Issue opens: Tuesday, 2nd August 2016
Issue closes: Thursday, 4th August 2016
Face Value – Rs.10
Price Band – Rs.258 – 268
Bid Lot – 55 Equity shares and in multiples thereon.
Recommendation: Do Not Subscribe
Valuation and Investment Rationale
S.P.Apparel will launch its initial public offering on 2nd August 2016. The issue will close on 4th August 2016 and is priced at Rs 258- 268 per share.
The issue is both an Offer for Sale (OFS) and fresh issue of shares. New York Life Investment Management India Fund who hold 10.50% of the company will be divesting 50% of its holding of 900,00 0 equity shares valued at Rs 241.2 million at the upper end of the band while the fresh issue is of Rs 2150 Million.
At the upper price band of Rs 268, the P/E for FY2016 is 15.62 times, while its peer Kitex Garment trades at a P/E of 20 times. On valuation basis S.P.Apparel does not look cheap and we do not recommend to subscribe as the company has grown at CAGR of just 7% from FY12-FY16, while at the same time Kitex has grown at CAGR of 15%.
The global apparel import market is expected to grow at a projected CAGR of just 5% (Source: RHP) hence growth will be a concern for the company. SP Apparel does not have any long term orders and their current order book has visibility only for the next 4 months . The company gets 80% of its revenues from exports, which is contributed by its top 5 customers, loss of even one customer can adversely affect the financials of its business.
The company’s revenues have grown at a CAGR of 7.57% from Rs 4016.17 million in FY12 to Rs 5377.54 million in FY16. The EBITDA for the company has grown at a CAGR of nearly 10% in the last four years from 612.37 million in FY12 to Rs 902.36 million in FY16. The company has an operating margin of 8.42% and net profit margin of 6.62%.
Management of S P Apparel:
Mr. P. Sundararajan is the Chairman and Managing Director of the Company. He holds a Bachelor of Science degree from the Bangalore University and he has approximately 31 years of experience in the textile and apparel industry. He is currently the managing director of Crocodile Products Private Limited and the director of Poornam Enterprises Private Limited.
Mrs. S. Latha is an Executive Director. She has approximately 24 years of experience in the textile and apparel industry. She is currently the director of Crocodile Products Private Limited.
Objective of the Issue:
1.Repayment or prepayment of debt incurred by Company
2.Expansion and modernization of manufacturing facility at Valapady, Salem, Tamil Nadu
3.Opening of new stores for the sale of ‘Crocodile’ products
4.Addition of balancing machineries for existing dyeing unit at SIPCOT, Perundurai
5.General corporate purposes
Overview of the Company’s business:
S.P.Apparel a leading manufacturer and exporter of knitted garments for infants and children in India. These are manufactured at the company’s integrated facilities due to which they provide end-to-end garment manufacturing services from greige fabric to finished products. Company also manufactures and retails menswear garments in India under the brand ‘Crocodile’.
Company’s export business for knitted garments for infants and children constitutes a significant portion of business at 86.13%, 84.62% and 79.84% of total revenues for the Fiscal Years 2016, 2015, and 2014, Revenues were generated by business of export of knitted garments products for infants and children. For Fiscal Year 2016, the company exported approximately 35.98 million pieces of knitted garments for infants and children directly to their international client, including TESCO and Primark.
Company has two Subsidiaries, Crocodile Products Private Limited (“CPPL”) and S.P. Apparels (UK) (P) Limited (“SPUK”). CPPL, which is a joint venture between Company and Crocodile International Pte. Ltd. (“CIPL”) and is engaged in the business of establishing and managing units to manufacture, trade, deal, import and export garments and has entered into a technology license agreement with CIPL for the exclusive manufacture, distribution and marketing of menswear products under the trademark ‘Crocodile’ in India.
The company sells ‘Crocodile’ branded products through a sales and distribution network that includes 40 exclusive brand outlets, of which 37 are company owned operated stores and 3 are franchise stores, and third-party ecommerce platforms.
Company has 21 manufacturing units in and around the region of Aviashi, Tamil Nadu.
Overview of the Industry
The global textiles and apparel value chain extends across boundaries of countries – while the developed economies like the United States, EU-28 and Japan are among the major consuming countries, most of the production takes place in developing and least developed countries due to low labour cost in these countries. In general, textiles and apparel manufacturing involves highly labour-intensive processes.
The global apparel market is estimated to be of USD 1,350 billion in 2014 and is expected to grow at a CAGR of 4.6% between 2014 and 2019. Europe and the United States are the biggest apparel markets with sizes of USD 425 billion and USD 305 billion respectively in 2014. Menswear and womenswear contribute 83% to the total global apparel market while children’s wear contributes 17%. The children’s wear market is expected to grow faster (CAGR of 5.6%) than the overall apparel market (CAGR of 4.6%) between 2014 and 2019.
China has started losing apparel manufacturing competitiveness in the global market owing to its increasing labour and energy cost. Additionally, the growing domestic market of China has forced many China based manufacturers to shift focus away from exports market to domestic market. Consequently, the share of China in global apparel exports, which was on an increasing trend in the previous decade, has lost pace in recent years.
Bangladesh and Vietnam lack integrated value chains and depend on imports for raw material and intermediary products, especially for cotton based apparel manufacturing which is predominantly used in infant and toddler apparel. Bangladesh also faces sporadic issues of social unrest, violation of safe working norms which are expected to affect its future growth in apparel exports. Most of the global brands as a part of their global supply chain mission prefer working only with socially compliant partners. Inadequate infrastructure, limited energy supplies and over-dependence on basic apparel are additional challenges for growth of apparel exports of Bangladesh.
India has the advantage of an abundant supply of cotton (second largest producer of cotton), Government support for apparel manufacturing and a strong reputation of meeting stringent quality, environmental and social norms of international buyers. India also has expertise in manufacturing of apparel with embroideries, trims, patchworks and appliques which are often used in children’s wear, especially in girl’s wear. India has the capability to meet design and product development requirements of western market which makes the country a sourcing destination of choice for buyers and buying offices that prefer to outsource designs from supplier.