Forcas Studio NSE SME IPO review (May apply)

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Review By Dilip Davda on August 14, 2024

•    The company is penetrating into affordable menswear and gaining momentum.
•    It has online/offline presence and increasing its popularity in Tier-2, Tier-3, Tier-4 cities.
•    The company posted growth in its top and bottom lines for the reported periods. 
•    Based on FY24 annualized super earnings, the issue appears aggressively priced.
•    Well-informed investors may park moderate fund for long term. 

ABOUT COMPANY:
Forcas Studio Ltd. (FSL) is into Menswear and deals in men's garments such as Shirts, Denims, T-shirts, trousers, Cotton pants, sports-wear, party-wear, fashion wear, boxers etc. and cater pan India through online and wholesale in its own brand and also white-labelling for other brands such as Landmark Group, V-Mart Retail, V2 Retail, Highlander, Cobb, Kontail and many more. The Company is in the business of manufacturing and selling of menswear garments through online ecommerce platforms and wholesale under the name of 'FTX', 'Tribe' and 'Conteno'. 

The Company sales products under its own brand through the most popular retail online e-commerce platforms namely, Flipkart, Myntra, Meesho, Amazon, Ajio, Jio Mart, Glowroad, Limeroad, Solvd and Shopsy. The wholesale business comprises of sale to wholesalers who purchase in bulk for onward sales to garment retailers in different states of the country. Further, its brand also is sold through large format stores including V-Mart Retail, V2 Retail, City Kart, Metro Bazar, Kothari Retail and Sarvana Retails.

The company transitioned to online business in 2021 to better serve Pan India clientele. In the two years since it went digital with menswear product line, it has served about 15,000 plus pin codes in India giving it a benefit of selling to the end consumer directly and understanding their buying pattern. Its products are available on India's top marketplaces, and it will be adding few more marketplaces in the current fiscal year. It has received positive response from customers for its products which is reflected customers' rating on the marketplaces. In addition to being present on the top online marketplaces, the company is also present in over 500 plus large format stores, which helps it to be visibly present in offline spaces. With more than 1200 SKUs, its product catalogue is broad and varied.
Digitalization has made the world a smaller place and world fashion is on display like never before to the Indian masses.

With its brand, it is trying to bring this aspirational fashion to the mass youth of Bharat in the fastest, most convenient and affordable manner. The company offers stylish and quality menswear at affordable prices for the masses of Bharat where it sees a significant opportunity for a value for money fast fashion brand. Its mission is to become the #1 Menswear company for masses of Bharat. It is currently targeting Tier-2, Tier-3 and Tier-4 cities dedicated to providing value to customers with fashionable and comfortable product ranges. The company is committed to superior customer service, innovation in fashion and product quality with 95% of the products priced below Rs. 499/-. By having products priced at such affordable prices it is helping the fashion hungry Indian mass customer from tier-2, tier-3, tier-4 to enjoy the latest fashion within their budget and to create an aspirational garment brand.

The Company mainly sources fabric from the local markets of Kolkata, Surat and Mumbai, and outsources its job work to the manufacturers at Kolkata under the supervision of company personnel for designs and quality control. The finished products are then branded and delivered at the Company warehouse. After Quality checking, the products are further dispatched as per orders from wholesalers and e-commerce platform buyers. It also has dedicated suppliers who does the entire process from sourcing till manufacturing, and deliver it designed garments which are then checked for quality at its warehouse. The Company develops garments through outsourcing model crafted by proficient people. It is a known fashion house and dedicated towards providing value to customers with its fashionable and quality products range. This gives it flexibility to easily get into new categories without any capex on plant and machinery making business and asset light model and also help it stay faster in adding different products.

The Company presently has four warehouses at Kolkata for the purpose of supply chain management. The finished products are shipped and sold through various e-commerce platform under the brand name 'FTX', 'TRIBE' and 'Conteno', and in large format stores. The Company have central inventory management system and enables it to deliver order directly to consumers. As of February 29, 2024, it had 68 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 4680000 equity shares of Rs. 10 each to mobilize Rs. 37.44 cr. at the upper cap. It has announced a price band of Rs. 77 - Rs. 80 per share. The issue opens for subscription on August 19, 2024, and will close on August 21, 2024. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.62% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, it will utilize Rs. 1.66 cr. for upgradation of warehouse, Rs. 13.00 cr. for prepayment/repayment of certain borrowings, Rs. 12.00 cr. for working capital, and the rest for general corporate purposes. 

The issue is solely lead managed by Horizon Management Pvt. Ltd., and MAS Services Ltd. is the registrar to the issue. Giriraj Stock Broking Pvt. Ltd. is the market maker for the company. 

Having issued initial equity shares at par value, the company issued further equity shares at a price of Rs. 40 per share in February 2024. The average cost of acquisition of shares by the promoters is Rs. Rs. 10.00 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 12.90 cr. will stand enhanced to Rs. 17.58 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 140.64 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total revenue/net profit of Rs. 51.13 cr. / Rs. 0.58 cr. (FY21), Rs. 53.80 cr. / Rs. 0.81 cr. (FY22), Rs. 71.62 cr. / Rs. 1.17 cr. (FY23). For FY24, with two broken periods (01.04.23 to 11.01.24 and 12.01.24 to 29.02.24) of 11 months, it has earned a net profit of Rs. 5.15 cr. on a total revenue of Rs. 96.49 cr. 

According to the management, with right product mix and customer friendly approach, it is penetrating into high margin stuff that has helped its FY24 boosted earnings. These trends will continue with added benefit of lower interest outflow and company will post improved performance in coming years.

For the last three fiscals, it has reported an average EPS of Rs. 1.14, and an average RoNW of 11.42%. The issue is priced at a P/BV of 5.43 based on its NAV of Rs. 14.74 as of February 29, 2024, and at a P/BV of 10.00 based on its post-IPO NAV of Rs. 8.00 per share (at the upper cap). There appears to be some mismatch in post-IPO NAV data in IPO price band ad. 

If we attribute FY24 super annualized earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 25.08. Thus the IPO appears aggressively priced. 

For the reported periods, the company has posted PAT margins of 1.16% (FY21), 1.52% (FY22), 1.68% (FY23), 5.36% (11M-FY24), and RoCE margins of 9.98%, 10.09%, 12.97%, 18.54% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Aditya Birla Fashion as their listed peer. It is trading at a P/E of NA (as of August 13, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 7th mandate from Horizon Management in the last two fiscals (including the ongoing one), out of the last 6 listings, 2 opened at discount, 1 at par and the rest listed with premiums ranging from 8.47% to 141.23% on the date of listing. 

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