielding state with its top-performing format – should augment the company’s return ratios.

SAI Silks vs Peers: Return On Capital Employed

Sai Silks: 23.5%

Vedant Fashions: 47.5

TCNS Clothing Co: 3.23%

Go Fashion: 25.6%

Aditya Birla Fashion & Retail: 8:32%

Shoppers Stop: 65.7%

Trent: 27.5%