Saraswati Saree Depot coming with IPO to raise Rs 160 crore

Saraswati Saree Depot 

• Saraswati Saree Depot is coming out with a 100% book building; initial public offering (IPO) of 1,00,00,800 shares of Rs 10 each in a price band Rs 152-160 per equity share.        
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors. 
• The issue will open for subscription on August 12, 2024 and will close on August 14, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 15.20 times of its face value on the lower side and 16.00 times on the higher side.
• Book running lead manager to the issue is Unistone Capital.
• Compliance Officer for the issue is Ruchika Gheeya.  

Profile of the company

Saraswati Saree Depot is a wholesaler of sarees, kurtis, lehengas, and other womens’ ethnic wear garments, with a management spanning three generations, a workforce with decades of experience, networks across the country and a loyal customer base. With its core objectives based on serving every customer, from a lady who wants to venture into entrepreneurship from her home, to dominant retailers in bigger towns and cities, the company is determined to not only expand its operations, but also to lead the charge in the growth of the industry as a whole, and promote the oldest and most experienced weavers of India. Currently, it is headquartered in Kolhapur, and has a second store in Ulhasnagar.

The company is a key player in sarees wholesale (B2B) segment and its origin into the sarees business dates back to the year 1966. It is also engaged in the wholesale business of other women’s apparel wear such as kurtis, dress materials, blouse pieces, lehengas, bottoms, etc. On an average of more than 90% of its total revenues are generated from sale of sarees. In Fiscal 2024, it has served over 13,000 unique customers and its product catalogue consists of more than 3,00,000 different SKUs.

The company’s sarees are sourced from different manufacturers across India. Over the years, the company has developed relationships with these manufacturers in hubs like Surat, Varanasi, Mau, Madurai, Dharmavaram, Kolkata, and Bengaluru. It regularly sources sarees and other women’s apparel from more than 900 weavers/suppliers across different states in India.

Proceed is being used for:

• Funding working capital requirements of the company. 
• General corporate purposes.

Industry overview

The apparel industry comprises companies that design and sell clothes. Within this, the readymade garments (RMG) or apparel segment includes shirts, trousers, T-shirts and jeans. It also comprises ethnic wear, such as kurtas, salwar kameez, lehengas and sarees. Indian apparels players employ various business models. The two key differentiating factors in these models are the strategy used to manufacture or procure (purchase or outsource) apparel, and the strategy used to distribute it. The business models can be analysed by dividing into three stages: manufacturing, branding and distribution. Companies often operate across segments, depending on their strategy and business model. Furthermore, among ethnic apparel players, supply chain management is as an important aspect. Players manage their vendors as well as contract manufacturers to maintain the quality and output of apparel. Players also associate themselves with jobbers, which only manufacture for a particular company. Among players who opt to manufacture on their own, the working capital requirement is typically higher. Players who are engaged in in-house manufacturing also need to keep a track on the procurement of raw material and inventory.

This distribution channel is gaining momentum in India. In this channel, apparel is sold by an RMG player to multi-brand outlets (MBOs) and large-format stores (LFS) that sell apparel of several brands through large retail spaces, located in prime locations of cities and towns. Usually, the MBOs/LFSs are present in shopping-mall chains or are standalone stores with a presence in more than one location, e.g., Shoppers Stop, Pantaloons Retail, Westside (Trent), Globus, Lifestyle and Pyramid. Realisations from this channel are lower than those earned by selling to retailers, as MBOs/LFS keep higher margins than retailers while purchasing garments, with their costs being higher. In terms of distribution, players can also sell garments through distributors, which, in turn, sell them either to retailers or MBOs/LFSs. The retailers or MBOs/LFSs sell the apparel to end-users. Since two middle agencies figure between the seller and end-users, realisations from this channel are lower than those earned by selling through retailers, because in this case both the distributor and retailer or MBO/LFS provide for their costs and profits while purchasing an apparel.

