JainMatrix Investments – IPO Reports deliver 60.5% returns

Date: 12th July 2014

During the past year, JainMatrix Investments has published eight IPO analysis reports.

Analysis of an IPO is unusually challenging. The companies do not have a long operating history, and the detailed data about them is not available. Many of these firms may be from new or emerging industries and with unusual business models, rather than established sectors. But there can be good rewards from IPOs, as from this uncertainty there can emerge a few very valuable new companies.

JainMatrix Investments captures its record of recent IPO recommendations. Here we are are trying to pass judgement on our own reports and analyses in the Result Today column:

Chart

* – we have taken VRL, Inox and Adlabs  at absolute value as its been a short time since listing. The data in Table above is as of 12th July 2015. All reports from table above can be accessed through links below.

  1. Our call on the Manpasand Beverages IPO was an Avoid. The offering closed with a weak subscription of 1.4 times the offered shares. It is still 2 days since listing, and there has been no sharp movement of share price either way, so we will wait for some direction.
  2. Of these 8, it can be seen that 5 of our 7 calls were Right with VRL Logistics, Wonderla Holidays, Snowman Logistics and Inox Winds performing very well.
  3. Even with Monte Carlo, we had an overall negative opinion of the firm, but expected a pop on listing. However this never came through. So our judgement is that the Result Today is Wrong.
  4. Adlabs Entertainment did not get enough subscription, it had to extend the IPO and lower the price, and is yet to pick up. Hence our call to Avoid was a Right call.
  5. We had an Avoid call on Shemaroo Entertainment essentially because of inadequate information available about business prospects and segments of the company. It has appreciated well since listing. But we stand by this IPO judgement made at that time – it is better to avoid firms you do not know enough about, than take such a chance.
  6. Looking at the performance of the 5 BUY calls made by us, we can see that investors who went along with our recommendations would have gained an absolute 60.5%.

Our lessons from the IPO analysis:

  1. IPOs that do not meet our criteria including financial, valuation, management quality, business outlook and disclosure, will get an Avoid rating.
  2. The IPOs of firms with innovative business models or in new and high potential industries get valued at a premium by the market, if the other criteria above are met.
  3. IPOs can generate high returns only if promoters of even good companies, leave enough on the table for investors in terms of the pricing.

Note that Share Prices of stocks can change from day to day. However judgments of performance in Long Term investing must be done only periodically, say in 6 or 12 months to allow the analysis calls to pan out over time.

As we get into a season of possibly a lot of IPOs, I sure hope the promoters from these firms are generous and make their offers at reasonable valuations.

JainMatrix Investments will keep you posted on the upcoming IPO’s. We hope that our calls helped you invest better, and look forward to your support and feedback.

DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from a financial planner /advisor. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Monte Carlo IPO – Visit here for the Short Term

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  • Price range: Rs 630-645
  • Date Dec 4th 2014 and IPO Period:  03-05 Dec
  • Industry – Textile and Apparel
  • Small Cap with 1370 cr. mkt cap
  • Advice: Buy for the short term

logo

Summary:

Monte Carlo Fashions is a player in woolens, apparel and home furnishings. The financial data available indicates good margins but uneven growth. The IPO valuations look reasonable compared to peers. The brand is strong. Growth plans include a thrust in South and West markets. Negatives and risks include only 3 year financial history available due to recent demerger, significant related party transactions in the supply chain, negative Free Cash flow over the last 3 years and weak Promoter group track record in terms of rewarding shareholders. BUY but with a short term perspective. 

Here is a note on Monte Carlo Fashions Ltd (MCF) IPO.

Monte Carlo Fashions – Description and Profile

  • Monte Carlo Fashions (MCF) is an apparel firm based out of Ludhiana, Punjab.
  • The FY14 revenues were Rs 519 crores and profits 55 cr.
  • It commands under 1% market share in Indian apparel, but has a strong and premium brand, ‘Monte Carlo’ established over 30 years. We can see the product segments in Fig 1a.
Monte Carlo Fashions IPO, JainMatrix Investments

Fig 1 – Product Segments and Shareholding Pattern

  •  Product distribution is through 196 ‘Monte Carlo Exclusive Brand Outlets’ and 1300 Multi Brand Outlets (MBO). Of these 196, 18 are owned and operated by MCF, and the rest run by franchisees.
  • The shareholding pattern post IPO is displayed in Fig 1b.

