Odel Unlimited (ODEL) Initial Public Offering

Odel Unlimited (ODEL), one of the nation's largest fashion, apparel and cosmetics retailers announced its IPO of 16.7 mn shares at LKR15.00 per share, expecting to raise LKR250.5 mn in total. The proceeds of the issue is planned to be partly utilized to support the expansion of branch net work (LKR150.5 mn) of the company and the rest (LKR100 mn) would be employed to settle part of outstanding loans.

The Company focuses on delivering maximum fashion and value to its shoppers by offering compelling selections. Odel stores offer a broad selection of merchandise and feature products from both local and exclusive international brand sources. The Company operates 12 stores spanning within the three districts of the Western Province and plans to open three more stores during the year 2010 (possibly in Wattala, Battaramulla and Kandy).

Odel's flagship store boasts of an average footfall of plus 1,500 per day (3,000 per day in the weekend) and a conversion rate of +90% whilst other branch stores also demonstrate above average footfalls and conversion rates though relatively lower than that of the flagship store.

Nonetheless Odel's cautious branch expansion efforts have made them to break even at the first month of operations itself. Given the uptrend in revenue stream and the company's emphasis on retiring debt capital we project net profit to grow by a three year CAGR of circa 27% during 2011E- 2014E.

In terms of earnings based valuations the share is attractive valued on 11.5X forecast FY11 net profit (based on the issue price of LKR15.00 per share) which is at a plus 20% discount to the forward market earnings multiple.

Further on a free cash flow to the firm (FCFF) valuation, intrinsic value per share is circa LKR18.00 (given a cost of capital rate of 18%) and remains attractive at the issue price of LKR15.00.

Based on both valuations the share generates good value at the issue price of LKR15.00. Further Odel IPO would be an opportune window for adventurers to capitalize on short term gains and to benefit in the medium term with the aggressive expansion driven organic growth of the company. Therefore strong upside for the share could be expected with steady income streams and Odel’s brand image coupled with strong investor appetite for IPOs, thus we recommend SUBSCRIBE

Industry Overview and Future Outlook
As a department store, Odel offers a wide range of product categories and operates across major segments of the Sri Lankan premium non-food retail industry. Except for the flagship outlet, the other stores generally focus on the premium clothing and footwear retail industry.

The country’s clothing and footwear industry is highly competitive as Sri Lanka being a major garment manufacturing nation. Low and middle level markets are spearheaded by clothing store chains such as “No Limit”, “House of Fashion” and “Fashion Bug” with stores Island wide. A high number of counter freight clothing items of premium brands are also visible in the country at a low price.

Odel has demonstrated strong performance where its top line grew at a four year CAGR of circa 11%. ODEL has reported a revenue of LKR2,416.8 mn in FY10, up circa 24% YoY. The growth in revenue is attributable to the aggressive expansion programme, improvement in per capita consumption and the increase in influx of tourists with the end of the three decade old war.

Revenue Trend
Subsequent to the strong spurt of growth in revenue the Operating profit has grown by circa 34% YoY to LKR208.2 mn in FY10. Further the EBITDA has been growing at an impressive four year CAGR of circa 26% with overheads being kept intact over the last five years.

In particular in FY10 EBITDA has surged by 68% YoY to LKR336.9 mn. Further the EBITDA margin has improved to 14% in FY10 from 10% in FY09 on the back of the capital gain of circa LKR75.6 mn made in FY10.

EBITDA vs EBITDA Margin Revenue: Cost Structure NPAT has grown by a tremendous three folds in FY10 on the back of the improvement in EBITDA and the reduction in finance costs. Even if the capital gain is removed the NPAT has marked a growth of 100% YoY in FY10.

Comparatively the Sri Lankan premium clothing and footwear industry is dominated by few players in the market of which Odel enjoys a sizable market share. Dilly’s Distinct and Cotton Collection cater to the same market segment as Odel although the product spread is rather limited as they focus mainly on premium clothing retail.

As a multi category retailer Odel contends with a broad range of competitors, not only limiting to the premium clothing retailers. Sri Lankan malls such as Crescat, menswear outlets such as Hameedias and sports outlets such as Reebok and Nike too competes with Odel in the respective fields.

The increased tourist influx following the three decade old war would have a positive impact on Odel as the company is renowned as “the tourist shopping destination in Sri Lanka”. Recovery in the economy brought about higher consumer sentiment driven by confidence in the market along with the reduction in unemployment. Thus with the disposable income on the rise local consumers tend to have a higher demand towards premium quality products.

Odel’s market positioning as a premium department store is a competitive advantage with a lower substitutability and a few number of competitors. With the expansions which are currently carried out, Odel expands its reach and would have access to a bigger market without dilusion.

The company’s own brand which yields a higher margin is mainly sold via the outlets in the Colombo suburbs. With the store expansion taking place the contribution from the own brands (at present the contribution is circa 20-30% of the top line) is expected to increase.

Valuations
Revenue is expected to increase at three year CAGR of circa 13% from FY11E to FY14E mainly on the back of improvement in consumption, growth in tourist arrivals to the country and better market reach via expansion of the branch network.

We expect the operating costs would grow at a three year CAGR of circa 13% from FY11E to FY14E slightly above the historical growth momentum. However we expect the OPEX to income ratio to reduce to circa 90% over the next four years from its current +95% levels due to revenue growth outpacing the OPEX growth.

As at 31st March 2010 the company has a debt of approximately LKR550 mn (Short and Long Term borrowings) with an interest cost of plus LKR70 mn. Odel is planning to retire part of its debt during FY11E using part of the funds (circa LKR100 mn) raised by the IPO. This would give rise to savings on interest costs from FY11 onwards without disturbing the cash position of the company. However we believe the company would resort to working capital loans and overdrafts to fund the short term funding requirements. Further it should be noted that the company would make its gearing position healthier by reducing the debt to equity ratio to less than 5% from its current 47%.

Given the uptrend in revenue stream and the company’s emphasis on retiring debt capital we project net profit to grow by a 3 year CAGR of 20% during 2011E – 2014E.

In terms of earnings based valuations the share is attractive valued on 11.5X forecast FY11 net profit (based on the issue price of LKR15.00 per share) which is at a plus 20% discount to the forward market earnings multiple.

Further on a free cash flow to the firm (FCFF) valuation, intrinsic value per share is circa LKR18.00 (given a cost of capital rate of 18%) and remains attractive at the issue price of LKR15.00. Based on both valuations the share generates good value at the issue price of LKR15.00. Further Odel IPO would be an opportune window for adventurers to capitalize on short term gains and to benefit in the medium term with the aggressive expansion driven organic growth of the company. Therefore strong upside for the share could be expected with steady income streams and Odel’s brand image coupled with strong investor appetite for IPOs thus we recommend SUBSCRIBE.