Sai Silks

Regional presence

Present in the premium, middle and value fashion categories

Sai Silks (Kalamandir) (SSK), established in 2005, retails textile products such as sarees, women‘s wear, men‘s wear and kids wear.SSK, through its four store formats including ‘Kalamandir‘, ‘VaraMahalakshmi Silks‘, ‘Mandir‘ and ‘KLM Fashion Mall‘, offers its products to various segments of the market including premium ethnic fashion, ethnic fashion for middle income and value-fashion, with a variety of products across different price points, thereby catering to customers across all the market segments.

SSK, through its store network of 54 stores as of July 31, 2023, offers a diverse range of products including various types of ultra-premium and premium sarees suitable for weddings, party wear, as well as occasional and daily wear, lehengas, men‘s ethnic wear, children‘s ethnic wear and value fashion products comprising fusion wear and western wear for women, men, and children.

The company commenced operations through its first ‘Kalamandir‘ store in 2005 at Hyderabad, Telangana, with a store size of 3,213 square feet and has over the years expanded to 54 stores in four south Indian states including Andhra Pradesh, Telangana, Karnataka and Tamil Nadu, with an aggregate area of approximately 603,414 square feet, as of July 31, 2023. In FY2023, the company earned 44.87% of its revenues from Telengana, 32.77% from Andhra Pradesh, 9.02% from Tamil Nadu and 13.34% from Karnataka.

The company‘s stores provide a unique experience and customer service, which combined with its inventory and variety of SKUs that the company offers, enables it to attract and retain a growing customer base that, as of July 31, 2023, exceeded over 5.98 million customers in India.

SSK stores are strategically located in prime areas of the cities in which it operates, to tap into the purchasing power of customers with a cluster-based model: the company generally opens new stores in the same city, rather than extending its store network in other cities, to efficiently operate its stores. Further, the company started selling its products through its own online website, www.kalamandir.com, www.brandmandir.com,www.kanchivml.com, www.klmfashionmall.com and www.kalamandirroyale.com as well as through other third-party online e-commerce websites which provides an omni-channel network to its customers, through online and offline channels.

Object of the offer

The IPO consists of a fresh issue of Rs 600 crore and an offer-for-sale of up to 2,70,72,000 shares by its existing promoters. The OFS comprises up to 6409,345 shares by Nagakanaka Durga Prasad Chalavadi, up to 79,49,520 shares by Jhansi Rani Chalavadi, up to 30,83,865 shares by Dhanalakshmi Perumalla, up to 63,46,975 shares by Kalyan Srinivas Annam and upto 35,82,295 shares by others from promoter group.

Out of the proceeds from the fresh issue, Rs 125.08 crore will be used for setting up 30 new stores, Rs 25.40 crore towards setting up of 2 warehouses, Rs 280.07 crore towards funding working capital requirement, Rs 50 crore towards repayment or prepayment of certain borrowings and the balance towards general corporate purposes.

Strengths

SSK is one among the leading ethnic wear and value-fashion retail company in south India having a portfolio of established formats with focused sales and marketing strategy. The company is one among the top 10 retailers of ethnic apparel, particularly sarees, in south India in terms of revenues and profit after tax in Fiscal 2020, 2021 and 2022.

SSK stores are strategically located in prime and central areas of the cities in which it operates, to tap the purchasing power of customers,with a cluster-based model. The company generally opens new stores in the same city rather than extending its store network in other cities to efficiently manage its stores and inventory. The company generally opens retail outlets for each of its formats,serving as a one-stop destination for its customers which results in larger transactions per visit to its stores.

The company has an established brand name demonstrated by its renowned presence in the south Indian retail markets. SSK markets its products under the brand names of ‘Kalamandir‘, ‘Mandir‘, ‘Varamahalakshmi‘ and ‘KLM Mall‘ and ‘KRR‘ catering to a different set of customers. The company has been enhancing its market position by consistently expanding its scale of operations year over year.

SSK has a strong presence in both offline and online marketplace with an omni-channel network.

