Saturday, November 29, 2014

Upcoming IPO: Is Monte Carlo going to be Lovable?

Woolen and cotton garments manufacturer Monte Carlo Fashions Ltd (MCFL) is entering the capital market with its initial public offering of nearly 54.33 lakh equity shares of Rs 10 each in price band of Rs 630 to Rs 645 per share. In the price band, the issue will lead to Rs 342 crore -350 crore being mobilized. The issue will constitute 25% of the post-issue paid up capital.

The issue will open on 3 December 2014 and will close on 5 December 2014. Although the IPO has not been graded by any credit rating agency, that’s no reason for investors to look away from this IPO. MCFL is backed by private equity firm Samara Capital which invested Rs 175 crore in the company in tranches nearly two years ago. This investment gave Samara Capital a stake of 18.5% in the company valued at Rs 945 crore. With the listing, the valuation is expected to go up to Rs 1,400 crore, translating into a cool 48% gain over two years. Still, Samara Capital would retain 11% stake in Monte Carlo after part exiting the investment. The remaining shares are being offered by promoters while the company will not get any funds from the issue. Monte Carlo is a well-known brand and clearly, Samara Capital sees more upside to its investment. This is quite a big indicator about the company’s prospects.

At the lower end of the price range, the stock will be valued at little less than 25 times its earnings in the trailing 12 months. This is not inexpensive but nowhere close to “stretched” levels, especially in the absence of any listed direct competitor. While several clothing companies are listed on the bourses, it is important to highlight that Monte Carlo is a niche “product” company. Unlike generic brands which seem to have taken inspiration from Kardashian family, Monte Carlo has a specific image in a specific product category which has served it well. Actually strong brand image and rich margins put it closer to Lovable Lingerie and Page Industries, even though these companies are in totally different product categories. As we look at Lovable Lingerie’s 36.5 price earnings ratio, Monte Carlo may very well look a discounted play. Page Industries too trades at a lofty valuation of 60.9 times its annual earnings. Both peers have a double digit net margin – a metric where they find company in Monte Carlo.    

The company has not yet announced participation of any anchor investor but given the positives, some of the well-known names in the market might be interested in anchoring the ship. The book running lead managers for the IPO are SBI Capital, Axis Capital, Edelweiss and Religare Capital Markets. The company plans to focus to expanding reach in the southern and western parts of India where it is relatively weak. 

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