S P Apparels IPO review (May apply)

S P Apparels Ltd (SPAL) is a leading manufacturer and exporter of knitted garments for infants and children in India. These are manufactured at its integrated facilities that allow it to provide end-to-end garment manufacturing services from greige fabric to finished products. SPAL also manufactures and retail menswear garments in India under the brand ‘Crocodile’. The company believes its core competency lies in clear understanding of the specifications of knitted garments in the infants and children category, the buying preferences of customers and ability to deliver products of a consistent high quality that meet the product specifications and stringent compliance requirements of international customers.

SPAL is the second largest exporter among manufacturers of knitted garments for infants and children in India in terms of revenue in the Fiscal Year 2014. Its export business for knitted garments for infants and children constitutes a significant portion of our business. 86.13%, 84.62% and 79.84% of the total revenues for the Fiscal Years 2016, 2015 and 2014, respectively, were generated by business of export of knitted garments products for infants and children that includes body suits, sleep suits, tops and bottoms. For Fiscal Year 2016, it exported approximately 35.98 million pieces of knitted garments for infants and children directly to international customers, including TESCO and Primark.

SPAL’s business consists of two main divisions – (i) garments division (for manufacture and export of knitted garments for infants and children); and (ii) retail division (for manufacture, distribution and marketing of products in India under the brand name ‘Crocodile’). It has two Subsidiaries, Crocodile Products Private Limited (“CPPL”) and S.P. Apparels (UK) (P) Limited (“SPUK”). CPPL, which is a joint venture between the Company and Crocodile International Pte. Ltd. (“CIPL”), is engaged in the business of, inter alia, 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. 6.43%, 3.39% and 3.35% of its total revenues for the Fiscal Years 2016, 2015 and 2014, respectively were generated by the Company’s retail business.

It sells the ‘Crocodile’ branded products through a sales and distribution network that includes 40 exclusive brand outlets, of which 37 are company owned operated stores and three are franchise stores, and third-party e-commerce platforms. SPUK was incorporated in 2014 to explore possible marketing opportunities and engage in trading activities with new customers in the United Kingdom, Ireland and other European countries. SPUK has a design studio and has hired experienced designer consultants that provide design support services to customers and also provides after sales service for any technical and other grievance.

To part finance its debt repayment/pre-payment plans, expansion and modernization of manufacturing facilities, adding balancing machinery, opening of new stores for “Crocodile” products and other general corpus fund needs, the company is coming out with a maiden IPO of combo offer with fresh equity issue worth Rs. 215 crore (approx 88.23 lakh shares at the upper price band) and offer for sale by existing stakeholders of 900000 equity shares (worth approx. Rs. 24.12 crore at the upper price band). Thus the aggregate size of the issue is around Rs. 240 crore. Issue opens for subscription on 02.08.16 and will close on 04.08.16. Price band for the issue is Rs. 258-268. Minimum application is to be made for 55 shares and in multiples thereon, thereafter. BRLMs to this issue are Motilal Oswal Investment Advisors Pvt Ltd and Centrum Capital Ltd. Link Intime India Pvt Ltd is the registrar to the issue. Post allotment, shares will be listed on BSE and NSE. After initial equity issue at par till March 2006 it issued shares at a price of Rs. 200 per share in November 2006 and at a price of Rs. 210 in June 2015. Its current paid up equity capital of Rs. 17.15 crore will stand enhanced to Rs. 26 crore.

On performance front, the company has (on a consolidated basis) reported turnover and net profits of Rs. 428.89 cr. / Rs. 2.36 cr. (FY13), Rs. 452.07 cr. / Rs. 6.68 cr. (FY14), Rs. 479.23 cr. /Rs. 10.05 cr. (FY15)  and Rs. 537.75 cr. / Rs. 34.71 cr. (FY16). Thus if we attribute latest earnings on fully diluted equity post IPO then the asking price is at a P/ E of  around 20 (at the upper price band) the is in line with peers.

On BRLM’s front, two BRLMs handled four public issues in past three years out of which three issues closed below the issue price on listing date.

Conclusion: BRLMs’ have poor track record. However, considering the sops for the segment in which the company is engaged and has shown improved performances for past four fiscals, cash surplus investors may consider for medium to long term investment in this issue.