IPO Analysis – Sudar Garments
This IPO looks like Stiffly priced despite small scale of operations. The small garment manufacturer wants to expand and get into retail in a bigger way.
Incorporated in January 2002 and promoted by Murugan Muthaih Thevar, Sudar Garments is engaged in the business of manufacture of garments for men’s wear, women wear and kids wear. It has manufacturing facility at Khalapur Taluk, Raigad District, Maharashtra. The company is an apparel manufacturer with capability of designing and manufacturing involving cutting, body stitching, washing, Ironing and finishing.
The company is coming out with an IPO to raise capital to facilitate the expansion of existing capacity, setting up the retail stores and for working capital requirements. It is offering 9.09 million equity shares of face value Rs 10 each at a price band of Rs 72 -77 per share. Accordingly, the company will raise Rs 65.43 crore to Rs 69.98 crore, based on the lower and upper band of the offer price. The issue closes on 24 February 2011.
Strengths:
- Capacity utilization has been in increasing trend from 64% in FY 2008 to 82% in FY 2009 and 94% in FY 2010.
- On the financial front, company has reported 155% jump in the net sales at Rs 52.76 crore and whopping 599% increase in net profit at Rs 4.11 crore in the year ended FY 2010. Operating margin expanded by 260 bps to 17% in the year ended FY 2010. The spike in turnover was powered by more than two fold increase in its capacity from 8 lakh garments to 20 lakh garments per annum.
Weaknesses:
- Limited experience in handling retail or franchise business and existence of already strong retail chains and various brands in the market is a major threat to the company to establish and strengthen its retail share. Highly competitive retail market and spike in yarn and fabric prices exert pressure on margins.
- Despite having own brand “Glory to Glory”, major part of the sales were to wholesalers and Merchant exporters. The company also lacks long-term export contracts.
- The Operations are subjected to high working capital requirements. It is fully dependent on the external suppliers for fabrics, which constitute 90% of the total raw material cost. Any material shortage or interruption in supply of raw materials and volatility in the prices will impact the business.
- The company’s manufacturing operations are labor intensive and depend on the availability of the personal. Nearly 95% of the company’s employees are employed on contract basis.
- The company derives 99% its revenues from just 5 customers. So any loss of one or more customers or reduction in their demand could adversely impact the business of the company. On the other hand, significant portion of the company sales (more than 95%) were on cash credit. Delays associated with the collection of receivables from the customers or receivables turning bad will adversely impact the business operations.
- The company has negative cash flows from operating activities in FY 2006, FY 2007, FY 2010 and H1 FY 2011 due to increase in the trade debtors and Inventories.
There are two basic issues! Relative to smaller scale of operations, the company has disproportionately higher equity. Secondly, non-integrated apparel players (without own yarn / fabric manufacture) are witnessing fall in margins.
Stock Market India Recommendation: Avoid the IPO
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Thanks for sharing the IPO analysis, Chirag. I am sure lots of investors will find it extremely useful in deciding whether to invest in the IPO of this company or not. GEPLCapital.com, a broker portal, also has such in-depth IPO analysis of various companies that have issued their IPOs in the recent past. Keep visiting their website for analysis of forthcoming IPOs!