Go Fashion (India) Ltd: Go to book profit on listing

Go Fashion IPO: Go Fashion (India) Ltd is tapping the capital markets with its fresh issue for Rs125 crores and an offer for sale of 1,28,78,389 shares in a price band of Rs 655-690. The issue opens on Wednesday (November 17) and closes on Monday (November 22). The company completed allocation to anchor investors. It allotted 66,10,492 shares at Rs 690 to 18 anchor investors comprising of 33 entities.

The highest allocation was made to Government of Singapore who was allotted 8,52,432 equity shares or 12.90 per cent of the anchor allotment. Its associate, Monetary authority of Singapore was allotted 1,62,057 shares or 2.45 per cent of the anchor book making a total of 10,14,489 shares or 15.35 per cent of the anchor book. This was followed by Fidelity funds who were allotted 13.16 per cent of the book to three entities. Three domestic funds, namely ICICI, HDFC and SBI were allotted almost an identical 6.58 per cent of the anchor book. This meant that the top five anchor investors were allotted 48.27 per cent of the anchor book.

Domestic mutual funds were allotted 22,04,797 equity shares or 33.35 per cent of the anchor book. This was to seven mutual funds comprising of 18 schemes.

The company is into the business of selling women's bottom wear which includes western trousers and pants, jeggings, treggings, skirts, shorts, leggings, churidars, patiala, salwar, palazzo, dhoti pants, harem pants, denims, athleisure, sleepwear and leisure. The key takeaway is the fact that they do not have any presence whatsoever in the women's top segment or in men's wear. Secondly every piece of garment is outsourced. Yet another differentiation is the fact that Go Fashion is in the business of basics and essentials while most others sell fashion apparel. The difference is the word fashion which entails design, and end of season discounts, etc., while basics and essentials have no such issue. This ensures steady round the year margins.

They sell their products through EBO's (exclusive brand outlets), LFS (large format stores) and MBO (multi grand outlets. In the last 15-18 months, the number of EBO's opened and closed for various reasons has seen the number not move significantly and they have 459 EBO's as on September 30. The company has an eight per cent market share in the segment and some of its competitors include TCNS, Jockey or Page Industries, Dollar, Lux and Rupa amongst others. Many of the others are present in different segments as well.

The company enjoys gross margins which are around the 55 per cent level and EBITDA margins in the range of 28-32 per cent. While in FY20 it reported net margins of 13.4 per cent, it reported losses in FY21 and the first quarter of FY22 as well. The pandemic has had a severe impact on the company. Revenues in FY20 were at Rs 396 crores which fell to Rs 282 crores in FY21 and were Rs 40 crores in the first quarter of FY22. The corresponding quarter in FY21 saw revenues of Rs 21 crores.

When a company makes profits, it earns a net profit and therefore an EPS. This EPS is then converted into a PE which is the valuation at which a company raises money. When a company is loss making there is no profit, no EPS and therefore the PE is infinite. The new trend in the market with these new age companies has changed the valuation metrics of companies tapping the capital markets. Invariably one finds companies which are loss making either before the current year or have lost money before the pandemic and valuation for such companies becomes a nightmare.

Go Fashion is no exception. If one were to look at its top line it is a significantly small company with revenues of Rs 400 crores in FY20. While the pandemic has made the company lose 18 months in its performance, it has also ensured that the company has to rebuild. It would at best get back to levels of around FY20 give or take a quarter in FY23. The growth story would start from there.

As the large part of this issue is an offer for sale and one is aware that private equity investors are milking the market currently and laughing their way to the banks, one can be sure that the issue will not be priced reasonably. On top of that the grey market is super active on this counter and the premium is in the region of about 60-70 per cent of the IPO price.

Taking into account the pop that is visible, there is no way that one can advise against applying for the issue. Apply, and if you are lucky to get allotment, sell on listing and enjoy your profits. At the time of writing this article, retail investors have already submitted five lakh applications and the retail portion is already subscribed close to 10 times.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)