>CANTABIL RETAIL:IPO NOTE; Expansion led growth

■ About Cantabil Retail (CRIL): CRIL, an integrated discount apparel retailer, is in the business of designing, manufacturing, branding and retailing of apparels under the brands ‘Cantabil’ and ‘La Fanso’. The ‘Cantabil’ brand offers a complete range of formal wear, party wear, casuals & ultra casual clothing for men, women and kids in the middle-to-high income group. The ‘La Fanso’ brand caters to men’s segment in the lower-to-middle income group. Apparel range catering to a wide customer base, strong in-house design & research team and inhouse integrated capacity, are some of the strengths of CRIL.

■ Retail network of 411 outlets: Currently, CRIL has a network of 411 outlets (Cantabil - 270, La Fanso - 141), predominantly in North (230) and West (113), with total area under operation of 3.17 lakh sq.ft. Out of this, 268 stores are operated under Franchisee owned/leased and Franchisee operated (FOFO) model, while the rest under Company owned/leased and Franchisee managed (COFM). It intends to open 180 new outlets in the next two years; 80 in FY11e and 100 in FY12e.

■ Bahadurgarh manufacturing facility to reduce dependence on third parties: Presently, CRIL has three in-house manufacturing/finishing units and four warehouses located in Delhi. They also have third-party dedicated units manufacturing exclusively for CRIL and fabricating arrangements with 94 manufacturing units to which CRIL outsources cutting and stitching. CRIL is proposing to set up a large integrated manufacturing facility at Bahadurgarh to reduce its dependence on third-party fabricators and to meet growth needs.

■ Valuation and Recommendation: CRIL’s diversified product basket in the discount apparel segment, coupled with wide retail network, provides strong edge in the highly fragmented and competitive marketplace. Not only has Cantabil scaled up its business (Turnover up 9x and profits 12.5x in 4 years), it has also improved its operating margin by nearly 620bps in last four years and with the commencement of proposed facility at Bahadurgarh, it will provide further impetus to its margin profile. Given the proposed store expansion plans, we expect CRIL to witness strong growth in the medium term. At the higher band, valuations at ~15.4x FY10 EPS look reasonable in comparison with its peers. Higher inventory, working capital requirements and leverage (2.1x preissue) constitute key risks.

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