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Go Fashion IPO: How good is it?

A leading name in women's bottom wear has come out with its IPO. Here is a set of questions (and answers) that will help you to make an informed decision about it.

Go Fashion IPO: How good is it?

Go Fashion IPO: How good is it?

In our story, Go Fashion IPO: Information analysis, we have shared the key details of the IPO, along with important information about the company. Here we will answer some questions about Go Fashion and evaluate it on parameters like management, financials, valuations, etc.

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
No, the company reported a loss of Rs 3.5 crore for FY21.

2) Will the company be able to scale up its business?
Yes. With the pandemic receding, the company has started opening new stores and expanding its online business. Given the increasing demand and the restoration of economic activities, the company should be able to scale up its business.

3) Does the company have recognisable brands truly valued by its customers?
Yes. Go Colors is a highly recognised brand in the women's bottom-wear segment.

4) Does the company have high repeat customer usage?
No. As it operates in a highly competitive space, high repeat customer usage is not possible. We also do not have sufficient data to conclude that the company has high repeat customer usage.

5) Does the company have a credible moat?
No. Although the company has a strong brand image, it does not offer anything unique.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
Yes, the company does not have any major exposure to the international market and has adhered to all regulations so far.

7) Is the business of the company immune from easy replication by new players?
No. There are several competitors and also new players are emerging in the branded women's bottom-wear segment. Besides, unorganised players hold a significant market share in this segment.

8) Is the company's product able to withstand being easily substituted or outdated?
No. Although clothes are essential pieces of commodity, its competitors may offer better products.

9) Are the customers of the company devoid of significant bargaining power?
Yes. Since customers are individuals, they do not have any significant bargaining power.

10) Are the suppliers of the company devoid of significant bargaining power?
No, the company gets 66 per cent of the raw materials from the top five suppliers. Thus, changing suppliers or any changes in terms of contracts may affect the company's business.

11) Is the level of competition the company faces relatively low?
No, the company operates in a highly competitive market, with the presence of both organised and unorganised players.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. The promoter groups PKS Family Trust and VKS Family Trust, which operate through CEO Gautam Sarogi and non-executive director Rahul Sarogi, will hold a combined stake of 52.8 per cent.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. The top three managers, including Prakash Kumar Sarogi, Gautam Sarogi and Rahul Sarogi, have more than 15 years of combined experience.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
Yes. Although the company has 20 tax proceedings against it, it does not cast any doubt on the management's intention.

16) Is the company's accounting policy stable?
Yes, we have no reason to believe otherwise.

17) Is the company free of promoter pledging of its shares?
No, the promoters VKS Family Trust and PKS Family Trust have combinedly pledged 29 per cent of their stake before IPO and would stand at 30 per cent post IPO.

Financials

18) Did the company generate a current and three-year average return on equity of more than 15 per cent and return on capital employed of more than 18 per cent?
No, the company generated a three-year average return on equity of 10.2 per cent and a return on capital employed of 12 per cent. For the current year, the company has reported a loss. Thus, it does not have a return on equity and it reported a return on capital employed of 3.5 per cent.

19) Was the company's operating cash flow positive during the last three years?
Yes, the company has reported positive operating cash flow during the last three years.

20) Did the company increase its revenue by 10 per cent CAGR in the last three years?
No, the company's revenue decreased by 6 per cent CAGR in the last three years. This was mainly because of the pandemic.

21) Is the company's net debt-to-equity ratio less than one or is its interest-coverage ratio more than two?
No. Although the company has a debt-to-equity ratio of 0.6 (including lease liabilities), it has an interest-coverage ratio of 0.8 for FY21. It must be noted that this figure was a result of the pandemic, as the company had a strong ratio of five times in FY20.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
No. Retail businesses, in general, need a huge amount of working capital. The company has a cash-conversion cycle of 179 days for FY21 and even during the normal business periods such as FY20, it had a cash-conversion cycle of 108 days. Thus, it will need consistent and significant working capital.

23) Can the company run its business without relying on external funding in the next three years?
Yes. The company has planned to utilise the IPO proceeds to open new exclusive-brand outlets (EBOs) and meet its working-capital requirements. It won't need any external funding in the next three years.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. Although the company's short-term borrowings increased by 26 per cent from Rs 8.3 crore in FY19 to Rs 10.4 crore FY21, they decreased drastically to Rs 30,000 as of June 2021.

25) Is the company free from meaningful contingent liabilities?
Yes, the company has contingent liabilities amounting to Rs 2.4 crore, which is only 0.9 per cent of the total equity.

Stock/valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No. The stock will only offer an operating-earnings yield of 0.6 per cent on its enterprise value.

27) Is the stock's price-to-earnings less than its peers' median level?
Not applicable. The company and all other peers, except Trent, incurred a loss in FY21. Trent trades at a P/E of 599, as the company reported strong Q2 results after reporting consistent losses.

28) Is the stock's price-to-book value less than its peers' average level?
Yes. Post listing, the stock will trade at a P/B of 9.5 as compared to peers' average level of 14.5.

Go Fashion IPO: How good is it?

Go Fashion IPO: How good is it?

Also read Go Fashion IPO: Information analysis to learn about the key IPO details and important information about the company.

Disclaimer: The authors may be an applicant in this Initial Public Offering.