Organised retail has become a good business opportunity for the ones who have the capacity to wait for a long term to reap the actual benefits. We saw some of these companies raise funds from the public for further expansion of their network. And it has given good returns in terms of price appreciation to the investors. Also, it is easier for investors to identify these companies and actually judge their performance. With the tremendous growth seen, one is seeing higher valuation of these companies.

Business

Koutons Retail is an integrated apparel manufacturer and retailer in India. It has a network of 999 exclusive brand outlets having franchise arrangements across India. It has two brands: the Koutons brand is sold in 566 stores and Charlie Outlaw brand is sold in the remaining 433 stores. Of these two brands in the last financial year, Koutons contributed about 92.34% to the total revenue. Currently, the company is selling only men?s wear, which includes shirts, trousers, denims, suits, blazers, T-shirts, etc. Shirts contribute the highest volume sale of 39.69%, followed by trousers and cargos (25.42%) and T-shirts (15.58%).

To cater to the large network of outlets the company has 18 in-house manufacturing/ finishing facilities and 14 warehouses for storage in Gurgaon, Haryana. It also outsources some part of its work to third party manufacturers on job work basis. It has continuously enhanced its manufacturing/ finishing capacity in the last three years. However, the capacity utilisation in the latest results was much less than the previous results because the capacity enhancement was higher than the growth in sales. The company?s finishing capacity is higher than manufacturing because it currently outsources some part to third party manufacturers.

The company will utilise the funds to open 140 exclusive brand outlets (Rs 40.91 crore), establish new integrated facility (Rs 27.47 crore), plant and machinery (Rs 7.5 crore), and improve IT network (Rs 5.57 crore).

Financials

The textile industry is highly competitives with lower margins, and this puts pressure on the sustainability of small players in the long term. Koutons has an integrated facility, which increases the overall margin. Higher capacity will mean economies of scale. With all these, the company has the highest network of branded outlets. However, it is susceptible to foreign exchange fluctuations as it imports 27.59% of the raw fabric requirements from countries like China and Taiwan.

The company?s sales are recorded only when the product is bought by the end consumer. And due to this the inventory is very high at 92.62% of the total income. Its sales increased from Rs 22.318 crore in FY2002-03 to 403.62 crore in FY2006-07. Operating profit and net profit in FY2006-07 were Rs 71.48 crore and Rs 34.49 crore respectively. In the last financial year, operating and net profit margins were 17.71% and 8.54% respectively.

Concerns

Organised retail is an upcoming sector and Koutons has marketed itself as the retailer of branded garments, but it is susceptible to textile industry issues. One of the important differences between the other retailers and Koutons Retail is that the latter sells only garments. As garments are sold mainly in the festive season, maintaining huge inventory is the biggest task and requires regular working capital. This will lead to higher finance cost and ultimately lower profit margin.

Now this results in less cash in hand and less distributable profits to the shareholders. This will automatically bring the valuation at lower end. That is why textile players are commanding lower price earning as compared to other industry players.

Valuation

For the year ended March 2007, the fully diluted earning per share of Koutons was Rs 10.95. Considering the price band, P/E at the lower and higher band is at 33.76(x) and 37.86x. The pricing is relatively lower than its peers like Pantaloon Retail 58.50(x) and Provogue 68.71(x). Investors must consider the above factors while investing.