Bang Overseas IPO - Avoid

Incorporated in 1992, Bang Overseas provides fashion fabrics and meets the ready-to-wear requirement of customers in the apparel, textile and retail segment. Starting as a textile trader, the company has been conceptualising and designing fashion fabrics and an outsourcing hub for textile companies in Turkey, Portugal, Mauritius and other European countries since 1998. The first apparel-manufacturing unit, Reunion Clothing Company, with an installed capacity of 350,000 pieces per annum, was set up in Bangalore in 2005, A second manufacturing unit, Formal Clothing Company, with an installed capacity of 360,000 pieces per annum, was started in 2006. At present, the company has an installed capacity of 720,000 and 540,000 pieces per annum at the two manufacturing units.

Its products retailed through 157 points of sales comprising own retail outlets, large format stores (LFS) like Shoppers' Stop, Pyramid, Globus, the Loot, Saga, and other multibrand outlets (MBO) spread all over India. A centralised warehousing and logistic centre at Kalher Village near Bhiwandi in Maharashtra facilitates the supply-chain management.

A third manufacturing unit, with total installed capacity of 600,000 pieces per month, is to be set up in the Kolar district in Karnataka and 41 retail outlets are to be opened across India. The current IPO, expected to raise Rs 70 crore, is to meet the expenditure required to set up the manufacturing unit, retail outlets, warehousing and logistic facilities, and for brand building and general corporate purposes including issue expenses.

The fund requirement estimated for setting up the new apparel-manufacturing unit is Rs 36.71 crore, retail outlets Rs 10.63 crore, and warehousing and logistic facilities Rs 10.23 crore. The entire expenditure is to be financed by the IPO. Funds are to be deployed over the next two years.

Strengths

1. Thomas Scott is an established brand in the men's-wear segment, and contributed Rs 10.50 crore to the turnover in the year ended March 2007 (FY 2007).

2. Margin has shot up from 5.9% in FY 2003 to 17.4% in FY 2007 due to increase in volume of sales of apparels and sourcing of textiles at better prices.

3. Has 12 Thomas-Scott retail outlets including three franchisees.

4. Contribution of sales of apparel to total sales has been increasingly steadily, going up from 40% in FY 2006 to about 50% in FY 2007. This is encouraging as the demand for apparels is poised for a strong growth across the globe.

Weaknesses

1. Has limited manufacturing experience.

2. Had negative cash flows in the past. Sustained negative cash flow could impact growth and business. Cash flow from operating and investing activities was a negative Rs 1.58 crore and Rs 7.24 crore respectively, in FY 2006. Cash flow from operating and investing activities was a negative Rs 1.69 crore and Rs 2.18 crore, respectively, in the six months ended September 2007.

3. The franchise model, proposed to be follow, requires inventory to be carried on books till the sale of the apparels to the end consumer and not pass the inventory risk to the franchisee. This requires high inventories, and could result in inventory write-downs and have an adverse effect on business and finances. Presently, there are only three franchise but 47 new franchise-operated outlets are to be added.

4. With exports comprising about 39% of garment sales in FY 2007, rupee appreciation is a negative.

Valuation

Consolidated net profit was Rs 10.87 crore in FY 2007/ This represents EPS of Rs 5.7 on post-issue equity of Rs 13.56 crore. The offer price discounts FY 2007 EPS 25.3 times at the lower band price of Rs 200 and 26.2 times at the upper band price of Rs 207. Well established and larger players like Gokaldas Exports are available at much lower 13 times discounting, while higher discounting for Kewal Kiran (32.9 times) and Provogue India (122.1 times) are partly for the strong brand name (of the former) and valuations of the mall development subsidiary (of the latter).

Recommendation

In case of this IPO, share is being issued at a multiple of 26.2 times at the upper band, which makes the issue fully priced, leaving no scope for any capital appreciation. Plus, the present state of the market, adds uncertainty to the prospects of the company and issue. Better to skip this issue.

Reference:- www.capitalmarket.com www.moneycontrol.com

ANURAG DUJARI

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