Monte Carlo Fashions Ltd. (MCFL) is one of the leading apparel brands in India which primarily caters to the premium and mid-premium branded apparel segment for men, women and kids. The company offers a comprehensive line of woollen, cotton and cotton-blended knitted and woven apparel and home furnishings under the 'Monte Carlo' brand.
Well established brand and distribution network: Monte Carlo is the flagship brand of the company which is a market leader in the woollen knitted apparel industry in India and has been recognized as a 'Superbrand' for woollen knitted apparel in each edition of Consumer Superbrands India since its first edition in September 2004. Monte Carlo enjoys significant premium and brand recall on a pan India basis. The company took the task of creating brand in a market largely dominated by unbranded products and is reaping rewards as well. Also, it has a strong distribution network comprising of 196 'Monte Carlo Exclusive Brand Outlets' and over 1,300 Multi Brand Outlet (MBOs) through which its products are sold.
Asset light business model; healthy balance sheet coupled with decent return ratios: The company has an asset light business model as it operates largely through the franchise network (178 franchise outlets as compared to 18 outlets owned by the company). Also, it outsources the manufacturing of cotton apparel, woollen woven apparel and home furnishing products to a network of job work entities. As a result, it has a low Debt/Equity (D/E) of ~0.2x and has the lowest employee cost as a percentage of sales in the industry. Further, the company has decent return ratios with ROE and ROCE of 14.6% and 16.6%, respectively (in FY2014).
Outlook and Valuation: The company's net sales have grown at a CAGR of 16.3% over FY2012 to FY2014. Although, the EBIDTA margins have declined from 22% in FY2012 to 18.7% in FY2014, we believe they are at sustainable levels. The net profit has grown at a CAGR of 5.8% over FY2012-FY2014. At the lower end of the price band, the stock is valued at ~24.8x PE on FY2014 earnings which we believe is fair considering its i) strong brand image, ii) strong distribution network, iii) healthy balance sheet and iv) widening product portfolio. We recommend Subscribe to the issue at the lower end of the price band from a two-year perspective. From a one-year perspective, we see limited upside potential as valuations seem to be fair.