Lovable Lingerie Ltd (LOVLIN) - ICICI Direct

Result UpdateRating matrixRating : HoldTarget : | 320Target Period : 12 monthsPotential Upside : -6%Key Financials(| crore) FY11 FY12E FY13E FY14ENet Sales 104 133 166 198EBITDA 19 23 28 34Net Profit 14 22 22 28Valuation summaryFY11 FY11 FY13E FY14EP/E (x) 40.8 40.8 26.1 20.9Target P/E (x) 38.2 38.2 24.4 19.6EV to EBITDA (x) 20.7 20.7 19.7 15.8Price to book (x) 4.1 4.1 3.3 2.9RONW (%) 10.0 10.0 12.5 14.0ROCE (%) 12.8 12.8 15.2 16.6Stock dataMarket Capitalisation| 575 croreDebt (Jun-12)| 2 croreCash (Jun-12)| 5 croreEV| 572 crore52 week H/L (|) 637 / 278Equity Capital| 16.8 croreFace Value | 10MF Holding (%) 3.4FII Holding (%) 10.5Price movement6,0005,6005,2004,8004,400Aug-11Analyst’s nameNov-11Price (R.H.S)Feb-12Bharat Chhodabharat.chhoda@icicisecurities.comDhvani Modidhvani.bavishi@icicisecurities.comMay-12Nifty (L.H.S)Aug-12700600500400300200WHAT’S CHANGED…August 13, 2012Lovable Lingerie Ltd (LOVLIN)PRICE TARGET....................................................................... Changed from | 350 to | 320EPS (FY13E)......................................................................... Changed from | 13.9 to | 13.1EPS (FY14E)......................................................................... Changed from | 17.9 to | 16.4RATING....................................................................................... Changed from Buy to HoldMargin pressure led by high promotional spends| 342Lovable Lingerie’s (Lovable) Q1FY13 revenues and PAT were in line withour expectations. However, the operating margin came in significantlylower than our estimates. The company reported sales, EBITDA and PATof | 52.8 crore (up 15.4% YoY), | 8.3 crore (down 7.1% YoY) and | 7.5crore (up 7.4% YoY), respectively. Increasing employee expenses andpromotional costs weighed on the operational performance of thecompany thereby leading to a 381 bps YoY decline in operating margin.While key raw material prices have cooled off, advertising and promotioncosts are set to rise as the company pushes its brands. Consequently, wehave revised our operating margin estimates downwards by 106 bps and170 bps for FY13E and FY14E, respectively. We thereby, downgradeLovable Lingerie from BUY to HOLD.Weak operational performance likely to continueThe company has been witnessing an increase in the employee costssequentially on the back of the capacity expansion. Also, the companyhas been spending increasingly on promotional activities so as to push itsmid range brands. Both these factors have led to a weak operationalperformance and we expect the same to continue. We have revised ouroperating margin estimates to factor the same.Presence across segments to aid topline growthThe company is present in the fast growing women’s innerwear segment.With its various brands and long standing presence in the Indianinnerwear market, the company is well poised to capture growth acrosssegments with its brands – Lovable (premium), Daisy Dee (mid-segment)and College Style (youth segment). With capacity expansions likely to becompleted by FY13E (from 6.75 million pieces to 9.25 million pieces), weexpect topline growth to come through. We expect topline to grow at aCAGR of 22.1% during FY12-14E.Weak operational performance to cap upsidesThis is the second quarter in a row where the company has reported a dipin operating margins YoY. Considering the pressure on the operationalperformance we do not expect much upside in the stock currently. Wethereby downgrade Lovable Lingerie to HOLD with a revised target priceof | 320.Exhibit 1: Financial Performance(| crore) Q1FY13 Q1FY13E Q1FY12 Q4FY12 QoQ(Ch %) YoY(Ch %)Net Sales 52.8 54.7 45.7 19.1 176.4 15.4EBITDA Margin (%) 15.7 19.0 19.5 10.9 477 bps -381 bpsDepreciation 0.5 0.4 0.4 0.4 22.6 27.3Interest 0.2 0.1 0.1 0.2 -11.6 177.0Other Income 2.4 0.7 0.5 5.5 - -Reported PAT 7.5 8.2 7.0 6.5 15.3 7.4EPS (|) 4.5 4.9 4.2 3.9 15.3 7.4Source: Company, ICICIdirect.com ResearchICICI Securities Ltd | Retail Equity Research

Q1FY13 Result Highlights• Lovable’s Q1FY13 performance was in line with our estimates onthe revenue and PAT front. However, the operating performancecontinued to remain weak (in a seasonally strong quarter). Thecompany reported a 15.4% YoY increase in sales to | 52.8 crore(I-direct estimate: | 54.7 crore)• Operating margin dipped 381 bps YoY led by higher employeeand promotional spends. The company reported an EBITDAmargin of 15.7% as against our expectation of 19.0%• Despite the weak operational performance, a higher other incomeaided the company to report a PAT of | 7.5 croreLovable’s Q1FY13 sales increased 15.4% YoY to | 52.8Exhibit 2: Sales trendcrore as against our expectation of | 54.7 crore. Thecompany has now started to enjoy the benefits ofenhanced capacities250200166198150| crore10050164635 351953-Q4FY11Q1FY12Q2FY12Q3FY12Q4FY12Q1FY13FY13EFY14ESource: Company, ICICIdirect.com ResearchExhibit 3: EBITDA margin trend%201918171615141312111017.619.518.615.110.915.717.1 17.4Q4FY11Q1FY12Q2FY12Q3FY12Q4FY12Q1FY13FY13EFY14EEBITDA MarginSource: Company, ICICIdirect.com ResearchThe operating margin dipped in Q4FY12 on the back of higher employeecosts and also increased other income. The company reported anoperating margin of 10.9% as against our expectation of 15.5%.ICICI Securities Ltd | Retail Equity Research Page 2

We were disappointed on the operating front. Despitesofter input prices, the company posted a 381 bps YoYdecline in operating margins to 15.7% (I-direct estimate:19.0%). Higher employee costs (due to expandedcapacities) and higher promotional spends dented theoperating marginExhibit 4: Cost analysis (as a percentage of sales)Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13Raw Material Cost 46.1 40.6 42.0 42.6 34.1 38.6Employee Cost 13.4 8.8 10.9 10.7 18.6 9.0Other Expenses 22.9 31.1 28.6 31.5 36.4 36.6Source: Company, ICICIdirect.com ResearchDespite a weak operational performance, the PAT stoodat | 7.5 crore on the back of high other incomeExhibit 5: Net profit trend3027.52522.020| crore151051.57.04.63.56.57.5-Q4FY11Q1FY12Q2FY12Q3FY12Q4FY12Q1FY13FY13EFY14ESource: Company, ICICIdirect.com ResearchExhibit 6: Revised estimatesFY13EFY14EParticulars (| crore) Earlier Revised % Change Earlier Revised % ChangeSales 165.7 165.7 - 198.4 198.4 -Operating Profit 30.1 28.3 -5.8 37.9 34.5 -8.9Margin (%) 18.2 17.1 106 bps 19.1 17.4 170 bpsNet Profit 23.4 22.0 -5.7 30.1 27.5 -8.5EPS (|) 13.9 13.1 -5.7 17.9 16.4 -8.5Source: Company, ICICIdirect.com ResearchWe have revised our operating margin estimates downwards on the backof increasing promotional and other overheads. Our revised EBITDAestimates for FY13E and FY14E stand at 17.1% and 17.4%, respectively.ValuationThis is the second quarter in a row where the company has reported a dipin operating margins YoY. Considering the pressure on the operationalperformance we do not expect much upside in the stock currently. Wethereby downgrade Lovable Lingerie to HOLD with a revised target priceof | 320.ICICI Securities Ltd | Retail Equity Research Page 3

Financial summaryProfit and loss statement(| Crore)(Year-end March) FY11 FY12E FY13E FY14ETotal operating Income 104.0 133.0 165.7 198.4Growth (%) 19.6 27.8 24.6 19.7Raw Material Expenses 49.2 52.8 80.1 94.0Employee Expenses 11.6 15.5 17.9 22.2Manufacturing Expenses 3.3 4.3 5.4 7.5Selling Expenses 20.4 27.7 34.0 40.2Total Operating Expenditure 84.6 100.2 137.4 163.9EBITDA 19.5 32.8 28.3 34.5Growth (%) 20.6 18.5 22.8 21.7Depreciation 1.4 1.5 1.7 1.8EBIT 18.1 31.3 26.7 32.7Growth (%) 22.0 19.2 23.7 22.5Interest 0.5 0.6 0.5 0.5Other Income 0.9 6.7 2.8 3.9PBT 18.5 37.4 28.9 36.2Total Tax 4.4 6.1 6.9 8.6PAT 14.1 31.3 22.0 27.5Growth (%) 40.3 53.7 1.7 24.9EPS (|) 8.4 12.9 13.1 16.4Source: Company, ICICIdirect.com ResearchCash flow statement(| Crore)(Year-end March) FY11 FY12E FY13E FY14EProfit before Tax 18.5 27.7 28.9 36.2Add: Depreciation 1.4 1.5 1.7 1.8(Inc)/dec in Current Assets (7.5) (22.2) (4.5) (14.4)Inc/(dec) in CL and Provisions (7.1) 7.2 (0.1) 4.0Taxes Paid (5.6) (6.1) (6.9) (8.6)Others (0.4) 0.6 0.5 0.5CF from operating activities (0.7) 8.7 19.5 19.4(Inc)/dec in Investments (91.1) (3.1) (0.1) (1.3)(Inc)/dec in Fixed Assets (1.5) (15.7) 2.0 2.6Others 0.9 - - -CF from investing activities (91.7) (18.7) 1.9 1.3Issue/(Buy back) of Equity 105.7 - - -Inc/(dec) in loan funds (0.3) - - -Dividend paid & dividend tax (0.9) (0.5) (8.6) (6.4)Others (0.5) (0.6) (0.5) (0.5)CF from financing activities 104.0 (1.1) (9.1) (6.9)Net Cash flow 11.6 (11.1) 12.4 13.8Opening Cash 2.7 14.3 3.3 15.6Closing Cash 14.3 3.3 15.6 29.5Source: Company, ICICIdirect.com ResearchBalance sheet(| Crore)(Year-end March) FY11 FY12E FY13E FY14ELiabilitiesEquity Capital 16.8 16.8 16.8 16.8Reserve and Surplus 124.4 142.2 159.0 180.1Total Shareholders funds 141.2 159.0 175.8 196.9Total Debt - 3.4 - -Deferred Tax Liability 1.3 1.0 1.2 1.4Minority Interest / Others - - - -Total Liabilities 142.6 163.5 177.1 198.4AssetsGross Block 19.1 20.1 21.2 22.4Less: Acc Depreciation 6.1 7.7 9.4 11.2Net Block 12.9 12.4 11.9 11.3Capital WIP - 14.9 11.9 8.3Total Fixed Assets 12.9 27.2 23.7 19.6Investments 93.1 96.1 96.2 97.5Inventory 22.4 33.6 31.8 37.5Debtors 10.6 15.5 20.9 24.5Loans and Advances 3.7 9.8 10.8 15.9Other Current Assets - - - -Cash 14.3 3.3 15.6 29.5Total Current Assets 51.0 62.2 79.1 107.3Current Liabilities 11.9 15.6 16.8 19.6Provisions 2.9 6.5 5.2 6.4Total Current Liabilities 14.8 22.0 22.0 26.0Net Current Assets 36.2 40.1 57.1 81.3Others Assets 0.4 - - -Application of Funds 142.6 163.5 177.1 198.4Source: Company, ICICIdirect.com ResearchKey ratios(Year-end March) FY11 FY12E FY13E FY14EPer share data (|)EPS 8.4 12.9 13.1 16.4Cash EPS 9.2 13.8 14.1 17.4BV 84.1 94.6 104.7 117.2DPS 1.5 2.0 2.6 3.3Cash Per Share 8.5 1.9 9.3 17.5Operating RatiosEBITDA Margin (%) 18.7 17.4 17.1 17.4PBT Margin (%) 17.8 20.8 17.5 18.2PAT Margin (%) 13.5 16.3 13.3 13.9Inventory days 62.1 76.8 70.0 69.0Debtor days 42.5 35.7 46.0 45.0Creditor days 36.0 35.1 37.0 36.0Return Ratios (%)RoE 10.0 13.6 12.5 14.0RoCE 12.8 13.3 15.2 16.6RoIC 41.6 34.4 34.4 39.3Valuation Ratios (x)P/E 40.8 26.6 26.1 20.9EV / EBITDA 20.7 24.9 19.7 15.8EV / Net Sales 3.9 4.3 3.4 2.8Market Cap / Sales 4.0 4.3 3.5 2.9Price to Book Value 4.1 3.6 3.3 2.9Solvency RatiosDebt/EBITDA - 0.1 - -Debt / Equity - 0.0 - -Current Ratio 3.4 2.8 3.6 4.1Quick Ratio 1.9 1.3 2.2 2.7Source: Company, ICICIdirect.com ResearchICICI Securities Ltd | Retail Equity Research Page 4

ICICIdirect.com coverage universeSector / CompanyCMPM Cap EPS (|) P/E (x) EV/EBITDA (x)RoCE (%) RoE (%)(|) TP(|) Rating (| Cr) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14ETextilesAlok Industries (ALOTEX) 16 21 Buy 1,326 4.6 6.1 8.2 3.5 2.6 2.0 4.5 4.5 3.9 12.6 12.0 12.9 10.4 12.7 15.5JBF Industries (JBFIND) 132 120 Hold 957 31.0 34.0 46.6 4.3 3.9 2.8 4.8 5.4 5.3 17.0 12.6 11.6 14.7 14.5 17.5Kewal Kiran Clothing (KEWKIR) 577 611 Hold 711 42.3 51.9 61.1 13.6 11.1 9.4 7.2 5.7 4.6 27.9 29.9 30.2 23.1 24.3 24.2Lovable Lingerie (LOVLIN) 342 320 Hold 575 12.9 13.1 16.4 26.6 26.1 20.9 24.9 19.7 15.8 13.3 15.2 16.6 13.6 12.5 14.0Page Industries (PAGIND) 3,126 3,115 Hold 3,487 80.7 104.7 135.4 38.7 29.9 23.1 24.4 18.7 14.7 53.2 52.3 53.0 54.3 52.8 51.6Rupa & Company (RUPACO) 140 - Unrated 1,115 5.5 6.2 7.8 25.6 22.7 18.0 14.2 13.1 10.9 22.9 21.4 23.7 21.9 21.1 22.4Vardhman Texriles (MAHSPI) 234 229 Hold 1,486 22.6 29.3 38.2 10.3 8.0 6.1 6.6 4.4 4.1 7.7 8.9 9.8 7.2 8.8 10.7Exhibit 7: Recommendation History625550475400325250Nov-11Jan-12Feb-12Apr-12May-12Jul-12Aug-12PriceTarget PriceSource: Company, ICICIdirect.com ResearchExhibit 8: Recent ReleasesDate Event CMP Target Price Rating29-Mar-12 Initiating Coverage 351 350 HOLD4-Apr-12 Q4FY12 Preview 372 350 HOLD15-May-12 Q4FY12 Result Update 315 350 BUY5-Jul-12 Q1FY13 Preview 342 350 HOLDSource: Company, ICICIdirect.com ResearchShareholding Pattern(%)70605040302010067.011.33.018.867.010.33.918.867.011.82.319.067.010.53.419.1Q2FY12 Q3FY12 Q4FY12 Q1FY13Promoters FIIs DIIs PublicSource: Company, ICICIdirect.com ResearchExhibit 9: The road ahead200150| crore8.410050-12.9 13.11331661041914232228223428FY11 FY12E FY13E FY14ENet Sales EBITDA Net Profit EPS (RHS)Source: Company, ICICIdirect.com Research19816.4181260|ICICI Securities Ltd | Retail Equity Research Page 5

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