Widely read:
Sai Silks, a well-known women's apparel brand, has launched its IPO (initial public offering). Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.
In a nutshell
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Quality
: Sai Silk's three-year average ROE and ROCE were 17.1 and 17.9 per cent, respectively.
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Growth
: Its annual revenue and net profit grew by 41.3 and 336 per cent, respectively, between FY21 and FY23.
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Valuation
: The stock will trade at a P/E and P/B of 34.9 and 3.4 times, respectively. These figures are lower than its peers' median P/E and average P/B, respectively.
- Overview : Sai Silks has a significant retail presence in the saree niche segment. The apparel industry's shift towards the organised sector and rise in demand for ethnic wear will be the key growth drivers for the company. However, volatile commodity prices and ever-changing trends in fashion and consumer preferences can pose challenges for the business.
About Sai Silks
Sai Silks owns and operates retail stores of women's apparel and accessories. As of July 2023, the company runs 54 stores across four states in South India. It has a strong presence in Telangana and Andhra Pradesh, as the two states generated over 80 per cent of the company's revenue in FY23. Sai Silks primarily sells ethnic wear for women, with sarees being its largest segment (68.3 per cent of revenue in FY23). The enterprise generates most of its revenue (98.6 per cent) from its retail outlets.
Strengths of Sai Silks
- Sai Silks has divided its stores into four different sub-brands, which allows it to cater for all segments of customers, right from the affordable market (55.5 per cent of revenue in FY23) to the premium segment (44.5 per cent of revenue in FY23).
Weaknesses of Sai Silks
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The apparel industry is highly fragmented and uncertain as customer preferences shift frequently, and the company largely depends on selling sarees for revenue.
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The firm has a minimal presence in the e-commerce sector. This can be an issue in the current business environment as online shopping gains traction. A weak online presence stops the company from reaching customers in new geographies and limits its business to South India.
- As per the nature of the business, the company needs to maintain a high inventory level. It leads to increased working capital requirements and may result in losses as inventory loses value, especially in the fashion business, over time.
IPO details
| Total IPO size (Rs cr) | 1201 |
| Offer for sale (Rs cr) | 601 |
| Fresh issue (Rs cr) | 600 |
| Price band (Rs) | 210-222 |
| Subscription dates | September 20-22, 2023 |
| Purpose of issue | To fund capex, working capital and repay debt |
Post-IPO
| M-cap (Rs cr) | 3405 |
| Net worth (Rs cr) | 997 |
| Promoter holding (%) | 60.8 |
| Price/earnings ratio (P/E) | 34.9 |
| Price/book ratio (P/B) | 3.4 |
Financial history
| Key financials | 2Y growth (% pa) | FY23 | FY22 | FY21 |
|---|---|---|---|---|
| Revenue (Rs cr) | 41.3 | 1351 | 1129 | 677 |
| EBIT (Rs cr) | 128.3 | 172 | 102 | 33 |
| PAT (Rs cr) | 336 | 98 | 58 | 5 |
| Net worth (Rs cr) | 397 | 301 | 243 | |
| Total debt (Rs cr) | 526 | 347 | 279 | |
|
EBIT is earnings before interest and taxes
PAT is profit after tax |
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Key ratios
| Ratios | 3Y average (%) | FY23 | FY22 | FY21 |
|---|---|---|---|---|
| ROE (%) | 17.1 | 28 | 21.2 | 2.2 |
| ROCE (%) | 17.9 | 23.6 | 21.7 | 8.5 |
| EBIT margin (%) | 8.9 | 12.7 | 9.1 | 4.9 |
| Debt-to-equity | 1.3 | 1.2 | 1.1 | |
|
ROE is return on equity ROCE is return on capital employed EBIT is earnings before interest and taxes |
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Risk report
Company and business
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Are Sai Silks's earnings before tax more than Rs 50 crore in the last 12 months?
Yes, the company's profit before tax for FY23 was Rs 134 crore. -
Will Sai Silks be able to scale up its business?
Yes. As per a report from Technopak, the women's apparel market will grow by around 21 per cent annually till 2027, and the Indian wear segment will constitute approximately 65 per cent of the total market size. -
Does Sai Silks have recognisable brands with client stickiness?
Yes, the company has a recognisable brand in the key markets of South India. -
Does the company have a credible moat?
No, the company faces high competition in the apparel industry.
Management
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Do any of Sai Silks's founders still hold at least a 5 per cent stake in the company? Or do promoters have over a 25 per cent stake in the company?
Yes. Post-IPO, the promoter's stake will be 60.8 per cent. -
Do the top three managers have over 15 years of combined leadership at Sai Silks?
Yes, the Managing Director, Nagakanda Durga Prasad Chalavadi has been with Sai Silks since its inception in 2005. -
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 Sai Silks free of promoter pledging of its shares?
No, the company's promoters have pledged 16.9 per cent of their shares.
Financials
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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?
No, the company's three-year average ROE and ROCE are 17.1 and 17.9 per cent, respectively. In FY23, the company's ROE and ROCE were 28 and 23.6 per cent, respectively. -
Was the company's operating cash flow positive during the last three years?
No, the cash flow from operations was negative in FY21. -
Is the company's net debt-to-equity ratio less than one?
No, the net debt-to-equity ratio was 1.2 times in FY23. -
Is Sai Silks free from reliance on significant working capital for day-to-day affairs?
No, the company has high working capital requirements. Its cash conversion cycle stood at 125 days in FY23. Further, it finances its working capital through internal accruals and bank overdrafts. -
Can the company run its business without relying on external funding in the next three years?
Yes. Although the company's net debt-to-equity is slightly greater than one, the company should not require external funding in the near future because of capital raised through fresh IPO shares issues. -
Is Sai Silks free from meaningful contingent liabilities?
Yes, contingent liabilities as a percentage of equity is 0.3 per cent.
Valuations
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Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
No, the stock will offer an operating earnings yield of 4.4 per cent on its enterprise value. -
Is the stock's price-to-earnings less than its peers' median level?
The stock will trade at a price-to-earnings ratio of 34.9 times, lower than its peers' median level of 82.3 times. -
Is the stock's price-to-book value less than its peers' average level?
Yes, the stock will trade at a price-to-book value of 3.4 times, lower than its peers' average level of 21.6 times.
Disclaimer: This is not a stock recommendation. Do your due diligence before investing.
Suggested read: Learning from IPOs
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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