Scotts Public Issue To Cost Rs 130-132 Per Share

Scotts Garments (SGL) is set to tap the primary market with its upcoming IPO. The garments company’s public issue will open on April 25 and will close on April 29, 2013. The company had filed a DRHP for the said IPO with the SEBI in October 2010.

SGL is going to offer 1.05 crore equity shares with a face value of Rs 10 per share through this issue. In this offer, 4.5 lakh equity shares will be reserved for eligible employees and the remaining approximately 1 crore equity shares would be the net issue to the public. The equity shares in this offer are in the price band of Rs 130-132 per share and will be based on book-building method. Based on the lower price band, the company will raise an amount of Rs 136.59 crore. The issue and the net issue constitutes of 26.95% and 25.8% of post issue paid-up equity capital of the company. Currently, SGL has 2.85 crore equity shares. The proposed listing of equity shares will be for the BSE and the NSE indices. The book running lead manager for the offer is Keynote Corporate Services and the co-book running lead manager for the same is Canara Bank.

The garments company was incorporated in December 1992 and its commercial commencement began in the year 1994. SGL is one of the reputed manufactures of ready-made garments in India. It produces and exports various woven, knitted and denim garments. Its product portfolio comprises of shirts, tops, skirts, trousers, shorts, t-shirts, jerseys etc. The company's woven garments segment provides high quality casual wears for men, women and kids. Its knits segment includes soft and comfortable fabrics garments in various colours. Its denim range includes Indigo Blue, AZO free Sulphers, Pigments & Tints, Multicounts, Flame, Flat Finish, Coated, Over-dyed Denim etc. The company has a fully equipped manufacturing facility with its partners. At present, SGL has an installed capacity of 99.72 lakh pieces per annum for woven garments and 117.36 lakh pieces per annum for knitted garments.

Further, SGL posted Rs 500.25 crore income from operations in FY12, which is just 1% up from Rs 495.28 crore in FY11. The income in this period remained almost constant, due to the 5 months suspension of printing and dyeing operations at its Tripura unit. Due to the sale of certain equity shares investments, the company's other income grew to Rs 65.88 crore from Rs 8.47 crore in FY11. Moreover, its total expenses remain almost unchanged - Rs 428.52 crore in FY12 - which was Rs 427 crore in FY11, due to the suspension of work in FY12. The increase of Rs 1 crore in expenses was mainly led by the hike in raw material cost. 

During the same period, the EBITDA stood at Rs 71.73 crore by showing a growth of 5% from FY11. Interestingly, the bottomline grew by 140% to Rs 84 crore in FY12 against Rs 35 crore in FY11. The EBITDA margin remains flat in FY12 on a YoY basis, while, it showed a 974 basis point growth in PAT margin to 16.8%. The increase was mainly on account of capital gains from the sale of investments.

The company proposes to utilise the issue proceeds for capacity expansion and to meet the working capacity requirement. SGL, with the raised funds, is going to establish a facility for trouser manufacturing at Doddaballapur, Karnataka. In addition, it is also going to establish a Knitted & Fabric processing unit at Kagal, Maharashtra. The company has also raised a term loan of Rs 150 crore from Canara Bank for its capacity expansion plan. Further, the remaining issue proceeds will be utilised to fulfill the working capital requirement for the new units.

Based on the offered share price, the company is trading at a PE of 6.03x of EPS FY12 of Rs 21.56. Whereas, its peer companies such as Mandhana Industries, Bombay Rayon Fashions, KPR Mill and Gokaldas Exports are trading at trailing 12-month (TTM) PE of 11.16x, 18.34x, 5.45x and -0.7x respectively of TTM EPS. The proposed price band for the public issue seems expensive considering the listed players. 

The readymade garments sector is a very competitive one with very few entry barriers to this industry. Along with this, the customers are not much aware of SGL's brand, which makes it a weak player in the market. Hence, we recommend our readers not to subscribe to this public issue.