India's apparel exports encompass a diverse range of products that cater to global markets. India has established itself as a prominent player in the international textile and apparel industry and is the third largest exporter of textiles and apparels in the world, exporting various types of garments to meet the evolving demands of consumers worldwide. One of the major categories of apparel exports from India is Readymade Garments (RMG) which includes a wide array of clothing such as shirts, t-shirts, trousers, dresses, skirts, blouses, and more. The RMG segment offers an extensive range of styles, designs, and sizes to cater to different consumer preferences across various regions. Ethnic wear also holds a significant position in India's apparel exports and includes traditional Indian clothing such as sarees, salwar kameez, lehengas, and sherwanis. These garments showcase the rich cultural heritage of India and are highly sought after by the Indian diaspora and enthusiasts of Indian fashion across the globe.

Pros and strengths

Diversified supplier and customer base: Over the years, the company has developed long-standing relationships with the manufacturers in hubs like Surat, Varanasi, Mau, Madurai, Dharmavaram, Kolkata, and Bengaluru. It regularly source sarees and other women’s apparel from more than 900 weavers/suppliers across different states in India. Currently, its product catalogue lists more than 300,000 different SKUs. In Fiscals 2024, 2023 and 2022, its revenues from its Top 10 customers represented 7.85%, 8.91% and 7.90%, respectively of its total revenues representing a diversified customer based. Similarly, in Fiscals 2024, 2023 and 2022, its purchases from its Top 10 suppliers represented 25.68%, 22.89% and 26.81%, respectively of its total purchases. The company majorly sells the products in southern and western regions comprising mainly of Maharashtra, Goa, Karnataka and Tamil Nadu and the company has served more than 13,000 unique customers in fiscal 2024. 

Diverse product portfolio: The company’s product portfolio spans over a wide range of items, including sarees, kurtis, dress materials, blouse pieces, lehengas, bottoms, etc. with over 300,000 different SKUs. Its diverse product range enables it to mitigate the risk of over-reliance on a single category of product and provides it with an edge over its competitors in terms of the variety offered by it to its customers.

Bulk buying capabilities: In order to offer a diverse portfolio to its customers, it focuses on purchasing in bulk from its weavers/ suppliers. Its bulk purchasing capabilities enable it to optimize costs and reduce supply chain risks. Further, procurement in bulk allows it to negotiate better prices and in turn offer competitive prices to its customers.

Existing client and supplier relationships: The company’s Promoters and their family members having been in the business of women’s apparels for over five decades, their relationships with weavers/suppliers and its customers are a core competitive strength for it. Due to the strength of the long-standing relationships with suppliers, its company enjoys several benefits in terms of pricing, exclusivity in designs, and payment terms, all of which is passed on to its customers by the way of attractive prices, an exclusive product range, and high-quality products. Its Promoters existing relationships help it to get repeat business from its customers. This has helped it to maintain a long-term working relationship with its customers and improve its customer retention strategy. 

Risks and concerns

Business subject to seasonality: The company is impacted by seasonal variations in sales volumes, which may cause its revenues to vary significantly between different quarters in a fiscal. Typically, it sees an increase in its business before and during festival and wedding seasons. Its sales also typically experience a surge ahead of festivals that are significant in west and south India. Few of its products, such as sarees is specifically made for the festivals and marriage season causing its sales for such products to increase due to the seasonal customer demand during such period. These products may not have the same level of customer demand during the other seasons of the year, at which point of time, other kinds of products may be in demand. Inability to accurately predict demand for different kinds of products may cause inventory build-up or lead to inadequate supplies of products in demand, each in turn leading to lower sales of its products and decrease in revenue from operations.

