Sudar Garments - Better Not Worn

Sudar Garments (SGL) is a Mumbai-based company tapping primary capital market with an initial public offer of 90.88 lakh equity shares of Rs 10 each with a price band Rs 72 to Rs 77 per equity share. The issue would constitute 49 per cent of the fully diluted post-issue paid-up capital of the company. Through this issue, company intends to raise Rs 65.4 crore and Rs 69.96 crore at lower end and upper band respectively.

SGL is engaged into the business of manufacturing of garments for menswear, womenswear and kidswear. At the end of FY10 SGL has capacity of 20 lakh garments per annum. SGL, which started manufacturing on contract basis for exporters, has now shifted its focus to domestic market. It has yielded results and company was able to face the recession of FY08 in a better way. Domestic sales that accounted for just six per cent of total sales in FY06 now constitute 60 per cent of the total turnover. But this increase in domestic sales has come at a cost. In order to capture the market, the company has increased the credit days given to debtors. This is clearly reflected in the increase in average debtor’s day that has increased from around 90 days in FY06 to 140 days in FY10. Going forward we feel that it might create a problem in working capital management, especially in rising interest rate scenario. This might be the reason why almost one-third of the issue proceeds will go to meet working capital requirement. Rest of the IPO proceeds will be used for expansion of the existing apparel manufacturing unit and setting up of retail outlets and brand building.

Coming down to valuation of the company it looks little bit stretched compared to its listed players. When we annualized the six-month earning ending September 2010 of SGL we get EPS of 4.6 on expanded equity which discounts the IPO price by 15.6 times and 16.7 times in the lower and upper price band. This is too expensive compared to one of the listed player, Bang Overseas that is trading at 6.6 times of its FY11E earning. Even when we see market cap to sales (FY11E) of the company it is at 1.28 and 1.36 times at lower and higher price band respectively against 0.25 times at which Bank Overseas is trading.  Apart from the valuation issue what is also worth noting is that at the end of FY10 top six customers constitute 98 per cent of total turnover. Therefore we ask our readers to stay away from the issue.