Saraswati Saree Depot IPO analysis

Saraswati Saree Depot IPO will open for subscription on August 12, 2024, and close on August 14, 2024. We break down the strengths, weaknesses, and growth prospects of the women's ethnic wear wholesaler to help investors make an informed decision.

Saraswati Saree Depot IPO in a nutshell

• Quality: During FY22-FY24, Saraswati Saree's average ROE and ROCE were 84.7 per cent and 36.9 per cent, respectively.
  
• Growth: Its revenue and net profit grew 5.4 and 54.9 per cent per annum, respectively, over FY22-FY24.
  
• Valuation: Post the IPO, the stock will be valued at a P/E and P/B of 21.5 and 3.8 times, respectively.
  
• Overview: Ethnic wear, such as sarees, accounts for 60-65 per cent of the women's wear market. With the growing number of working women and their rising discretionary income, the demand for occasional-wear sarees is only expected to increase. Wholesalers like Saraswati Saree stand to benefit from these growth trends. However, the company operates in a highly fragmented segment, with the unorganised players taking up 63-65 per cent market share.

About Saraswati Saree Depot

With its origins dating back to 1966, Saraswati Saree has a rich and long-standing history in the saree business. The company started its operations under the late Laxmandas Dulhani and is now being run by his son Shanker Dulhani. Saraswati Saree operates in the wholesale (B2B) ready-made garment segment, specialising in women's wear. It serves over 13,000 customers from its two stores in Kolhapur and Ulhasnagar in Maharashtra. Notably, sarees accounted for over 90 per cent of the company's FY24 revenue.

Strengths of Saraswati Saree

• Robust distribution: The company boasts a diversified supply chain of over 900 weavers and suppliers across different states. The top 10 suppliers accounted for only 25 per cent of the company's total purchases in FY24.

Weaknesses of Saraswati Saree

• Revenue concentration: Saraswati Saree's stores are located only in two cities of Maharashtra. The Kolhapur store, which is its largest, contributed around 88 per cent to the company's total revenue in FY24.
  
• Low margins: Being a wholesaler, the company has dismal operating profit margins with a three-year average of just 5 per cent.

Risk report

Saraswati Saree and its business

• Was the company's earnings before tax more than Rs 50 crore in the last 12 months?
  No. The company reported a profit (before tax) of Rs 38.6 crore in FY24.
  
• Will the company be able to scale up its business?
  Yes. Demand for women's ethnic wear is expected to remain buoyant, which is being supported by their rising discretionary incomes. This will help the company scale its business.
  
• Does the company have recognisable brands with client stickiness?
  No. Saraswati Saree operates as a wholesaler with no brand of its own.
  
• Does the company have a credible moat?
  No. Many organised and unorganised players offer products similar to those offered by the company.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post the IPO, the promoters' stake will be 74.7 per cent.
  
• Do the top three managers have more than 15 years of combined leadership?
  Yes. Even though the company was incorporated in 2021, its top management has been running the business for more than 15 years.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is the company free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE were 84.7 and 36.9 per cent, respectively. In FY24, its ROE and ROCE were 58.9 and 42.6 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative cash flow from operations in FY22 and FY24.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's net debt-to-equity ratio was 0.7 times as of FY24.
  
• Is the company free from reliance on huge working capital for day-to-day affairs?
  No. Wholesale businesses are capital intensive. In FY24, the company's inventory accounted for almost 50 per cent of its total assets.
  
• Can the company run its business without relying on external funding in the next three years?
  No. Its working capital requirements for FY24 amounted to Rs 57 crore. It is now raising Rs 104 crore from the IPO as a fresh issue, but given its history of short-term borrowing and working capital requirement, the company may have to rely on debt or external fundraise going forward.
  
• Is the company free from meaningful contingent liabilities?
  Yes. Its contingent liabilities as a percentage of total equity were around 0.1 per cent as of FY24.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. After listing, the stock will offer an operating earnings yield of 5.9 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. It will be valued at a P/E of 21.5 times compared to its peers' median of 47.5.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. It will be valued at a P/B of 3.8 times compared to its peers' average of 5.9.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.

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