Dependent on third party weavers/suppliers for sourcing product: The company outsources all of its products from third party weavers/supplier. As of March 31, 2023, it had a network of over 900 weavers for procurement of products. It does not have any exclusive arrangements with its weavers/suppliers and cannot assure that they will service its orders on priority, or that they will not supply same/similar products to its competitors or third parties. If its existing weavers are, temporarily or permanently, unable to provide it with the products as per its requirements, or at all, it may adversely affect its business operations. Further, it plans inventories of its products based on estimated customer demand. In the event of disruptions in the supplies of products from its weavers/suppliers, it may not be able to meet inventory requirements or be able to sell appropriate quantity of products, thereby leading to reduced sales and impaired results of operations.

Requires significant amount of working capital: As the company’s business forms part of the wholesale sector, it requires a significant amount of working capital. Majority part of its working capital is utilized towards purchasing finished goods from weavers/suppliers, expenses towards operations of its stores, inventory, payments to vendors and trade receivables. Since the wholesale industry is working capital intensive, it has a lot of fixed expenditures for operation of stores and maintenance of optimum inventory levels. Inability on its part to maintain sufficient cash flows, credit facilities and other sources of funds, in a timely manner, or at all, to meet its working capital requirements or pay its debts, may adversely affect its financial conditions and results of operations. Additionally, the amount of its future working capital requirements will vary basis the estimates of various factors, including, cost overruns, unprecedented expenses, regulatory changes, economic conditions, new developments and opportunities in the industry, which may consequently result in short-term borrowings in the future. Due to such factors, its requirement for working capital may increase in the future, which may adversely affect its business and results of operations. 

High volume-low margin business: The company’s business is a high-volume low margin business. Its inability to regularly grow its turnover and effectively execute its key business processes could lead to lower profitability and hence adversely affect its operating results, debt service capabilities and financial conditions. Due to the nature of the products, it trades and due to high competition, it may not be able to charge higher margins on its products. Hence, its business model is heavily reliant on its ability to effectively grow its turnover and manage its key processes including but not limited to procurement of products and timely sales / order execution. Due to the nature of its business involving low profit margins, sudden changes with respect to price movements in goods being traded or sudden ad hoc anomalies in business or operations could substantially affect its net bottom lines and hence, adversely affect its results of operations and financial conditions.

Outlook

Saraswati Saree Depot is a wholesaler of sarees, kurtis, lehengas, and other womens’ ethnic wear garments, with a management spanning three generations, a workforce with decades of experience, networks across the country and a loyal customer base. With its core objectives based on serving every customer, from a lady who wants to venture into entrepreneurship from her home, to dominant retailers in bigger towns and cities, the company is determined to not only expand its operations, but also to lead the charge in the growth of the industry as a whole, and promote the oldest and most experienced weavers of India. The company firmly focuses in the ideals that it was built on, and is ready to surge to new heights in the next decade. Currently, it is headquartered in Kolhapur, and has a second store in Ulhasnagar. On the concern side, the success of the company’s business depends on the uninterrupted supply and transportation of its products from weavers/ third party suppliers to its stores, it depends on third-party transportation and logistics providers. It does not enter into agreements with such third-party transportation providers for transporting its finished products through road. 

The company is coming out with a maiden IPO of 1,00,00,800 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 152-160 per equity share. The aggregate size of the offer is around Rs 152.01 crore to Rs 160.01 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by Rs 90.63 million, or by 1.50%, from Rs 6,035.18 million in the Fiscal 2023, to Rs 6,125.80 million in the Fiscal 2024. The company recorded an increase in its profit by Rs 65.54 million or by 28.53% from Rs 229.74 million in Fiscal 2023 to Rs 295.28 million in Fiscal 2024. Meanwhile, the company intends to focus on strengthening its sales through e-commerce channels to benefit from evolving customer trends. It intends to make investments in digital channels to build an omni-channel engagement experience for its customers (both B2B and B2C) and has a dedicated team for its e-commerce operations. It also proposes to further strengthen its data analytics which will enable a better understanding of the preferences of its customers, improve sales and help in scaling its operations.