Shares of Mandhana Industries, which has a licence arrangement to sell garments under the brand ‘Being Human’ of Salman KhanFoundation, have hit the 20 per cent lower circuit during each of the past two trading sessions. After the sharp fall in the stock price, Mandhana has announced that it is in the process of demerging the Being Humanretail business into a separate company — Mandhana Retail Ventures.
Investors who wish to take advantage of the fallen stock price by making fresh purchases need to consider a few risk factors. After the demerger of the retail business, Mandhana may not offer much value to shareholders. In the last few years, the stock has enjoyed good investor interest due to the company’s tie-up with ‘Being Human’, which although smaller in size was the most profitable and high growth business. The retail business had operating margin before depreciation (EBIDTA margin) of as high as 25 per cent and contributed 10-15 per cent of the consolidated sales. The EBIDTA margin of the remaining business was only 14 per cent.
The company’s stretched working capital cycle and rising debt have also been key concerns. Rating agency CARE recently downgraded the company’s non-convertible debentures to BBB+ from A. “The revision takes into account its stretched working capital cycle on account of elongation in its receivables position and low pricing power,” said the CARE report. Some analysts are concerned if the company will be able to pay back the debt once the retail business is gone.
Investors need to be aware of two more risks associated with the company. One, there is uncertainty over the terms at which the licence agreement with the foundation, Being Human, would be re-negotiated.
The company said that it is in the process of signing a new contract with the foundation. In the earlier agreement, Mandhana has been paying close to 5 per cent of its sales as royalty income. Second is that the demerger ratio may not be in favour of the shareholders.
According to the latest shareholding details, promoters holding was at 73 per cent and lesser known entities, which some analysts refer to as p-notes, own 6 per cent of the company’s stake.