IPO Analysis: Credo Brands Marketing Ltd

IPO Rating: Apply for listing gains

About the Issue: 

The company provides a comprehensive wardrobe solution, encompassing a range of items such as t-shirts, shirts, sweatshirts, jeans, cargos, chinos, jackets, blazers, and sweaters. It is gearing up to launch its Initial Public Offering (IPO) for equity shares, each having a face value of Rs 2. The IPO price range is set between Rs 266 and Rs 280 per equity share, resulting in a total issue size of Rs 549.78 crore at the upper price band. The IPO is scheduled to commence on December 19, 2023, and will conclude on December 21, 2023. The market lot size for the IPO is 53 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 689 shares or a total investment of Rs 1,92,920 assuming the upper price band.  

Objects of the Issue 

Considering that the issue is exclusively an offer for sale, it is crucial to emphasize that the company will not directly profit from the offer proceeds. Instead, all offer proceeds will flow to the selling shareholders, distributed in accordance with the number of offered shares they sell as part of the offer. The company seeks to harness the advantages that come with listing equity shares on the stock exchanges. 

Promoter holding 

Kamal Khushlani and Poonam Khushlani are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 61 per cent in the company.  

Company profile 

The company is dedicated to offering a meaningful wardrobe solution for various occasions in a customer's life. Its products are recognized for their youthful aesthetics, staying abreast of the latest fashion trends. Furthermore, the company is actively involved in the retail sale of garments and accessories. 

Over the past few years, the company's product line-up has undergone a significant transformation. Initially limited to shirts, t-shirts, and trousers back in 1998, it has expanded into a diverse array of items. This now includes sweatshirts, jeans, cargos, chinos, jackets, blazers, and sweaters. These offerings span across various styles, from relaxed holiday casuals to authentic daily wear, urban casuals, party wear, and even athleisure categories.  

However, the company does not engage in apparel manufacturing. To enhance its in-house design capabilities, it operates a sampling facility situated in its registered office. This facility plays a crucial role in swiftly bringing new ideas and designs to life. Afterward, the samples are showcased to the company's various distribution channel partners at bi-annual tradeshows. Once orders and feedback are received, the company proceeds to place orders for production. 

The company's products are accessible through an extensive pan-India multichannel distribution network, encompassing exclusive brand outlets (EBOs), large format stores (LFSs), and multi-brand outlets (MBOs). Additionally, the products are available through online channels, including the company's website and various e-commerce marketplaces. As of September 30, 2023, the company operates a total of 1,807 retail outlets across India. These outlets comprise 404 exclusive brand outlets (EBOs), 71 large format stores (LFSs), and 1,332 multi-brand outlets (MBOs). 

Financials  

The company achieved significant revenue growth, while the sudden surge in net profit from Rs 3 crore in FY21 to Rs 78 crore in FY23 raised eyebrows. While a boost in profitability is positive, projecting the June quarter profit figures for FY24 indicate a significant potential shortfall compared to earlier performance. Anticipating a seasonal upswing in the upcoming quarters due to the winter sale of items like jackets and sweaters, it is premature to make definitive remarks about the overall financial performance for FY24 at this juncture. In terms of return on equity (RoE), the company posted RoE figures of 2 per cent, 17 per cent, and 30 per cent for FY21, FY22, and FY23, respectively, signalling a sudden growth in each consecutive fiscal year. 

Valuation and outlook 

The issue is priced with a P/BV ratio of 6.21 times, calculated using its Net Asset Value (NAV) of Rs 45.08 as of June 30, 2023. When we calculate the PE ratio for the company by considering the annualized FY24 earnings relative to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 52.  

As per its official documents, the company has referenced several listed peers, including Aditya Birla Fashion and Retail Ltd, Go Fashion (India) Ltd, Arvind Fashions Ltd and Kewal Kiran Clothing Ltd. In terms of valuation and returns when compared to its listed peers, Credo Brands Marketing Ltd demonstrates a significant outperformance.  

The Indian retail apparel market is sensitive to changes in the economy, and customer purchases tend to decrease during recessionary periods. Several factors beyond company’s control, such as interest rates, global market volatility, inflation, tax rates, government policies, and unemployment rates, impact consumer confidence and spending patterns. It is crucial to continuously predict the latest trends and understand consumer preferences to sustain the business. Additionally, it's worth noting that the company does not engage in any kind of apparel manufacturing. 

Therefore, even though the offer seems attractively priced based on valuation, we recommend that investors cautiously consider a moderate subscription to the offering, prioritizing potential listing gains.