Lovable Lingerie IPO Review and Analysis – Should you buy the Stock for some love?

Lovable Lingerie is an inner-wear textile company that is coming out with a $20 million IPO.Unlike other totally junk issues which are totally hands of  market operators,this one seems to have decent fundamentals and the valuation is not too expensive either.The company has managed to sell 6% pre-IPO to Sequoia Capital which is one of the blue blood PE firms in the country.However this should not be an endorsement given that a number of their investments have bombed in the recent mid cap and small cap carnage.Corporate governance and management issues in small companies in India is totally out of control so investing just based on pure fundamentals does not help.Also a number of other companies in the same sector in textiles remain at attractive valuations.That said the company does have good differentiation as it leverages on the fast growing Indian consumer growth story.The company sells Lingerie though top retail outlets like Lifestyle,Shopper’s Stop in top Indian metros and has good brand recall.Here are the positives and negatives of the company based on its DRHP.

Issue Details

The company is coming out with a public issue of 4.5 million shares at a price band of Rs 195-205 to raise around $20 million diluting around 27% with the total market cap of around $70 million post IPO.The company will use most of the money to expand manufacturing,build its brand,open a new JV,open new outlets and a design studio.The money being raised seems that it will be well used.

Positives

1) Very high Return Metrics – The company has managed to generate high returns on very low equity and capital investment leading to ROCE and ROE of over 50%.

2) Good Growth,Zero Debt and Improving Margins – The company has managed to growth topline at a CAGR of 30% and bottomline at 38%.The company managed a 15% Net Margin on sales ending 2010.The company also has negligible debt

3) Valuation – The company’s valuation does not seem expensive at around 10x P/E ( considering the IPO cash) compared to higher valued Peers like Page Industries.However given the smaller size and limited operating history it is not a surprise as well given that other textile companies operate at single digit margins.

4) Good Industry – “The overall innerwear market (excluding kids) in India was worth `around $2.3 billion in CY 2009. It has grown at a CAGR 16% over the last four years. The growth can be only continue as India’s per capita incomes continues to grow and aspiration level  keeps growing.

Negatives

1) Rising Material Costs – The price of cotton is skyrocketing along with other commodities.This will put huge pressure of the margins of the company as it may not be able to pass on the costs to the customers given the tough competition.

“The cost of fabrics, lace and elastic accounted for 32.10%, 27.53%, 35.27% and 36.75% of total expenditure in each of the Financial Years 2008, 2009 and 2010 and for the nine months period ended December 31, 2010, respectively”

2) Conflicts of interest with other promoter companies – The company’s promoters have other companies which are in the same innnerwear line of business.Given the tendencies of Indian promoters to fleece minority investors I would be careful

“some of our Directors are also directors on the boards of our Promoter Group companies or
other companies engaged in or likely to engage in, or whose memorandum of association enable them to
engage in, the same line of business as our Company.”

3) Competition – The lingerie market in India faces tough competition from both organized and unorganized players.Given the highly attractive nature of this sub sector,does not look like it will decrease anytime soon.There are other major brands like  Triumph, Enamor, Amante, Jockey, Juliet, Softline.

4) Irregularities in Lease Agreements – Another source of discomfort in that the company’s premises have irregularities.

“The lease agreements entered into by our Company with respect to our Kolkata branch office, Chennai branch office and Delhi branch office have neither been stamped nor have they been registered with the relevant local authorities.”

Summary

After the raft of junk IPO issues like Omkar,Sudar Garments,Lovable Lingerie seems to be a much better stock.However the current steep fall of Indian mid cap and small caps has made the comparisons look not so good for the company.There are both negatives and positives for buying the Lovable stock.The P/B,P/E and P/S metrics for the company are reasonable given the growth,return metrics and low debt size.However there are some issues as well.Note a total thumbs up in subscribing to the Lovable Lingerie IPO but you some adventurous investors could test it I guess.Note the Indian consumer growth story is just about starting and Lovable Lingerie if it manages to execute without the common frauds being seen should do well.