IPO Update: Koutons Retail India

Aggressive growth, Aggressive pricing

Koutons Retail has entered the capital markets with an offer of 35.24 lac equity shares at a price band of Rs. 370 -415. Investment guru is of the view that the company has taken advantage of the retail growth story of India and has been able to deliver excellent growth with a viable business model. The future holds good for the company and the IPO proceeds would be used for expansion plans to fuel company growth engine. At the same time the company has priced the issue quite aggressively. However, given the growth rate in Topline and bottomline, and future expansion plans , and due to low float available to public, the stock would be bound to offer smart listing gains to the investors.

The Organized Retail story

The Indian retail sector is at an inflexion point with economy growing at 7-8%, favourable demographics, rising consumer incomes, real estate developments like emergence of new shopping malls and changing lifestyles that bring the Indian consumer closer to the consumers in more developed markets. All these changes are driving growth of organized retailing.

India is the second fastest growing economy in the world, where currently the retail market is valued at USD 270 billion. Food and grocery is the dominant sector followed by clothing, textiles and fashion accessories. Organised retail has been growing at a CAGR of 30%. Apparel and accessories retailing is the largest segment of organized retailing in India, constituting 39.0% of total organized retailing business, which is valued at approximately Rs. 550.0 billion (USD 12.4 billion). The rise of Mall culture in urban India has been a boon for the apparel sector and has the trend is fast catching up in smaller cities. The potential is huge.

About Koutons India

An integrated apparel manufacturing and retail company in India. The company is in the business of designing,manufacturing and retailing apparel under the “Koutons” and “Charlie Outlaw” brands through a network of 999 exclusive brand outlets (as of August 20, 2007) across India.

The company has 18 in-house manufacturing/finishing units and 14 warehouses which are spread across various locations in and around Gurgaon. The company has increased annual manufacturing capacity from 6 Lac pieces of apparel in 2005 to 1.24 Crore as of March 31, 2007

The “Koutons” brand has been core to the success of the company. Sales from brand “Koutons” has increased from Rs. 516 million for 2005 to Rs.3,727 million for 2007 and has contributed 99.11% and 92.34% of total income in fiscal 2006 and 2007, respectively.

Koutons brands caters to middle and high fashion segment and offers a complete range of men’s wardrobe. The company has also relaunched its old brand “Charlie Outlaw” targeting the youngsters.

The company adopts three tier retail model to market its products. It has Company owned and company operated stores, Company owned and Franchisee operated stores and Franchisee owned and Franchisee operated stores. At present the majority (858) outlets are franchisee owned and operated. 124 outlets are company owned and franchisee operated while only 17 outlets are under company owned and operated model. The focus is on increasing in company owned and operated stores.

Company’s Strength

Koutons is an intergrated player as its operations cover manufacturing to retailing processes. The scale of operations helps the company to enjoy higher operating margins.

Company enjoys high brand visibility and this helps it to maintain the growth rate.

The company is bringing diversification in its retail model from franchisee based to Company owned and operated stores. This will improve profitability in long term.

The company is also moving from men’s range to complete family range of apparels. This would provide drivers for future growth.

Alert Areas

Aggressive growth of the company has led to higher inventory levels which in turn increases the working capital requirements.

The company is dependant on brand “Koutons” for its sales. Inability of company to maintain the brand image could lead to slower growth in sales and profitability
The franchisee model has its own pitfalls and company’s overdependence on this model may be a risk factor. Also the entire inventory risk in the franchisee model is borne by the company.

Object of the Issue

The issue proceeds would be utilized in setting up exclusive brand outlets and new manufacturing facilities

Financials and Valuation

Income has grown from Rs. 581.46 million in fiscal 2005 to Rs. 4,036.17 million in fiscal 2007, at a CAGR of 163.5% and our profit after tax has increased from Rs. 19.29 million in fiscal 2005 to Rs. 344.87 million in fiscal 2007, at a CAGR of 322.8%.

For the year ending 31st March,2007, the EPS stood at 14.22. The average return on networth is 21.2%. Net asset value per share is Rs. 59.49.

On post issue equity, the EPS works out to be 11.3. At the offer price of Rs. 415 the issue comes at a PE of 36.8 which makes it a aggressively priced issue. Peers like Kewal Kiran and zodiac are quoted at a PE multiple of 16 and 19 respectively.

Issue Opens: 18-Sep-2007
Issue Closes: 21-Sep-2007

Check IPO Allotment Status of Koutons Here


Anonymous said...

can this company sustain the growth rate of last three years in future ? I doubt !


