Timbor Home Limited IPO Review (Avoid)

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Review By MLR Securities Private Ltd on May 30, 2011

• Issue Date: 30th May - 2nd June
• Price Range: INR 54 - 63
• Issue Size: INR 20 - 23 Cr
• Mcap: INR 80 - 93 Cr
• IPO Grading: CRISIL IPO Grade 1
• Promoter Holding: 47% (Post Issue)
• BRLM: Corporate Strategic Alliance ltd

Ahmedabad-based Timbor Home Limited manufactures and markets modular kitchens, furniture and doors, and door and window frames. The company markets its products under the brand names Timbor Cucine- Modular Kitchens, Timbor Doors-Doors & Door Frames, Timbor Home-Home Furniture, and IKI Kitchens-Hi-end kitchen solutions using ‘Hettich' hardware and accessories. It operates as a manufacturer-retailer with 84 retail stores, of which three (all in Ahmedabad) are company owned and company operated (COCO) while the rest are franchisees.

Of the total issue proceeds, the company will use 2.6 Cr for capacity expansion, 4 Cr for establishment of stores, 13.2 Cr for working capital requirement and the remaining amount for other corporate purpose.

Mr Anant Maloo is the promoter and managing director of the company. He holds a Bachelor's degree in Commerce and has a Diploma in international business. He has been in this business over the past decade and is also running a building material business through a private limited company. He is supported by Mr Manan Vidhyapati Patel and Mr Abhijeet Dwarkadas Daga. Mr Patel has a Bachelor of Engineering from the Bangalore University and takes care of marketing activities. Mr Daga has a Bachelor of Commerce from Gujarat University and has more than nine years of experience in plywood and timber trading.

• The company has expanded its network aggressively by pursuing the franchisee model - 97% of its stores are franchise stores and just 3% company owned company operated. During FY10, the company generated 49% of revenues from franchise stores.
• In order to reduce dependence on franchise sales and to curtail investment in the COCO, the company is increasingly looking at the corporate sale model. Although Timbor has moved to corporate sales with a view to increase its market share and strengthen its brand, it could not succeed and contributed only 2% of total sales in FY10, down from 8% in FY08.
• The company's topline grew at a CAGR of 49% in the last five years to Rs 51 Cr while PAT grew at a CAGR of 78% to Rs 1.7 Cr in FY10. In the 9mFY11 the company posted total income of Rs 55 Cr with a PAT of Rs 3 Cr. The EBITDA margin improved to 6% in FY07 to 11% in FY09. However, in FY10 it contracted to 10% on account of higher input cost. The PAT margins are quite volatile with an average net margin of 4%.
• For the first nine months of FY11, the company's working capital requirement has gone up drastically. Its working capital days have increased to 217 days from 184 days in the past one-year. Its sundry debtors have almost doubled for the first nine months of FY11 as against FY10. The company at present is quite highly leveraged with a debt equity level of 1.4:1 which will come down to 0.7:1 post issue.

Concerns

• Immense Competition: Furniture retailing has low entry barriers as no major technology or other relevant experience is required to run the business. Apart from unorganised players dominating the market, Timbor faces large retailers with strong brands as well as strong balance sheets. The retail furniture industry includes big players from the formal sector such as Future Group, Trent, RPG, Vishal Retail and Godrej.
• Shift in Business Model: The company plans to open 20 stores under the COCO model over the next two years. These stores will be larger in size, around 3,000-4,000 sq.ft. and located in tier-II cities of Gujarat and other states of the country. The company has started shifting its focus from the franchise to the COCO model in order to improve profitability. However, this model has its own risks given the high overhead costs.
• Low recall value: Although the company has been in the business for the past five to six years, it has not been able to establish the brand. Brand recall is low compared to major brands like Godrej and Home   Town (Pantaloon), Durian, etc., which are well established and have good recall in the market.

Valuations

The company has given the PBT of Rs 3.06 Cr but not given the profit after tax for first nine months of FY11. Assuming a tax rate of 33%, the company's annualised profit is 2.73 Cr. This gives earnings per share of Rs 1.9. THL is asking for valuations of 28-33 on a price band of Rs 54-63 which is quite aggressive considering its size of its operations. Other much bigger players in the similar industry like Greenply Inds and Century Plyboard are trading at a TTM P/E of 14 and 19 times respectively.