IPO ANALYSIS: LOVABLE LINGERIE LIMITED – BLOATED EQUITY, AGGRESSIVELY PRICED – AVOID.

The Mumbai based innerwear manufacturer is entering the capital markets shortly with issue of 45, 50,000 equity shares of Rs 10 each in the price band of Rs 195-205. The company recently raised Rs 20cr (Pre IPO placement) by allotting 10 lakh equity shares @Rs 200 to SCI Growth Investments, including share premium of Rs 190. Anand Rathi is the BRLM. The issue opens on 08-03-11 and closes on 11-03-11.

BUSINESS:

The company, incorporated in the year 1987, is one of the country’s leading women’s innerwear manufacturers.  The products include brassieres, panties, slips / camisoles, home wear, shape wear, foundation garments and sleepwear products. The Company was licensed the brand Lovable from Lovable World Trading Company, USA. Subsequently, by an agreement, the Company acquired the brand “Lovable” from Lovable World Trading Company, USA, on an exclusive basis for the territories of India, Nepal, Sikkim and Bhutan. The innerwear products manufactured under the brand Lovable cater to the premium segment market in the country.

Lovable and Daisy Dee are the flagship brands.  Lovable is amongst the top preferred brand in women’s innerwear in the country. As part of the growth strategy, the company has diversified the portfolio of brands and acquired brands like “Daisy Dee” from Maxwell Industries Limited, and College Style from Levitus Trading Limited, Hong Kong. 

The company has three manufacturing facilities of which two are situated in Bengaluru and one is situated in Roorkee, Uttarakhand. The company has a total installed capacity of 30 lac pieces each per annum to manufacture brassiere and panties.

Going forward, the company proposes to implement a project for modernization and integration at a new location in Doddakalasandra, Bengaluru, which will result in increase in capacity and value-addition by 25 lacs pieces per annum. The manufacturing unit situated at Roorkee, Uttarakhand commenced operation in February, 2010 and has an installed capacity of 7.5 lac pieces per annum to manufacture brassiere and panties. 

OBJECT OF THE ISSUE

 The objects of the Issue are:

1.  Setting up of a manufacturing facility to create additional capacity at Bengaluru

2.  Expenses to be incurred for Brand Building;

3.  Brand Development expenses for “College Style” 

4.  Investment in Joint Venture;

5.  Setting up of Exclusive Brand Outlets

6.  Setting up of retail store modules for “shop-in-shop”

7.  Up gradation of design studios

8.  General corporate purpose

FINANCIALS:

RS IN CRORES

	08	09	10
TOTAL INCOME	63.08	68.81	86.79
PAT	4.16	2.87	10.55
EPS (RS)	6.31	3.82	14.07##

## On an equity of Rs 7.50cr, the post issue equity will be Rs 16.80cr.

MAATERS OF CONCERN:

a. The company has capitalized its reserve by issuing bonus shares (97,50,000) to the promoters in the year 2010. This, along with the present issue will raise the equity base to Rs 16.80cr.

b. Labour intensive industry and hence may face labour disruptions, which may affect the production.

c. For setting up of additional manufacturing facilities at Bangalore, the appraisal was done by BOB in 2009, for which a Term loan of Rs 16.33cr has been sanctioned by BOB. However, for the purpose of IPO, the company again has included the entire amount as cost of the project. One wonders what happened to the Term Loan availed, for the same purpose.

d. The land on which the proposed expansion is to be carried out is a disputed one. The expansion is likely to be delayed.

e. The Company is dependent on third party transportation providers for the supply of raw materials and delivery of the products and any disruption in their operations or a decrease in the quality of their services could affect the Company's reputation.

f. IPO grade 3 by CARE.

VALUATION AND RECOMMENDATIONS:

At Rs 195-205, the issue is very expensive, considering the bloated equity before the IPO. Assuming that the company will report a PAT of Rs 12cr for FY 11 (up 20% over previous year), the EPS on the post issue equity of Rs 16.80cr will be around Rs 7/- and the PE will be around 30 which makes the IPO expensive.  Most of the IPO funds will be spent on brand building, JV and Exclusive out lets, which may not add up to higher margins. Compared to the previous years, the margin in the year 2010, (IPO in mind) has improved substantially which is to be taken with a pinch of salt.  AVOID SUBSCRIPTION.