IPO Review: Lovable Lingerie

 

Of the total, about a fourth will be deployed in setting up a manufacturing unit in Bangalore, while Rs 24 crore will be spent on brand building. Besides, it will invest Rs 25 crore in its existing joint venture with Lifestyle Galleries of London (LGL), which will market, manufacture and distribute the brand 'London Calling' in the super premium lingerie segment and also cater to the exports market. Of the balance proceeds, the company plans to invest Rs 14 crore in setting up Exclusive Brand Outlets (EBOs) that will aid further growth.

Factors like rising disposable income, rich experience of promoters in the industry, wide distribution network and globally successful brands are some key strengths of the company. Further, a strong balance sheet, with near-zero debt, is an enabler for further fund raising, if required.

The flipside is that the company's dependence on third parties for supply of raw materials exposes its margins to the risk of fluctuating input prices. Raw material prices as a percentage of sales stood at 41 per cent for the nine months ended December 31, 2010. Further, its relatively small scale of operations and high competition are some other challenges. These issues, however, could subside once the company gains scale, which could provide it different levers to sustain margins.

With the aim to diversify into new market segments, Lovable intends to tap the sleep wear and home wear segment. Given the focus on brand building, and high competition, its ad spends are expected to rise significantly (18 per cent of sales in 2009-10). While the company has set aside some IPO funds towards this, there is a possibility of margin compression in the medium term.

Meanwhile, the company's track record has been good, with revenues and net profit growing at a compounded rate of 30 per cent and 38 per cent, respectively over 2006-10; Ebitda margins, too, have expanded from 17 per cent to 19 per cent.

Based on annualised earnings of nine months to December 2010 and the post-IPO equity capital, at Rs 205, the PE works out to 20.5. Although there are no strict listed comparables, Page Industries (four times bigger than Lovable in revenues) trades at a PE of 31 times its 2010-11 annualised EPS and Maxwell, which is slightly bigger in revenues but does not have an impressive record, trades at 19 times its 2010-11 annualised EPS. While valuations look stiff, given Lovable's track record and growth plans, investors with some appetite for risk may apply. Last month's Rs 20 crore (6 per cent stake) pre-IPO placement to SCI Growth Investments, a subsidiary of Sequoia Capital, provides some comfort.