Retail brand potential

S. Kumars Nationwide (SKNL) is a play on 2 fronts – brands and retail. Though it is in a currently least favored category of textiles and hence shunned by markets, there are quite a few positives which can be looked at and which do not appear to have been adequately priced in.

On the brands front, they have major brands such as S. Kumars, Reid & Taylor, Stephens Brothers, Carmichael House and Belmonte. Out of these, 2 major brands which are doing quite well in the mid to premium segment are Reid & Taylor and Belmonte, and to a lesser extent Carmichael House. In fact, considering the celebrity endorsements that these brands have got (Shahrukh Khan for Belmonte and Big B for Reid & Taylor), they surely merit some consideration. After all Sharukh and Big B are not likely to lend their name to all and sundry and the fact that they have chosen to align with these brands does give them credibility. And both these brand ambassadors surely don’t come cheap. The fact that S Kumars has been able to afford them also shows the company in a positive light.

In July 2008, GIC (the investment arm of govt. of S'pore) bought 25% stake in Reid & Taylor (a 100% subsidiary of SKNL) for 900 crore valuing the company (Reid & Taylor) at 3600 crore. This was in 2008, and investors like GIC invest for keeps i.e. they are not like hedge funds out to make a quick buck but more like pension funds who are content to hang in there for the long term for their investment to grow amid boom and bust cycles.. Since then things would definitely have looked up. Current market cap of the whole company (SKNL) which holds a 75% stake in Reid & Taylor is about 1000 crore. This gives a measure of the value that still exists.

The major problem which is hindering the stock from a fundamental perspective is the huge debt of about 3400 crore on the balance sheet. The promoters were hoping to cash in on Reid & Taylor IPO in Sept ’10 to ease this burden, but the market condition over the last year or so has put paid to those hopes. Even if they go for PE funding or private placement, the buyers are unlikely to accept high valuations (rightly or wrongly) demanded by the promoters. An extreme step from the promoters could be to sell off Reid & Taylor completely and deleverage their balance sheet. This would be on lines similar to what Pantaloon Retail (who incidentally are saddled with the same problem of huge debt and are in a similar industry) did recently when they sold off their Pantaloons brand/format to Aditya Birla group.

In the results declared yesterday (31-May-12), they have posted an EPS of 13.85 for FY12 giving it a PE multiple of just about 2.5 at the current price of about 34. This is too low for such a company, irrespective of other factors such as a debt overhang. And the book value of the company is 48.

In March ‘11, promoters increased their stake in the company @43/share, a 30% discount to the current price. Around the same time, they also placed shares to Daiwa Capital Markets Singapore @57/share on conversion of FCCBs. Later in Dec ’11, they also converted their previously allotted warrants @64/share. Prior to that, in Sept ’10, they had made a private placement to institutional investors @80/share.

So the promoters have been able to place shares at 2-3 times of current price as well as bought shares themselves at prices significantly higher than the current. This shows the confidence not only of external investors, but also of the promoters in the company. Of course, all these transactions happened when times were far better than they are now, and things were just beginning to look up. Just last year at this time, the share price was quoting around 70. It has been a 50% drop from those levels in just a year.

All in all, assuming that things do turn around for the Indian economy in general and markets in particular, at some point in not too distant a future, S Kumars Nationwide should go places.