Earth Spirit said...

Sadly, market bulls and investors see only half of the picture -- the monetary side.

While one feels great about the India Growth Story, there is a hidden tragedy -- a sort of India Death Story, unreported by the media. It is a story of social and environmental costs being quietly passed on by manufacturers, and frankly, society and environment are getting saturated.

An important social principle is violated by many manufacturing activities: While engaged in a profit-making activity, one must not leave a mess behind for the rest of society to clean up.

This principle can easily be understood as common decency. If I come to your house as a salesman in order to market something, I must clean up any mess that I make while selling my product.

But this principle is continually breached by manufacturers and marketers on a large scale in our country, and nobody even thinks of objecting!

Have you ever pondered how mineral water and soft-drink manufacturers who sell their product to you in a PET bottle take no further responsibility what happens to their non-biodegradable bottle? Most often, it ends up as litter in the environment, because the consumer simply does not know what to do with the bottle, other than tossing it away.
This is not how it should be. At the time of conceptualizing and designing the product, the manufacturer has the responsibility of thinking what will happen to the discarded packaging, or, in the case of non-consumables, to the product itself after its use. He must take the responsibility to create a safe avenue for its disposal or recycling.

This requires a mechanism to collect the empty container or used product. So he must set up that mechanism. For instance, the grocery shopkeeper may incentivate the consumer to return PET bopttles to him by initially charging a coupl;e of rupees as deposit for the bottle, which he returns when the consumer returns the bottle to him. These bottles can then be sent back to the company’s recycling facility. (This is how soft-drink bottles made of glass were returned to manufacturers until very recently, remember? We, the consumers, were OK with this system. So why the sudden urge to package everything in discardable materials?)

We should mobilize citizens to demand legislation that every manufacturer must repurchase/collect and recycle as many tonnes of raw material as he uses on a week-by-week basis. For example, if a mineral-water manufacturer uses ten tonnes of plastics per week to manufacture bottles, he MUST buy back ten tonnes of plastic scrap and safely recycle it.

Now think for a moment about used automobiles. Used cars and scooters in India are sold as second-hand vehicles, and then third-hand, fourth-hand. A second-hand vehicle may go from a metropolis to a small town or village. It keeps going further and further into the interiors as it ages, as its condition deteriorates and its market price dwindles. And then?

And then it is sometimes sold to a garage at a throwaway price, and this garage may salvage spare parts from it. ut what remains of this vehicle, including worn-out tyres, may lie around rusting and gathering dust for years and years on some deserted road. The tyres, when they are often burnt in winter for warmth, releasing black, acrid smoke and carcinogenic chemicals into the atmosphere.

Or it lies as a rusting eyesore in some building compound for many years as the last owner loses all motivation to either repair it or sell it.

Thus, every automobile manufacturer sells a product that turns into many hundred tonnes of junk — assorted metal, plastic, glass and rubber junk — after 6-8 years. They end up littering the beautiful countryside with this junk. Is this socially acceptable behaviour?

If one looks for solutions, they are not difficult to find. Legislation and regulations are the answer.

Automobile manufacturers must be required by law to buy back that many tonnes of metals, plastics, glass etc every week, and find ways to recycle them. The cost may be met by raising the market price of their product… but the responsibility to make the recycling activity happen MUST be fixed on the manufacturer of every product.

The same applies to tyres, batteries, plastic goods, newspapers, textiles, chemicals, auto-lubricant oils, etc. The list is long.

It is possible that this will make some manufacturing and marketing processes unviable. If so, this would mean that these economic activities were unviable in the first place, and were sustainable only by passing on hidden costs to the environment, to society and to consumers! Such activities must necessarily come to an end.

Many industrial activities are environmentally and socially subsidized to keep them economically profitable. Let us lobby governments to knock off that subsidy and see how many activities remain sustainable!

I propose peaceful demonstrations to compel industries to self-regulate, and legislators to pass laws:

Small groups of citizens shall collect the branded packaging material of various manufacturers from the environment, and delivering them in large bundles every week to their corporate offices. It belongs to them, right? So let them have it back!

A peaceful demonstration like this, sustained over some weeks, would make a powerful statement. I think this will make a powerful media impact as well… and thereby, an impact on the consciousness of people.

This would be the first step to making changes happen. Citizens, industry and government must first be made to acknowledge that there is a problem; then viable solutions will begin to emerge.

What say, fellow-citizens? I would appreciate your detailed responses to this idea.

Those who wish to join me in peaceful social action (as described) are urged to email me at friendlyghost.kk@gmail.com