Friday 28 March 2008

Multibagger - Celebrity Fashions Ltd

Ashish Chugh, Investment Advisor

Celebrity Fashions : BSE ID : NSE ID : Reco Price Rs. 32.70 CMP: Rs.35.95 (Gain 9.94%)

The recent initiatives undertaken by the management for sale of its unit and relocation of another unit will help the company reduce its debt and tide over the problems due to appreciating rupee. The company plans to focus on domestic market where its brand INDIAN TERRAIN is well established.

Celebrity Fashions Ltd. came out with its IPO in December 2005 offering shares at Rs.180.

The company has 9 factories covering about 8 lac sq ft of shop floor space employing over 10,000 people. The total installed capacity of these facilities is about 10 mn pieces of Bottoms and 4 mn pieces of Woven Tops in a year. With a capacity of 10 mn pieces per annum, the company is the leading manufacturer of bottoms in South Asia. All these units employ cutting edge technology across all major manufacturing processes like cutting, sewing, finishing and washing. With a full fledged design studio, the company is amongst the very few, who offer complete design to delivery packages for its customers. Celebrity Fashions makes garments for brands like GAP, Levis, Dockers, Banana Republic, Ann Taylor, Timberland, Eddie Bauer and Kohls in the US and Diesel, Marlboro Classics and Armani Jeans in Europe.

The company also operates in the domestic branded menswear market under the brand name 'Indian Terrain'. The brand has, in a short span of seven years, established itself and has earned an image of quality and style. The brand is available in 350 multi-brand outlets (MBOs) including Departmental Stores like Shoppers Stop, Lifestyle, Piramyds, Pantaloon, Central, Globus and other prominent Retail chains and also at Indian Terrain Exclusive Stores spread across the country.

Comparison With Peer Group:

Provogue Kewal Kiran Bombay Zodiac Gokaldas Celebrity
Clothing Rayon Clothing Exports Fashions
Sales FY 07 (Rs. Cr) 239 133 489 203 1034 333
Sales -9mts Dec 07 (Rs Cr) 245 124 664 165 793 255
OPM (FY07) 14% 24.60% 20.20% 13.70% 12.10% 5.60%
EPS -TTM (Rs.) 12.81 17.4 17.28 21.96 16.62 Loss
P/E Ratio 81 17.3 16.3 18.67 10.4 0
Book Value (Rs.) 133.24 102 77 120 118 84
Market Price (Rs.) 1041 301 282 410 173 32.7
Market Cap (Rs. cr) 1988 371 1777 344 594 58.3
Sales to Market Cap 0.12 0.36 0.28 0.59 1.74 5.71

Conclusion:

The appreciation of Rupee against the dollar and the high debt on the balance sheet took their toll on the financials of the company. The company which was deriving roughly 80% of its turnover from exports saw the export division making losses.

The company is initiating the following steps to tide over the difficult times by way of restructuring.

a) The company has finalized sale of its manufacturing unit located at Irrungattukottai, Jwala for a total consideration of Rs.42.50 crores.

b) The company is relocating its unit located at Valachery –Tambaram Road, Chennai and has plans to sell the land and building.

c) The Company has decided to focus significantly towards the domestic branded market as against the current focus of exports markets due to the challenging business environment on account of Rupee appreciation against USD and International competition

The management plans to use the sale proceeds from the sale of its unit at Irrungattukottai for reducing its term loans and working capital loans. The company intends greater penetration in the domestic market through leveraging the Indian Terrain brand. Indian Terrain today is a leading Men’s Wear brand in the premium segment. The company may leverage the Indian Terrain brand to launch Women Wear and Kids Wear. With a successful brand positioning, and passion for quality, the management intends a significant increase in the sales from the brand – this includes increasing the retail outlets and opening of more Indian Terrain stores. The company is also tying up with retail chains for manufacturing under private labels - the company is creating ‘Spirit’, and economy range exclusively for Reliance Retail.

The company suffers from low valuation on account of – a) Low Operating Margins vis-à-vis the Peer group b) losses being suffered by the export division and c) High Interest cost. The company however has a very high Sales to Market Cap ratio compared to the peer group. The stock is available at a substantial discount to its book value.

The company has a successful brand – Indian Terrain, whose brand value alone could be substantial. The recent initiatives taken by the management point towards the intent and willingness of the management to undertake steps in response to the changing business scenario. Successful turnaround would lead to improved valuations for the company, however the process may take a few quarters and has a high degree of uncertainty attached, the stock is therefore advised for investors with an appetite for HIGH RISK.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queries at nexgenfin@yahoo.com.

This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.