Sai Silks: Up 35% from IPO price in just two months, should you buy this newly listed stock?

The newly-listed Sai Silks (Kalamandir) has been seeing strong investor interest, rising almost 35 percent from its issue price in just 2 months. In a recent note, domestic brokerage house HDFC Securities has initiated coverage on the stock with a ‘buy’ recommendation and a target price of ₹385, indicating an upside of 29 percent from its current market price of ₹298.75, as on November 24.

The bullish call is on the back of strong financial performance, a robust track record, and a healthy growth potential in the saree industry.

The ₹1,201 crore initial public offering (IPO) was open for subscription between September 20 and September 22 with a price range of ₹210-222. The issue included a fresh share sale of ₹600 crore and an offer for sale (OFS) of up to 2.70 crore equity shares by its promoter group shareholders.

The issue was overall subscribed to 4.47 times. The qualified institutional bidders' (QIBs) allocation was booked 12.17 times, while the portion for non-institutional investors was subscribed to 2.54 times. However, the quota reserved for retail investors saw only 91 percent bidding.

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The stock was listed on September 27, 2023, at ₹231 on the NSE, a 4 percent premium to the issue price. From its listing price, the stock has advanced over 29 percent till date.

Soon after listing, the stock witnessed some profit booking. However, it has shown tremendous recovery in November so far. It has surged over 25 percent just in November after a 5.6 percent fall in October.

The stock hit its record high of ₹302.40 in the previous session (November 24, 2023).

About the firm

Launched in FY05, Sai Silks (Kalamandir) Ltd (SSKL) is one of the largest apparel retailers in south India, offering products across ethnic wear (predominantly sarees) and value fashion. The retailer houses four popular brands—Kalamandir, Kancheepuram Vara Mahalakshmi Silks, Mandir and KLM Fashion Mall—straddling multiple price points. Their cluster-based presence (spanning 54 stores; 6,02,414 sq. ft) across the four southern states (Telangana, Karnataka, Andhra Pradesh, and Tamil Nadu) ensures superior operating efficiencies/unit economics.

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Investment Rationale

A benefactor of unorganised to organised migration in sarees: Historically, the retail trade of sarees was dominated by unorganised players in small format stores. SSKL, along with a few other organised retailers, continues to solve the need to consolidate SKUs/variety on offer for consumers via large-format retailing. The saree market in south India is pegged at ₹26200 crore (overall saree market: ₹52,393 crore). SSKL (5 percent market share) is expected to be the key beneficiary of this value migration as it is attacking a broad consumer cohort at multiple prices— KMR (ASP: ₹1,760), VML (ASP: ₹4,800), MDR (ASP: ₹13,400), and KLM (ASP: ₹800), stated the brokerage.

SSKL—a smart scaler: SSKL has been a disciplined scaler with an extremely concentrated cluster-based expansion approach. Of the 150+ south districts, SSKL is only present in 12 (presence: 54 stores spanning 6,03,414 sq. ft as of Mar-23). Such a dense presence typically helps improve brand recall within catchments, ergo aids sales density and keeps the cost of retailing tight, noted HDFC. It also pointed out that SSKL enjoys amongst the highest revenue/sq. ft ( ₹22k/sq. ft) and among the lowest retailing costs within apparel retail (25 percent of sales).

Tamil Nadu (TN) foray holds promise: The brokerage noted that TN market ( ₹7400 crore, 32 percent share in the South) enjoys higher footfall density and consumer affinity for saree purchases. Hence, it is key for all saree brands. Most of SSKL’s IPO proceeds are earmarked to expand its TN presence via VML. Given that SSKL has a mere 1 percent share in TN, SSKL’s foray into the state via VML seems promising—in terms of both growth and unit economics, said HDFC (25 out of 30 stores earmarked for expansion will be VML stores and in TN).

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Financial Analysis:

Revenue: The brokerage informed that SSKL has delivered 17 percent revenue CAGR over FY16-23. While most of the growth is expansion-led, SSSG has hovered at 2-4 percent typically. Interestingly, an SSSG of 3 percent is sufficient to cover store-level cost inflation as store-level costs are estimated to account for only 15 percent of sales while central costs constitute the remaining 10 percent of sales, noted HDFC.

VML format (superior unit economics vis-à-vis other formats) will be the vehicle for expansion (of the 30 stores to be funded via IPO proceeds, 25 stores are earmarked for VML in Tamil Nadu). The brokerage built-in 30/44 VML/total store additions for FY23-26 (IPO proceeds + internal accrual funded) and expects VML to add over 80 percent of incremental sales over FY23-26 (60 percent of incremental area addition). Overall, for SSKL, it builds in 19 percent revenue CAGR for FY23-26.

Net profit: Improvement in net profit (built-in 40 percent CAGR over FY23-26) is a result of gross margin gains, steady cost of retailing and reduction of ₹12-15 crore in interest outgo due to paring down of debt from IPO proceeds + internal accruals. The brokerage has built-in ₹189/269 crore PAT in FY25/26, respectively.

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EBITDA margin (EBITDAM): EBITDA margin expanded by 562/449 bps over FY20-23 as the company continued to (1) premiumise its offerings, (2) take consistent price hikes, and (3) have an increased skew of higher EBITDAM format VML (skew increased from 36 percent of sales to 39 percent of sales), noted HDFC. GM increased from 31.5 percent to 39.1 percent over FY20-23.

Given that the predominant vehicle for expansion here on is VML (higher EBITDAM format courtesy of higher sales density and lower A&P and business promotion needs), the natural rise in skew should aid EBITDAM expansion over FY23-26. SSKL also intends to work on improving sourcing margins, ergo gross margins, by offering better terms of trade to its weaver network. This coupled with its consistent premiumisation drive should aid GMs, which should trickle down at the EBITDAM level too. The brokerage estimates a 267/280 bps EBITDAM expansion over FY23-26.

Track record and expectations

"SSKL’s growth resilience and product affinity can be seen in its near-complete top-line recovery from the pandemic blues by FY22. In FY23, it continued to improve its performance (up 19 percent YoY; ₹1352 crore; FY16-23 revenue CAGR: 16.7 percent). EBITDAM expanded (9.3 percent in FY20 vs 13.7 percent in FY23; HSIE), led by continued premiumisation across formats and price hikes. RoCE/RoE improved from 17 percent/20 percent in FY20 to 19 percent/27 percent in FY23 respectively. For FY23-26, we build in 19 percent revenue CAGR and an EBITDAM expansion of 300 bps primarily trickling down from GM gains as SSKL earns higher sourcing margins from vendors by offering them better terms of trade and the premiumisation drive continues. 15 percent and 16.7 percent EBITDAM baked in for FY25/26. 40 percent PAT CAGR built with a stable return profile for FY23-26," forecasted the brokerage.

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Key risks, as per HDFC:

1. Highly concentrated in a single product category (saree).

2. A slip-up in SKU management (saree is a high SKU/store product) could impact working capital.

3. Heightened competitive intensity from e-tailers.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision