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Go Fashion IPO - All You Need to Know

Editor, TRANSFIN
Nov 17, 2021 9:15 AM 6 min read
Editorial

Go Fashion, one of the prominent players in women's retail apparel, kicked off the bidding process for its IPO today.

The company is involved in the development, design, sourcing, marketing, retailing and sale of a wide variety of women's bottom-wear products under the brand "Go Colors". 

As of the end of today, the IPO has been subscribed 2.46 times. This is typical when measured against the lukewarm rise in the subscription pace of the mega IPO of Paytm which opened for bids only last week. 

So, the enthusiasm for Go Fashion's public issue, whether it's a result of the blockbuster Nykaa overdrive on the larger fashion industry or something else, is worth looking at. Here's our two cents. 

 

IPO Facts

  • Issue Size - ₹1,014cr (136.4m) (Fresh issue: ₹125cr ($16.8m); Offer for Sale: ₹888cr ($119.4m))
  • Price Band - ₹655-690 ($8.8-9.3)
  • Bidding Closes On - November 22nd
  • Issue Type - Book built issue
  • Market Lot - 21 shares
  • Issue Breakup - (QIBs: 75%), (NIIs: 15%), (Retail: 10%)

Yesterday, the company raised ₹455cr ($61.2m) from several anchor investors including the Government of Singapore, Abu Dhabi Investment Trust, Nomura, SBI Mutual Funds, Axis Mutual Funds etc. 

The Promoter Group currently owns 57.47% of the company which is expected to come down to 52.79% post-issue. Out of the net proceeds, an estimated ₹33.8cr ($4.5m) will be channelled towards rolling out new brand outlets (120) and ₹61.4cr ($8.2m) will be used to fund working capital requirements. 

As of the day's end, Go Fashion shares were trading at a premium of ₹560 ($7.5) in the grey market, up by ₹30 ($0.4) from yesterday.

 

Company Profile

Go Fashion India Ltd. (GFIL) was incorporated in 2010. Its primary business since then has been the outsourcing of apparel manufacturing. It is one of the few Indian companies that have been identified as "category creators" for bottom-wear products (e.g. Churidars, leggings, dhotis, harem pants, patiala, palazzos, culottes, pants, trousers, jeggings). 

Currently, the brand operates a network of 459 retail outlets in 23 states and UTs. It also retails through its e-commerce stores on multi-brand e-commerce platforms and in multi-brand stores across the country. Go Fashion's distribution channels also span across large-format stores (1,270 in total) like Reliance Retail, Central, Unlimited, Globus Stores, Spencer's Retail etc. 

The most distinctive feature of its business model is the fact that the company's products cater to women across all age groups and physiques. This variety ensures that its portfolio is immune to redundancies in ongoing trends owing to a range of selections available.

Having said that, the company operates in a fast-growing and highly-competitive market. Although it boasts of nationwide procurement and distribution channels, its financials were severely affected due to the pandemic. 

 

Company Financials

The Go Fashion brand has organically grown and expanded over the years increasing revenues and profitability (double-digit growth in both) commensurately except in FY21 when it incurred net losses on account of the pandemic's impact and closed 26 stores permanently

Going forward, the losses may take a while to recover and continue to have an adverse effect on liquidity as well.

Go Fashion's business model has resulted in largely positive cash flows. Go Fashion's ROCE (Return on Capital Employed) is also the highest among all major retail-led women's apparel brands in India as of FY20 (pg. 159, DRHP). 

The company has leveraged its first-mover advantage to create a direct-to-consumer brand. Given its plans to foray into loungewear and athleisure sections, growth visibility looks healthy in the long run. Its large network of exclusive brand outlets also provides immense potential for business expansion.

But there are concerns. Concerns ranging from any number of uncertainties including but not limited to - consumer spending, imperfect adaptation of consumer preferences, heavy industry competition and build-up inefficiencies in expansion as well as management. 

 

Industry Presence

Pros: Renown presence, well-diversified portfolio, multi-channel pan-India distribution network and reasonable valuation.

Cons

  1. Both Trent and Aditya Birla Fashion & Retail (ABFRL) have superior performance indicators.
  2. Exclusive Brand Outlets and Large Format Stores contribute disproportionately to Go Fashion's revenue (69% and 22% respectively) as opposed to online retail which is on the rise. 
  3. Concentrated presence in certain pockets (Tamil Nadu etc.).

In terms of valuations, the post-issue FY20 EV/EBITDA for Go Fashion comes out to 30.2x (at the upper price band) which is almost at par with TCNS's 29.3x. At the higher price band, Go Fashion is demanding an EV/sales multiple of 13.8x, a premium to the peer average of 10.9x signalling a fully-priced issue. 

The company does have a slight edge, however, when it comes to a track record of revenue growth, operating margin and return on equity compared to its peers. 

Go Fashion's dependence on the single-brand category may have fetched it premium returns until now but there's looming uncertainty in light of growing competition and diversification by other players in the apparel industry. Its stores are largely confined to Southern and Western India and so is its operation, given the dependence of the company on a single warehouse for a pan-India distribution

This not only adds to operating risks but also raises serious questions regarding capacity when it comes to future expansion of brand outlets as planned. 

To top it off, the company relies exclusively on outsourced manufacturingmeaning that it doesn't have its own manufacturing facilities but engages job workers. An outsized third-party reliance on this scale could seriously jeopardise growth prospects given the limits on the company's control over its own operations.

However, women's bottom-wear is a fast-growing segment, in fact, the fastest-growing category in the women's apparel industry. At the macro-level, India stands as the third-largest apparel market in the world currently. This offers great room for growth for all players including Go Fashion which are well-positioned with ample growth visibility to capitalise on the burgeoning market. 

 

Deeper Dive Into Details

Low procurement and operating costs remain the key advantages to Go Fashion's business model. Based on these factors, the company has managed to build an extensive sourcing network that adds more spokes to its growth wheel. 

Plus, there are two key secular factors that bode well for its story - 

I) India’s Private Final Consumption Expenditure has seen a 12.8% CAGR growth between 1991 and 2020. Despite some hiccups in 2020-2021, this is expected to return to a double-digit growth. This is well supported by a younger demographic which should generally drive higher levels of discretionary expenditure. 

The retail market as a whole is expected to grow at a 6.23% CAGR from from $796bn in 2020 to $1,077bn by 2025.  Within this, the share of apparel and accessories is expected to see the sharpest uptick accounting for 9% of the overall Indian retail basket. Indian apparel market is estimated to be a $90bn opportunity by 2025 implying 9% CAGR growth from 2020.

Ii) The overall share of working women increased from 14% in 2000 to 18% in 2010 and to 27% in 2018. This has been partly driven by rising enrolment of girls in secondary education and a sharp jump in women's enrolment even in the higher education sector (20% of women pursuing higher education compared to 22% of men). 

The above factors coupled with a general narrative of urbanisation are the key macro tailwinds that make the story optically exciting.

The overall women's bottom-wear market is heavily inclined towards the unorganised sector (77%). However, given the rise in disposable incomes, quality-awareness and digital penetration across the country, the tilt towards the organised sector is picking up pace. In times like these, the established brand-building efforts and customer base of companies like Go Fashion poses incredible opportunities. 

The IPO, thus, may have come at a right time and judging by the subscription numbers, Go Fashion is ready to go on top of the market. 

FIN.
 

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