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IPO: Monte Carlo Doesn’t Attract Us, Low Profit Growth and Potential Conflicts


We have yet another IPO in Monte Carlo fashions. First, let’s look at the fact that the IPO is already oversubscribed 2.44x.


The issue closes today, so I’ll make this quick so I can post it before the market closes.

  • It’s a small, Rs. 350 cr. issue
  • Priced at Rs. 630-645 per share.
  • The money won’t go to the company. All the money goes to existing shareholders who are selling.
  • Samara Capital is selling part of its stake from 18% to 10%.
  • Promoters are selling 17% of the company, taking their share down to 63% or so.


The company makes apparel, and mostly a brand of winter wear (sweaters and the like). Revenues in the last three years (FY2012 to FY2014) grew from 375 cr. to 519 cr. and profits grew from 49 cr. to 55 cr. It’s quite concentrated in Q3 (December quarter) because well, that’s when winter wear sells.

They have 2.17 cr. shares outstanding and there’s no dilution (since no fresh shares are being issued). That is an EPS of Rs. 25.34. This translates to a trailing P/E of 25.5.

Apparel will grow, so earnings could as well but consider that from FY2012 to FY2014, the company grew profits just 10% or so, in total. Even now it’s not getting more money (only existing shareholders are selling) so why would you imagine they will grow?

However, note that competitors like Kewal Kiran and Zodiac are listed at even higher P/Es of 30+.

One factor to consider is that there are a lot of related parties involved. The promoters own competitive businesses, and then they own the upstream supply chain. A good portion, more than 70% of the company’s raw materials are sourced from companies owned by promoters. This is a negative in the near term because of all sorts of governance issues it could introduce.

In the grey market, the IPO is trading at a 20% premium, it seems. This means there’s momentum, in all probability. That is also evident because of the oversubscription.

Will we buy?

At Capital Mind we don’t provide recommendations. What you do with your money is a decision we aren’t going to take. But we can take decisions with our money.

In this case, we’ll give this IPO a skip. While the momentum is there, we don’t see the ability to make much from here in absolute terms. If we invest Rs. 100 (just saying, the minimum lot is 23 shares, so a size of Rs. 15,000), it’s likely we see shares worth just Rs. 20 or 30, and if that appreciates by 20% on listing that’s a 2%-3% return on capital with all those risks.

And leaving momentum aside, the valuations look a little rich to us. This is of course a game of not so many valuation issues on fundamentals because anything and everything is going up, but the concerns are about the low profit growth the last two years for one. And second, that they have all those upstream promoter owned companies which could eventually impact profits (who’s to say how much is actually arm’s length? The answers are not easily available).

Fundamentally, results are likely to be good in the December quarter, so it’s likely some good news comes in when those numbers arrive. However, the longer term fear is that the company will need money to scale and it’s not really trying to get cash and do so (all the IPO proceeds go to current shareholders, not the company)

This would be a buy for us at less than Rs. 500, but I guess that’s not where the price is. The best thing for us is to wait till listing and then consider a buy on pure momentum rather than take a punt now.


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