The Hindu Business Line : Celebrity Fashions: Invest at cut-off

AN investment can be considered in the initial public offer of Celebrity Fashions. A substantial ramp up in revenues is in the offing, as Celebrity recently signed a memorandum of understanding with Ambattur Clothing to take over its trouser unit. The addition of the unit would more than double Celebrity's existing garment-making capacities and allow it to offer its international customers a wider range of clothing.

Celebrity's own expansion project is likely to become operational in early 2007 and would begin contributing to the revenues from FY-08. The Chennai-based garment exporter also has a presence in the domestic market through its small, but popular, brand "Indian Terrain". Celebrity intends to grow this brand through a more significant retail presence. An increasing contribution from this business offers scope for enhancement in margins.

However, the offer is a bit stiffly priced. The price band of Rs 160-180 values the offer at about 15-17 times its likely FY-07 per share earnings.

The risks to the recommendation are:

The offer proceeds would be used to fund a part of the acquisition, set up retail outlets andbuild two factories. If the planned acquisition falls through, the addition to the revenue stream would be delayed and Celebrity would divert the proceeds earmarked for the acquisition towards building two factories. The four factories would together contribute to the revenues only in FY-08.

If Celebrity goes ahead with the acquisition, it would have to face the challenge of smoothly integrating the Ambattur unit, which is on a larger scale, with its own operations. This assumes significance, as the company would have to gain the confidence of Ambattur's clientele — Gap and Banana Republic being the more prominent among them. The management of Ambattur Clothing is, however, expected to work closely with Celebrity during the first year to ensure a smooth transition.

Our recommendation is not linked to gains upon listing. The investment would have to be viewed from a long-term perspective.

Trousers, a good fit

Celebrity Fashions derives much of its revenue from the export of men's shirts. Prominent among its clients are Armani Exchange, Guess, Benetton, Next and Diesel. It has, however, been looking at diversifying its product range to offer trousers and a women's line of clothing as well.

It does sell trousers in the domestic market under the `Indian Terrain' brand, but the presence in this segment is small. In this context, the proposed acquisition of the Ambattur trouser unit for Rs 80 crore is a coup for the company. The unit, on a double shift, can produce up to six million trousers annually, from formals to casuals and denims.

It reported revenues of Rs 210 crore in FY-05, which is higher than Celebrity's overall revenue of Rs 135 crore. With a wider product range, Celebrity is also likely to expand its clientele. It now derives as much as 70 per cent of its export revenues from its top five clients. Celebrity proposes to fund about Rs 45 crore of the acquisition cost from the offer proceeds.

The balance will be paid over the next three years in equal instalments by way of issuing secured debentures that would carry an 8.75 per cent interest rate.

Expansion plans

While the acquisition, if completed, will have an immediate impact on the FY-07 revenue stream, FY-08 incomes are also likely to get a boost, once the two factories that Celebrity is setting up become operational. Celebrity is also consolidating its operations by bringing its two factories under one roof at an industrial park. This should result in improved efficiencies and the new unit is expected to become operational by the last quarter of FY-06.

As the company is operating at almost full capacity, the expansion plans would augur well for revenue growth.

Broadening the terrain

On the domestic front, Celebrity proposes to improve the visibility of its `Indian Terrain' brand by setting up 20 exclusive outlets across the country over the next three years.

At revenues of Rs 25 crore, Indian Terrain is a small brand compared to the likes of Color-Plus or Arrow. But in its short life-span of five years, Indian Terrain has gained prominence, particularly in the South, and offers a range of semi-formal shirts that compete with that of Color-Plus.

Indian Terrain is also retailed by several department chain stores such as Shoppers' Stop. As many of these chains are on an expansion spree, the brand should become more accessible. Revenues from the brand are, therefore, likely to be on the uptrend.

As realisations are likely to be better on the domestic front, margins may expand along with an increasing contribution from `Indian Terrain'. In the near-term, earnings growth would be at a lower clip than revenues, strained by higher interest and depreciation costs.

Offer details: 45.5-lakh shares are on offer, of which 50,000 is reserved for employees. Celebrity hopes to raise Rs 80 crore from the offer. Post-offer, the promoter's stake in the company would be about 42 per cent.

Reliance Capital and Bennett, Coleman & Co would have a stake of about 5 per cent and 7 per cent respectively, while New Vernon Bharat would have a 19 per cent stake. The lead manager to the offer is IL&FS Investsmart. The offer opens on December 19 and closes on December 22.

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