10 February 2013
Sai Silks (IPO) — AVOID THE IPO :: Business Line
Though the company is in a unique business, its valuations are weighed down by several factors.
Sai Silks (Kalamandir) retails sarees, which no other listed retailer is engaged in, besides ethnic women’s wear, jewellery, men’s and kids’ wear.
Still, investors can skip the initial public offer of the company. In the price band of Rs 70-75, offer valuations are at 18-19 times estimated earnings for 2013-14 (post-issue equity).
Though large retail stocks are trading at stiff valuations currently, Sai Silks is relatively small in scale. Though it has no direct peer, the closest comparable trades at just a slight premium.
Plus, the valuation may be weighed down by governance-related issues. High interest costs have dragged margins.
BUSINESS AND SCALE
Sai Silks has built up a good standing in Hyderabad and Bangalore and rich, smaller cities such as Guntur and Vijayawada. It is present across price points.
But with a network of just 15 stores, the company has limited scale. Further, 11 of these stores are in Hyderabad and Bangalore. Of the four new stores being planned, two more will come up in Hyderabad.
This leaves the company dependent on just two cities, despite existing and planned presence in the smaller, but promising, cities. About Rs 12.7 crore of the total issue proceeds of Rs 89 crore will fund the new four stores planned.
RELATED PARTIES OVERHANG
Trademark of brands — Kalamandir, Mandir and Varamahalakshmi — is currently registered with a promoter. The company is a licensed user paying an annual royalty of Rs 100,000 per retail outlet.
About Rs 8.5 crore of the issue proceeds is earmarked for building these brands. The company has applied to become the registered user of the brands late last year. Until such time, the promoter is free to licence brands to other entities.
Advertising and branding efforts will be undertaken by a related party. Plus, over the past three years, 86-90 per cent of all merchandise purchase has been from promoter group companies. The company has given a corporate guarantee of Rs 22 crore to a group company — a significant liability, since Sai Silks recorded sales of Rs 262 crore for the previous fiscal and net margins are just 4 per cent.
WORKING-CAPITAL INTENSIVE
Sales have grown 27 per cent annually over the past three years while net profits have grown 56 per cent on the back of control over staff and other expenses. Operating margins have improved five percentage points to 12 per cent over the past three years. This is a healthy margin for retailer. But high interest costs on debt taken to fund working-capital and a wind power project have dragged net margins. There will be limited respite from the Rs 91 lakh debt payment out of issue proceeds, given the outstanding debt of Rs 89 crore as of October 2012.
Rs 59 crore of proceeds will finance working-capital based on current expansion plans. Any further requirement will have to be again met through bank loans. Both working-capital and inventory turnover are low for the company.
SAFETY NET
Promoters are providing a safety net for resident retail investors. For a period of six months from the offer, if the stock’s price falls below issue price, promoters will buy only original allotted shares at issue price.
While this facility may reduce risks to the offer in the initial period, the objective of subscribing to any offer is long-term capital appreciation. This may not be easy in this case, given the relatively high valuations.
The issue is open from 11 to 13 February. The lead managers to the issue are Ashika Capital and Vivro Financial Services.
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