Cantabil Retail IPO Analysis – Average Company in a Bad Sector makes it Avoidable

Cantabil Retail is a discount apparel company with a Retail Focused Strategy that is looking to raise Rs 105 crore ($23mm) that should give it a market cap of around Rs 190 crore ( $42mm).The company has shown good growth albeit from a low base in the past . However the growth rate has slowed down.While margins have improved slightly the company still has a high debt burden of almost 2x debt/equity.The company uses its own and franchise retail outlets to sell clothes to consumers.There is nothing to distinguish the company from its peers.Its a boring company in a boring sector.Competition is high and company is subject to vagaries of high raw material prices which forms almost 70% of the COGs.

Good Part

1) Good Growth of  almost 66% CAGR over the past few years with Net Margin improving slightly to 7.3% last fiscal.The company’s brand name is somewhat recognized though it is nowhere near an aspirational brand.

Bad Part

1) Bad Sector – It is marked by very high working capital,low margins,high competition and volatility in raw material prices.While Cantabil has grown well,the sector is hardly to excite someone about.The company’s expansion plans will need lead to any dramatic improvement in its business model.

Summary

There is nothing to dislike about the company,however there is nothing to like about it either.Valuation at around 12x is not expensive however the risks of the sector and the smallness of the company does not make it very cheap either.Manufacturing in house,reduction of working capital might make it attractive later on. However I would give it a pass as there are better opportunities around.