The IPO of Credo Brands Marketing, which owns and operates Mufti brand of men’s apparel is open till December 21. The IPO values the company at 10.9 times FY23 EV/EBITDA or 23 times FY23 earnings. We recommend investors subscribe to the issue.

The apparel industry should be the first in the line of sectors gaining from rising middle class in the country. Based on store growth and healthy margins (even in last three years) Mufti should generate high earnings growth in the medium term. The relatively modest valuation is also a positive.

Credo designs and retails garments in the mid-premium segment of men’s apparel. The asset light model involves outsourcing manufacturing and leasing its retail outlets (for stores the company operates). The company has a presence in 540 cities in the country through EBOs (exclusive branded outlets – 56 per cent of FY23 revenues), MBOs (multi brand outlets – 30 per cent), LFS (large format stores – 3 per cent) and online (5 per cent). Within EBOs, company owned, franchise operated account for nearly half the share and franchise owned or franchise operated account for the other half. Despite the different channels, the company indicates that it generates a similar company wide EBITDA margin by retaining control on price and commission in each channel.

All eyes on consumer spending growth

The apparel market is expected to face strong growth and the particular sub-segment of organised mid-premium men’s western wear apparels, relevant to Credo, should sustain even higher growth in the medium term. The RHP refers to a report from Technopak Analysis which states an expected growth of 28 per cent CAGR in 2023-27 for organised retail.

Brand consciousness, increasing digitisation, greater purchasing power and increasing urbanisation are tailwinds of an improving demographics in the country. The entry of large conglomerates in organised retail will accelerate the shift from unorganised market in apparel which should favour Credo through higher MBOs or an expansion in overall market size.

Fast growing though retail stores

EBO store count addition, which is within company control, is the primary growth driver. EBO store count addition has been strong in the last three years, with a net addition of 5 per cent in FY22, 16 per cent in FY23 and 8 per cent till Sep-2023 (or 16 per cent annualised). The store count stands at 404 stores in September 23. The company should sustain 10-15 per cent net store addition by expanding into Tier-1/2 and 3 and within existing markets as well.

This should imply a low double digit volume growth from EBO segment with normal inflation adding another mid-single digit to the growth levers. Credo should sustain mid-teens growth from volume and price. The company has delivered 46 per cent revenue CAGR in last three years as pent-up demand post Covid aided growth along with internal growth. While the company has not disclosed same-store sales growth metric, it has reported a healthy capex payback period of 15-18 months for the ₹25 lakh capex per EBO store.

Strong margin profile

Manufacturing is outsourced and retail outlets in company operated portion are leased by Credo. The company fixes pricing vis-a-vis commission in channels – EBO/MBO/LFS or online, so as to maximise value and retain its brand image. By controlling designing and pricing in an asset light model, Credo has been able to generate 32 per cent EBITDA margin and 15 per cent PAT margin in FY23, the most recent normal full-year of operations for the company. With little by way of fixed overheads, Credo reported 20 per cent EBITDA margin in FY21 as well, a year marked by low consumer activity.

Valuation

Credo is modestly priced compared to peers on one hand or the growth metrics inherent to the business. But FY23 reported numbers could have gained marginally from pent-up demand of last two years and could lead to optically lower growth in FY24. But as measured against peers as well, Credo seems to be reasonably priced supporting our subscribe rating on the IPO. It is noteworthy that remuneration to related parties amounting to 7 per cent of FY23 PAT,which may be addressed post listing.

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