The efficient business model of the company has resulted in positive cash flows over the years, other than the year which witnessed the impact of the covid-19 pandemic with prolonged shutdowns. The company‘s net cash flows generated from and (used in) its operating activities were - Rs 15.2 crore, Rs 45.60 crore, and Rs 41.23 crore in FYs 2021, 2022 and 2023, respectively.

SSK procures directly from the suppliers from over 100 cities across India. SSK has a strong network of weavers to aggregators, which aids a seamless supply of goods. SSK, with the help of its long-standing presence in the retail industry and established strong relationship with its suppliers, is in a better position to bargain with its suppliers.

The company is led by Managing Director Nagakanaka Durga Prasad Chalavadi, who has more than 18 years of experience in the retail business. In addition, the company has a committed and large senior management team, which has an extensive experience in the retail and fashion industry, positioning to capitalize on future growth opportunities.

Weaknesses

The business is highly concentrated on the sale of women‘s sarees and is vulnerable to variations in demand and changes in consumer preference. Revenue from the sale of sarees constituted 67.36% and 68.38% of the total revenue in FY2022 and FY2023, respectively.

SSK has a presence predominantly in southern India, especially in Telangana. SSK derived 100% of its revenue from southern India and 44.87% from Telangana, followed by 32.77% from Andhra Pradesh, 13.34% from Karnataka, and 9.02% from Tamil Nadu in FY2023. Moreover, the company does not have any plans to diversify geographically.

The covid-19 pandemic, or any future pandemic or widespread public health emergency, could affect the company‘s business and financial condition.

The company has entered into a business assets transfer agreement to acquire the business assets of Sai Retail India. Any failure to realize the anticipated benefits of the transfer may have an adverse effect on the financial condition of the company.

As on the date of the Red Herring Prospectus,21,437,500 equity shares, constituting 31.33% of the fully diluted equity share capital collectively held by the promoters of the company, were pledged in favor of State Bank of India, pursuant to sanction letters dated December 5, 2017, March 8, 2019, March 10, 2020, March 20, 2021, March 5, 2022, and March 20, 2023, to secure the borrowing obligations of the company with the lender. However, pursuant to the letter dated October 20, 2022, from State Bank of India, such Equity Shares have been temporarily released from pledge for completion of the lock-in requirements as prescribed under the SEBI ICDR Regulations and will be subsequently re-pledged, subject to the provisions of the applicable law, with the Depositories post listing of the Equity Shares on the Stock Exchanges. Any default under the agreements pursuant to which these Equity Shares have been pledged will entitle the pledgee to enforce the pledge over these Equity Shares.

Operations of the company are vulnerability to intense competition amidst fragmented readymade garments industry. The retail business has low entry barriers and is highly competitive due to the presence of innumerable unorganized players in the industry.

As the company is into the retail business, operations of the company are highly working capital intensive in nature, governed by seasonality. A high level of inventory is required to be maintained to ensure a ready availability of stock. If the company is unable to maintain an optimal level of inventory, its business may be adversely affected.

Valuation

For FY 2023, consolidated sales were up by 19.7% to Rs 1351.47 crore, primarily due to increase in footfalls along with growing online sales. OPM rose 395 bps to 15.73%, which led to a 59.7% increase in operating profit to Rs 212.53 crore. Other income increased 101.8% to Rs 7.45 crore, while interest cost increased 58.5% to Rs 45.41 crore and depreciation increased 14.2% to Rs 41.01 crore. Eventually, net profit increased by 69.2% to Rs 97.59 crore.

FY2023 EPS on post-issue equity works out to Rs 6.36. At the upper price band of Rs 222, P/E FY2023 works out to 34.9 times. Listed industry peers of the company are Vedant Fashions, Go Fashion (India),Aditya Birla Fashion and Retail, Trent and Shoppers Stop.In comparison,Vedant Fashion is trading at P/E FY2023 of 72.75 times, Go Fashion (India) is trading at P/E FY2023 89.17 times and Trent is trading at a P/E FY2023 of 165.26 times. However, Aditya Birla Fashion and Retail incurred losses in FY2023.