Investors with an appetite for risk can consider subscribing to the initial public offer of Mudra Lifestyle. The price band of Rs 75-90 values the offer at 20-24 times its annualised FY-07 per- share earnings, on a fully expanded equity base. The pricing would be 10-12 times its likely FY-08 earnings, assuming that the capex plans proceed on schedule. Our estimates factor in a strong growth in revenues on the back of significant capacity expansion and robust demand from domestic garment retailers over a two/three-year period.
Growth prospects would hinge on Mudra Lifestyle's ability to transition from a fabric manufacturer to a garments supplier (for which it has ambitious expansion plans). This is a major risk to our recommendation. Investments can be considered with at least a two-year perspective, as the full benefits of the expansion are likely to flow in only in FY-09.
Background
Mudra Lifestyle is a manufacturer of fabrics and garments, with a predominant focus — unlike most textile players that hit the market recently — on the domestic market. Till now, the fabrics business has been the major driver of revenues, accounting for close to 90 per cent of its Rs 100-crore income in FY-06. The garments business, which caters to the demands of domestic branded players, has begun to make a stronger contribution. In the first half of thisfiscal, the segment recorded an income of Rs 16 crore or about 25 per cent of the overall revenue against Rs 9 crore in FY-06. The growth has come on the back of some capacity expansion, but indicates that orders are beginning to flow into this segment.
Mudra is slowly increasing its thrust on the garments business. It is embarking on a Rs 180-crore project that would substantially expand its weaving, processing and garments capacity and help set up a new yarn dyeing facility. Its garment capacity alone will more than triple to 10 million pieces a year. The weaving and garment capacities will go on stream by May, while processing capacities will become operational in October. The Rs 80-crore raised from the offer will help to partly fund this project; debt of Rs 100 crore has also been raised under the TUFS scheme, which offers an interest subsidy.
Investment rationale
We view Mudra's presence in the domestic market as a positive. Realisations are likely to be stable relative to the export market where competition would exert considerable pricing pressure. More significant is the strong demand that is likely to flow in from branded apparel outfits and retailers. Branded players such as Raymond and Madura Garments are rapidly expanding their retail presence through their own outlets and multi-brand stores. As they commit more funds towards retail expansion, they are likely to outsource more of their production to players such as Mudra. The likes of Reliance Retail and Bharti too are likely to be on the lookout for units that can produce private labels. Against such a backdrop, Mudra's scale and integrated facilities would be seen as an advantage.
Second, a growing contribution from garments could lead to better margins (currently at 17 per cent) and a higher return on capital. Mudra hopes to achieve a revenue mix of 50:50 for fabrics and garments by FY-08.
Risks
Mudra's garments business is still at a nascent stage and could encounter challenges of scaling up, including managing a larger workforce and contracting orders from branded players, most of which have their own manufacturing units.
There are not too many listed players that cater to the demand from domestic brand manufacturers. However, there could be new entrants that would want to capitalise on the opportunity; Gokaldas Exports recently announced plans to cater to the needs of domestic branded players and retailers.
As retailers would want to diversify their sourcing base, this may not be a constraint in the medium term. Mudra might, however, have to carve a niche for itself as it begins to compete with players with a presence in the export market.
Offer details: About 96 lakh shares are on offer, which will raise Rs 80 crore at the upper end of the price band.
A pre-IPO placement has been made to SIDBI Venture Capital and SBI at Rs 75 a share. The lead manager is SBI Capital Markets. The offer closes on February 8.