SP Apparels seems a good long-term bet

ET INTELLIGENCE GROUP| MUMBAI: Investors may consider applying for the initial public offering (IPO) of SP Apparels which opens on August 2 and closes on August 4. It has been gradually deleveraging and seeing consistent growth in its core exports business.

The retail business, which includes manufacturing and selling apparels under the licensed brand Crocodile, could be a value creator in coming years.

The IPO appears to be fairly priced. The only risk is that a significant part of the company’s revenues come from UK and pound has fallen after Brexit.
Issue Details: At the upper end of the price band of Rs 258-268, the company will issue fresh shares worth Rs 240 crore. One of its investors, New York Life Insurance will sell 50% stake worth Rs 25 crore. Post IPO, promoters’ stake will be around 60%. Of the proceeds, Rs 75 crore will be used for capacity expansion, Rs 63 crore for debt repayment and Rs 28 crore for retail expansion.

Business: SP primarily manufactures and exports knitted garments for infants and kids. It earns about 94% revenue (Rs 505 crore) from this and has five major clients — Tesco, Primark, ASDA, Mothercare UK and Dunnes Stores.

According to the management, it could not increase capacity due to high debt but will do so going ahead which will help in wining more clients. EBIDTA margin for the business is 19%.

In FY16, sales stood at Rs 14.5 crore. It plans to open 70 stores over the next three years and also give franchisee. Besides, it sells inner wears to the wholesalers/distributors in India. This contributed Rs 20.5 crore to the total revenues. The retail segment reported operating loss of Rs 4.5 crore.

Valuation: At the upper end of price band, the firm is demanding a valuation of 16x FY17 estimated earnings, which is fair for a company that has a profit growth of above 30% and generating an RoE of 29%. Its only listed peer, Kitex is trading above 20 times.

Funds from Anchor Investors: SP Apparels on Monday raised Rs 71.7 crore by allotting 26.8 lakh shares to 7 anchor investors at the higher end of the price band. DSP Blackrock Micro Cap Fund picked up 23.7%, while Goldman Sachs India Fund and Birla Sun Life Insurance picked up 20.8% each.