IPO: Credo Brands Marketing

Credo Brands, popularly known as Mufti, will launch its IPO (initial public offering) on December 19, 2023. Here is a breakdown of the company's strengths, weaknesses and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: Its three-year average ROE and ROCE are 16.2 and 17.1 per cent, respectively. It also generated positive free cash flows in the last three financial years.
  
• Growth: Its revenue and net profit grew at an annual growth rate of 43 and 375 per cent, respectively, over the last three years. Moreover, its EBIT and PAT margins have zoomed in the past two financial years.
  
• Valuation: The stock is valued at a P/E and a P/B of 23.2 and 6.2 times, respectively, compared to its peers' median and average of 81.1 and 8.3 times.
  
• Overview: According to a Technopak report, the apparel market size in India is expected to grow by 18 per cent annually between FY23 and FY27. A growing middle class, urbanisation, and proliferation of online buying can help Credo expand its sales. However, the company's over-dependence on offline retail distribution and lack of agreements with its manufacturing partners pose barriers to growth.

About Credo Brands

Incorporated in 1998, Credo Brands Marketing retails casual clothing for men under its flagship brand 'Mufti.' As of September 30, 2023, it had a presence in 591 cities across India.

Strengths of Credo Brands

• Strong distribution network: As of September 30, 2023, it had 1,807 retail touchpoints comprising 404 exclusive brand outlets (EBOs), 1,332 multi-brand outlets and 71 large format stores.

Weaknesses of Credo Brands

• High reliance on offline retail distribution channels: Brick-and-mortar account for a significant portion of its revenue. In FY23, only 5.1 per cent of the revenue came from online distribution channels. Similarly, in FY22 and FY21, digital sales accounted for only 8.2 per cent of the total revenue.
  
• Lack of exclusivity agreements with manufacturers: It outsources its manufacturing but does not have exclusive agreements with the manufacturers. Any fallout with the manufacturing partners will impact financials significantly.

Risk report

Company and business

• Are Credo Brands' earnings before tax more than Rs 50 crore in the last 12 months?
  Yes, the company's earnings before tax was Rs 104 crore as of March 31, 2023.
• Will Credo Brands be able to scale up its business?
  Yes. India's growing predisposition towards casual wear, rising urbanisation, and a growing middle class will help it scale up.
• Does Credo Brands have recognisable brands with client stickiness?
  Yes, it is a recognisable brand with a wide range of product offerings.
• Does the company have a credible moat?
  No, it faces significant competition from its offline and online peers.

Management

• Do any of the company'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. The promoters' stake will be 55.4 per cent post IPO.
• Do the top three managers have over 15 years of combined leadership at Credo Brands?
  Yes, the top three managers have over 30 years of leadership experience at Credo Brands.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes, we have no information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes, there is no information to suggest otherwise.
• Is Credo Brands free of promoter pledging of its shares?
  Yes, the brand's promoters have not pledged any shares.

Financials

• Did the company generate a current and three-year average return on equity (ROE) of more than 15 per cent and a return on capital employed (ROCE) of more than 18 per cent?
  No, its three-year average ROE and ROCE are 16.2 and 17.1 per cent, respectively. However, its ROE and ROCE stood at 30.0 and 28.2 per cent, respectively, as of March 31, 2023.
• Was the company's operating cash flow positive during the last three years?
  Yes, it reported positive operating cash flows in the last three years.
• Is the company's net debt-to-equity ratio less than one?
  Yes, as of June 2023, its net debt-to-equity ratio was zero.
• Is Credo Brands free from reliance on huge working capital for day-to-day affairs?
  No. It has high working capital requirements as it outsources manufacturing and needs capital for purchasing finished goods, funding warehouse operations, making payments to vendors, etc. The average working capital days for the past three financial years is 211 days.
• Can the company run its business without relying on external funding in the next three years?
  No, the company's debt-to-equity ratio was negligible as of June 30, 2023. Moreover, it has no plans to do any capex as its business is asset-light.
• Is Credo Brands free from meaningful contingent liabilities?
  Yes. Its contingent liabilities as a percentage of equity was 0.4 per cent as of June 2023.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No, the stock offers a 6.1 per cent operating earnings yield on its enterprise value based on its 12-month earnings as of March 2023.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes, it is valued at a price-to-earnings ratio of 23.2 times compared to peers' median level of 81.1 times (as of March 2023).
• Is the stock's price-to-book value less than its peers' average level?
  Yes, it is valued at a price-to-book ratio of 6.2 times compared to peers' average level of 8.3 times (as of June 2023).

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

Also read: Another IPO frenzy begins