IPO Review: Lovable Lingerie

IPO details:

Company Name: Lovable Lingerie

Issue Open: March 8-10

Issue Size: 45,50000 equity share

Net Issue : Up to 93.3 crore

Issue Price: 195-205

LOVABLE, one of the leading women's innerwear manufacturers, is coming out with an initial public offer of 45,50,000 equity shares to raise around 93.3 crore (at the upper price band). The fresh issue is equivalent to 27.08% of the company's post-IPO equity and will result in the promoter's holding falling to 73%.

   Of the total proceeds, the company will use 22.85 crore for capacity expansion, 24 crore for brand building and development and 17.7 crore increasing retail penetration, mainly through exclusive brand outlets. The remaining amount would be used for upgradation of design studios and general corporate purposes.

BUSINESS:

Lovable is among the top three players in the women's innerwear business, according to a CARE report. Its flagship brands include Lovable and Daisy Dee. The company acquired the brand Lovable from US-based Lovable World Trading Company for the territories in India, Nepal and Bhutan, "Daisy Dee" from Maxwell Industries and "College Style" from Levitus Trading, Hong Kong. Lovable is a premium brand while Daisy Dee is mid-segment brand.

   The company has undertaken concessionaire retailing model wherein it procures dedicated retail space in leading high traffic retail for stocking, displays and visual merchandising in the form of its "shop-in-shop" modules. Currently, it has 127 shop-in-shop counters in stores like Westside, Shopper's Stop, Lifestyle in 21 cities across India. At present it has three manufacturing plants, of which two are situated in Bangalore and one is in Roorkee, Uttarakhand, with a total manufacturing capacity of 67.5 lakh pieces per annum. The ladies innerwear market size in 2009 stood 7,862.58 crore growing at a three-year CAGR of 16%. Out of this, Lovable has around 0.9% of the total market share which from 0.6% in 2006.

FINANCIALS:

Net sales of the company grew at a CAGR of 29.8% to 86.95 crore in FY10. It has managed to surpass this figure in the first three quarters of the current fiscal. One concern here is the steep increase in the receivables by 30% against 1.2% increase in net sales in the first nine months of FY11 against FY10 data.

Due to gradual improvement in the operating and net margins, the net profit has grown at a higher CAGR of 38%. The return ratios of the company are impressive. In FY10, its return on capital employed was 66.9% and return on networth was 54.8%. The company has a low debt to equity ratio of 0.1.

VALUATION:

Considering post-issue equity and annualised earnings, the company demands an earnings multiple of 10. On the similar basis, after annualising the first three quarters, its peers Page Industries and Maxwell are trading at a price to earning valuation of 28 and 19, respectively. But their premium valuations reflect the strong brand presence in the Indian innerwear market. Also, the ratio of net working capital to sales for Lovable is higher than Page but lower than Maxwell. Considering these factors, the offer at price-earnings ratio of 10 looks reasonable. Investors may consider subscribing to the issue.

CONCERN:

The number of days Lovable takes to collect outstanding sales has shot up from 39 days in FY09 to 64 days in the first three quarters of FY11. This may put pressure on the company's working capital requirement.