Sai Silks (Kalamandir) Limited IPO

About the company:

Sai Silks Kalamandir Limited was incorporated in the year 2006. They are amongst the top 10 retailers of ethnic apparel, particularly sarees, in south India in terms of revenues and profit after tax in Fiscal 2020, 2021, and 2022. Through their four store formats, i.e., Kalamandir, VaraMahalakshmi Silks, Mandir, and KLM Fashion Mall, they offer their products to various segments of the market that include premium ethnic fashion, ethnic fashion for middle income, and value-fashion, with a variety of products across different price points, thereby catering to customers across all market segments. They have a store network of 54 stores which are all owned and managed by the company itself. The Company’s Net Revenue as of FY2023 stood at INR 1,359 crore.

The Objects of the Fresh Issue

1. Funding capital expenditure towards setting up 30 new stores (“New Stores”);
2. Funding capital expenditure towards setting-up of two warehouses;
3. Funding working capital requirements of our Company;
4. Repayment or pre-payment, in full or part, of certain borrowings availed by our Company; and 5. General corporate purposes.

Key Strengths:

Among the leading ethnic wear and value-fashion Retail Companies in south India having a portfolio of established formats with focused sales and marketing strategy.
They are amongst the top 10 retailers of ethnic apparel, particularly sarees, in south India in terms of revenues and profit after tax in Fiscal 2020, 2021, and 2022. By leveraging their experience in selling ethnic wear, they have over the years expanded their store portfolio to four formats, each offering a different set of products catering to the respective target segments and they continue to expand their product range to meet the demand of their different target segments.

Leading apparel retail brand in India with a scalable model that is well-positioned to leverage growth in the ethnic and value-fashion apparel industry in India.
Launched in 2005, they focus on spreading India’s vibrant culture, traditions, and heritage through their ethnic wear brands. The share of organized apparel retail which was 32% in 2020 is expected to increase to 48% in 2027. The share of organized retail in women’s apparel, which was 19% in Fiscal 2015, increased to 31% in Fiscal 2022 and is expected to reach 44% by Fiscal 2028, amounting to ? 1,754.44 billion. This under-penetration brings in long-term growth visibility.

Strong presence in offline and online marketplace with an omni-channel network.
Their store formats have a strong offline and online presence. While they commenced their operations through their first ‘Kalamandir ’store in 2005 at Hyderabad, Telangana with a store size of 3,213 square feet, they have over the years expanded their stores to 54 stores in four major south Indian states, i.e., Andhra Pradesh, Telangana, Karnataka and Tamil Nadu, with an aggregate area of approximately 603,414 square feet as of July 31, 2023. Their average store size, calculated on the basis of their operating stores as of July 31, 2023, is 10,390 square feet for their Kalamandir format stores, 3,310 square feet for their Mandir format stores, 6,099 square feet for their VaraMahalakshmi format stores, and 18,400 square feet for our KLM Fashion Mall format stores.

Track record of growth, profitability, and unit economics with an efficient operating model.
They have organically grown their operations and have demonstrated an increase in their revenues and profitability. Their revenue from operations increased from ? 6,772.48 million in Fiscal 2021 to ? 11,293.23 million in Fiscal 2022 reflecting full recovery from the effects of COVID-19 which further increased to ? 13,514.69 million in Fiscal 2023. Their Gross Margins were ? 2,304.04 million, ? 3,914.53 million, and ? 5,288.47 million, or 34.02%, 34.66% and 39.13% in Fiscal 2021, 2022 and 2023, respectively. Their EBITDA for Fiscal 2021, 2022, and 2023 was ? 623.61 million, ? 1,330.48 million, and ? 2,125.31 million, respectively while their EBITDA Margins were 9.21%, 11.78%, and 15.73%, respectively. Their restated profit after tax was ? 51.31 million, ? 576.87 million, and ? 975.88 million in Fiscal 2021, 2022, and 2023, respectively. Their restated profit after tax margin was 0.76%, 5.11%, and 7.22% in Fiscal 2021, 2022, and 2023, respectively.

Key Risks:

- The business is highly concentrated on the sale of women’s sarees and is vulnerable to variations in demand and changes in consumer preference, which could have an adverse effect on their business, results of operations, and financial condition.

- They have generated substantially all of their sales from stores located in Southern India and any adverse developments affecting their operations in these regions could have an adverse impact on our revenue and results of operation.

- The nature of their business requires them to maintain sufficient inventories resulting in high inventory costs. If they are unable to maintain an optimal level of inventory and working capital their business, results of operations and, financial condition may be adversely affected.

Key Financials

Conclusion

The company’s revenue growth has been good in the past two years. In the retail business, the margins are often compressed and therefore the importance of asset turnover and working capital becomes very important. The company has an impressive asset turnover of 1.11x and has been able to manage its working capital well leading to a handsome Return on Equity of 24.6% in FY23. The branded apparel segment is significantly underpenetrated, and therefore the market opportunity is large. Further, the company is involved in Ethnic wear which gives the company a natural cost advantage as consumers tend to be less price-conscious while buying apparel for major family events. The Company’s latest EPS stands at INR7.73, thus demanding a PE ratio of around 28 times. This valuation appears fair taking into consideration its track record, brand value, future growth prospects, and healthy financials. Therefore we recommend a Subscribe rating to this IPO.