Monte Carlo IPO Opens; Angel Broking Says Subscribe

Woolen and cotton apparel manufacturer Monte Carlo Fashions' initial public offer (IPO) opened on Wednesday. The issue will close on December 5.

The price band is Rs 630 to Rs 645 per share. Monte Carlo aims to garner Rs 342 at the lower end and Rs 350 crore at the upper end of the price band through this issue.

Through this public offer, Monte Carlo will issue 54.33 lakh equity shares for subscription. Monte Carlo is not issuing fresh equity shares under this issue, but it is diluting 25 per cent shareholding in the company.

As a result, promoters' stake in the company will come down from 81.06 per cent to 63.63 per cent. Mauritius-based private equity firm Smara Capital, which had acquired 18.51 per cent stake in the company in June 2012, will reduce its holding in the company to 10.94 per cent.

Here are some things to know about Monte Carlo Fashions:

Company profile: The Ludhiana-based company manufactures woollen and cotton apparel. It caters to premium and mid-premium branded apparel segment. It has nearly 200 exclusive outlets and over 1,300 multi brand outlets through which its products are sold. Monte Carlo has two manufacturing facilities in Ludhiana (Punjab).

Valuation:

The company had reported a profit of Rs 55.4 crore on sales of Rs 502 crore in the financial year 2013-14. Its reported earnings per share (EPS) for FY14 was Rs 25.5. At the lower end of the price brand the stock is valued at 24.8 times its FY14 EPS whereas its peers like KKCL (Kewal Kiran Clothing) and Raymond are trading at a valuation of 34.5 times and 27.7 times to its FY14 EPS respectively.

Should you buy?

Domestic brokerage Angel Broking recommends subscribing to the issue citing Monte Carlo's strong brand image, asset light model, healthy balance sheet with decent return ratio, positive operating cash flow and strong distribution network.

The brokerage says Monte Carlo's net sales have grown at a CAGR of 16.3 per cent over FY2012 to FY2014 and its net profit has grown at a CAGR of 5.8 per cent over FY2012 to FY2014. However the brokerage has highlighted that its gross profit margin (EBITDA margin ) has declined from 22 per cent in FY2012 to 18.7 per cent in FY2014, but it believes that margins are at sustainable level.

The company had generated a return on equity (ROE) of 14.6 per cent and a return on capital employed (ROCE) of 16.6 per cent in FY14, which is a decent return as per the brokerage.

Angel Broking has recommended to subscribe to the issue at the lower end of the price band from a two-year perspective. From a one-year perspective it sees limited upside potential in the stock as valuations seems to be fair.