IPO Offering Outline and Valuations:

  • The offer is of 54.33 lakh shares in price range Rs 630-645 available from Dec 03-05.
  • This 25% dilution will raise Rs 350 cr. at upper end, and value the firm at 1400 cr market cap.
  • The offering is at a PE range of 24.8-25.3 times FY14 earnings. This compares favourably with:
PEs

Fig 2 – PE range of Peers

MCF – Financial snapshot

  • Only 3 years data is available as MCF was demerged from group firm Oswal Woollen Mills Ltd. on 1st April 2011.
  • FY 2013 was a flattish year for MCF, followed by a good year of FY14. See Fig 3.
Monte Carlo IPO, JainMatrix Investments

Fig 3 – Monte Carlo Fashions Financials

  • The leadership team is Jawahar Lal Oswal, CMD and Sandeep Jain, ED.

Cash Flow

  • The Free Cash flow has not been positive for MCF in the last 3 years.
Monte Carlo IPO, JainMatrix Investments

Fig 4 – Free Cash Flow

Why Is Monte Carlo Fashions going for an IPO?

The objects of the IPO are:

  • Partial exit of Samara Capita, a Mauritius based Private Equity firm, that will reduce shareholding from 18.5% to 10.9%
  • Reduction in Promoter holding from 81% to 63.6% that will comply with SEBI rules for Promoter holding below 75%.
  • Visibility and marketing for the Monte Carlo brand and firm.

Industry

  • The Indian Textiles Industry accounts for 4% of GDP, 14% of industrial production; it directly employs 3.5 cr. people (highest after agriculture) and accounts for 17% of all exports.
  • The size of the domestic readymade apparel industry is expected to double within 5 years due to prosperity, better government policy, fashion and brand trends and consumer expectations.
  • Government Policy Support: The Indian government supports the textile industry by investment promoting schemes like TUFS (Technological Upgradation Fund Scheme) and SITP (Scheme for Integrated Textile Parks).
  • MCF too has availed the low interest TUFS loans for its funding needs.

Key Strengths of MCF and IPO offer

  • Strong Monte Carlo brand. MCF was spun off from the older firm, Oswal Woollen Mills. Brand strengths in woolens and warm clothing, and a higher end / premium positioning.
  • Strong presence in North and Eastern parts of India.
  • It rides the key investment theme of “consumption” that is reflected in high valuations for firms from apparel, food and FMCG sectors.
  • MCF has already raised Rs 105 cr. through issue of shares to anchor investors – Aditya Birla Private Equity Trust, DB International (Asia) and Birla Sunlife Trustee Company Pvt Ltd.
  • There is cash on the books of MCF and even the current loans taken are concessional/ low interest govt TUFS loans.
  • It has an asset-light model by outsourcing the apparel production to third-party manufacturers.

Key Weaknesses/ Issues/ Challenges of MCF and IPO offer

  • Weak presence in South and West regions of India. Here MCF plans to widen distribution and push the non-woolen product range like cotton and blended apparel, kids wear and home furnishings.
  • Negative Free Cash flow over the last 3 years. It is investing in its operations.
  • There is only a short financial history of MCF, not enough is known of this company.
  • This business group has not established a track record for rewarding shareholders. Group companies Nahar Spinning and Punjab Woolcoombers (listed in 2007) are today trading below their IPO prices while one, Nahar Capital (listed in 2008), has barely made it to the IPO price level. Another, Nahar International (earlier known as Punjab Concast) is no longer traded on the bourse.
  • High proportion of related party transactions. Complex web of group companies are part of MCF’s supply chain in terms of raw materials, apparel manufacturing, etc. This is seen as a financial uncertainty in terms of related party transactions and potentially notional / temporary profits.

Opinion, Outlook and Recommendation

  • The organisation is rated average in terms of overall offering.
  • The IPO was subscribed 61% of its entire offering till EOD 3rd Dec. This included Institutions 74% and Retail 79%. This is a good sign, and the firm may be able to ride the very positive current investor sentiments and elevated index levels to generate interest.
  • Retail investors may apply for the MCF IPO but should not hold for the long term.

JainMatrix Knowledge Base:

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. JM and its promoters/ employees have no financial interest in Monte Carlo Fashions and no known material conflict of interest as on date of publication of this report. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com