IPO: Koutons Retail India

Issue opens: Sept 18, 2007
Issue closes: Sept 21, 2007
Issue Price: Rs 370-415 per equity share of Rs 10 each in lots of 15 shares
Issue Size: 3,524,439 equity shares of Rs 10 each (of a total capital base of 30,551,397 equity shares of Rs 10 each)

Strengths:
1) Koutons looks like an attractive company with over a 1000 company managed stores and 18 manufacturing units.
2) If I compare its pricing with Raymonds and other garment companies with COFO (company owned franchise operated) retail centers, the pricing looks attractive.
3) By designing, manufacturing, distribution and as well as sales under the same flagship, the company is able to cut a lot of costs.
4) Huge sales per store due to hefty discounts offered by the stores.

Weakness:
1) I doubt weather the COFO model can work in the long run. Opening up manufacturing as well as retail outlets needs huge capital investments and hence limits the company’s ability to expand fast, as well as react to the changing market scenario.
2) Its unlikely that the company will be able to distribute from the multibrand shops and malls. This shuts it off from a major business opportunity and capitalize on the retail revolution.
3) INVENTORY TROUBLE: against a sales of Rs 402.40 crore, the inventory stood at Rs 373.84 crore. That is a whooping 340 days of inventory. In garment/fashion industry, you cannot stock for 340 days… primarily because the kind of stock which is sold, depends on the season.
4) Low Brand Value: Kouton’s stores only stock their own brands and perennial 70% discounts have completely eroded its brand value. This will prevent the company to move up the value chain.

Analysis:
I am very skeptical about the Company owned retail model. Its primarily because it involves huge capital investments, inventory problems and limits the enterprise’s ability to survive a business cycles. The company has been growing at a rapid pace, and if you are bullish about retail industry, then this might be a good company to invest in. But I would try to be away from a company who maintains 340 days of inventory and pushes sales by offering 70% discounts all year round.