Saraswati Saree Review (Apply)

Review By Dilip Davda on August 8, 2024

•    The company is having unique business model of organized saree sales as a wholesaler.
•    90% revenue comes from Saree sale alone and the rest from other products like Kurti, Dress material, other garments and related products.
•    The company posted growth in its top and bottom lines for the reported periods. 
•    Based on FY24 earnings, the issue appears fully priced. 
•    Investors may park funds for medium to long term rewards.

ABOUT COMPANY:
Saraswati Saree Depot Ltd. (SSDL) is a key player in sarees wholesale (B2B) segment (Source: CRISIL Report) and its origin into the sarees business dates back to the year 1966. It is also engaged in the wholesale business of other women’s apparel wear such as Kurtis, dress materials, blouse pieces, lehengas, bottoms, etc. On an average of more than 90% of its total revenues are generated from sale of sarees. In Fiscal 2024, it has served over 13,000 unique customers and its product catalogue consists of more than 3,00,000 different SKUs.

The change in the buying pattern has resulted in players selling higher priced sarees than the value range sarees. This is expected to drive the growth for the market in the coming years. Saree industry in India is expected to grow at a 5-6% CAGR over fiscal 2024 to fiscal 2029. (Source: CRISIL Report). The saree market in India has been traditionally dominated by small retail shops and unorganized players who usually have standalone outlets which is characterized by loyal customer group. The unorganized players usually have fewer number of SKUs, and many of these players stock the sarees based on the local or region specific demand. On the other hand, with rising aspiration of the country’s middle class and rising disposable income, the organized players are tapping in to this demand for branded and quality products. The organized retailers in particular are targeting the saree market with offerings in the mid to premium range. As the disposable income for people in India increases and large global and Indian brands across the industries make their way into the overall apparel market, the aspiration to wear branded apparel has increased in the Indian population.

In the year 2002, Saraswati Sadi Depot hosted for the first time a special event known as “Utsav” before the joyous festival of Diwali, where it gathered customers from across regions to participate. During Utsav event, exclusive collection of products is presented with generous special offers made to its loyal customers. After consistent success over the years, the Utsav event became a permanent fixture of Saraswati Sadi Depot’s business. During Utsav event, sales for up to 13-15% to the annual revenues are recorded.

Saree is an ethnic wear garment which has its origin in India and is one of the most popular readymade garment in India which is dressed on casual occasions as well as on festive occasions. A saree typically ranges from six to nine yards in length and can be dressed in several ways. In India there are different kind of sarees which are prevalent with Indian women. The most prevalent sarees include silk sarees, cotton sarees, synthetic fibre sarees etc. apart from these prevalent fabric sarees, there are blends and mixture of fabrics in which sarees are available across the saree industry in India. The demand for saree market in India in recent years have come from growth in the wedding and celebration wear market. However, the industry is seeing the change in the consumer buying pattern as customers are seeking quality and premium products.

Pursuant to growth in business, the partnership firm shifted its operations to the newly constructed Uchgaon premises at Kolhapur, Maharashtra in 2015 – a landmark in the firm’s history. The newly constructed complex spans over approx. 169,120 sq. ft. area having designated section for different varieties of sarees and other women’s apparel wear within the complex for ease of shopping. The business expanded their product range to include ready-made garments in 2017 with the beginning of Kurti sales. Since then, the ready-mades portfolio has grown to include several other offerings such as bottoms, pyjamas, one-piece clothing and dresses. The Kurti business of the partnership firm has grown significantly and has been recognized with awards such as “Star of the Industry” and “Iconic Brand” at the annual Kurti Expo events. After incorporation in 2021, the Company has been carrying on the business with the same core values and management team. In Fiscal 2024 it provided service to more than 13,000 unique customers and crossed Rs. 600 cr.  in sales in Fiscal 2024.

Its sarees are sourced from different manufacturers across India. Over the years, it has developed relationships with these manufacturers in hubs like Surat, Varanasi, Mau, Madurai, Dharmavaram, Kolkata, and Bengaluru. It regularly sources sarees and other women’s apparels from more than 900 weavers/suppliers across different states in India. Currently, its product catalogue lists more than 300,000 different SKUs. The Kolhapur Unit is contributing over 88% of its top line and its Ulhasnagar unit is sharing the rest. As of June 30, 2024, it had 314 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo IPO of 6499800 fresh equity shares issue worth Rs. 104.00 cr.  (at the upper cap) and an Offer for Sale (OFS) of 3501000 equity share worth Rs. 56.02 cr. (at the upper cap). The overall size of the IPO will be of 10000800 equity shares worth Rs. 160.02 cr. (at the upper cap). The company has announced a price band of Rs. 152 – Rs. 160 per equity shares of Rs. 10 each. The issue opens for subscription on August 12, 2024, and will close on August 14, 2024. The minimum application to be made is for 90 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 25.25% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity shares issue, it will utilize Rs. 81.00 cr. for working capital, and the rest for general corporate purposes.

The company has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors.

The sole Book Running Lead Manager (BRLM) to this issue is Unistone Capital Pvt. Ltd., while Bigshare Services Pvt. Ltd. is the registrar to the issue.

The company has issued entire equity shares at par value so far. It has also issued bonus shares in the ratio of 330 for 1 in June 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NIL, Rs. 0.02, Rs. 0.03, Rs. 0.04, Rs. 0.05, and Rs. 0.06, per share.

Post-IPO, its current paid-up equity capital of Rs. 33.10 cr. will stand enhanced to Rs. 39.60 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 633.60 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 550.31 cr. / Rs. 12.31 cr. (FY22), Rs. 603.52 cr. / Rs. 22.97 cr. (FY23), and Rs. 612.58 cr. / Rs. 29.53 cr. (FY24). The company posted growth in its top and bottom lines for the reported periods.

For the last three fiscals, the company has posted an average EPS of Rs. 7.39 and an average RoNW of 60.92%. The issue is priced at a P/BV of 8.16 based on its NAV of Rs. 19.61 as of March 31, 2024, and at a P/BV of 3.75 based on its post-IPO NAV of Rs. 42.65 per share (at the upper cap).

If we attribute FY24 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 21.45. Based on FY23 earnings, the P/E stands at 27.59. Thus the issue appears fully priced.

The company reported PAT margins of 2.24% (FY22), 3.82% (FY23), 4.83% (FY24), and RoCE margins of 169.07%, 98.03%, 64.46% respectively for the referred periods.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Go Fashion and Sai Silks (Kalamandir) as their listed peers. They are trading at a P/E of 70.2, and 24.0 (as of August 08, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
The BRLM associated with the offer has handled 17 pubic issues in the past three fiscals, out of which no issues closed below the offer price on the listing date.