Should you subscribe to Campus Activewear IPO?

While listed footwear players are many, there are wide variations in their valuations. At one end are small/micro caps such as Liberty, Mirza International and Khadim, trading at 28-31 times and at the other are bigger players such as Bata and Relaxo, which trade in 3-digit PEs. Metro Brands did a Bata/Relaxo when it came out with its IPO a few months ago.  Its IPO was priced at 150 times the annualized earnings of the first half of FY22. Trading slightly above its IPO price currently, it is now valued at 81 times its expected earnings for FY22 as per Bloomberg consensus. Campus Activewear is going the Metro way. At the price band of ₹278 -292, the stock will trade at 74-78 times its annualised 9-month FY22 earnings.

Campus has its positives. Campus operates entirely in the sports and athleisure (S&A) space, a segment in which Bata (Power) or Relaxo (Sparx) have only a toehold and Metro does not have a presence. Campus holds a 17 per cent market share in the branded S&A footwear industry. It holds SKUs (stock keeping units) comparable to Puma and Adidas, but operates at relatively lower price points, and is hence uniquely positioned to tap into this space.

However, coming at a time when the market rally from the March 2020 Covid lows has given way to intermittent corrections and volatility, the Campus Activewear IPO leaves very little margin of safety for investors at this valuation. Hence, investors can give the offer the go-by currently. The entire IPO is an offer for sale by promoters and other investors for ₹1333 crore – ₹1400 crore.

Business factors

Apart from being focused on S&A, Campus’s business can be distinguished from some other players on two counts – one, on being focused on the online and trade distribution segment and two, on having in-house manufacturing capabilities when many in the industry operate on a fully outsourced model.

Campus sells predominantly through its distribution channels deriving 61 per cent of its revenues from this segment. Outside of this, while it does have exclusive brand outlets (EBOs) and sells through modern trade /large format stores as well, Campus derives 35 per cent of revenues from online sales. Going forward, the company expects to see its trade distribution vs. direct to customer (consisting of EBO, modern trade and online) mix at 50: 50. This bodes well for margins as while blended operating margins stand at about 19.3 per cent currently (9MFY22), the online segment is the most profitable for company. Campus has tie-ups with Fynd, Nykaa, Myntra and Flipkart. Campus products are sold here through modes such as for a fixed fee, or through revenue sharing or the other cost sharing arrangements.

Campus has steadily increased its average selling price from ₹481 in FY19 to ₹615 in the nine months ended December 2021 and moving this further up is a key focus area. Usually, retail- focused players set up a combination of company owned stores as well as franchisee stores to nudge customers to up trade as they can display a lot more SKUs in these stores than in mutli-brand outlets.

A higher mix of company owned stores leads to higher capex requirements, long-time to break even for some, losses in others as well as lower profitability of some others. All this lead to drag on financials. Campus operates about 115 stores ( own + franchisee) currently, 50 per cent of which have been opened in the second half of this fiscal. According to the company, 90 per cent of its EBOs break-even in the first year and it takes 30-36 months for a store to mature (payback period for the investment). Store level EBITDA margin for mature stores stand at 25-27 per cent. It is now looking to open 100-125 EBOs in each of the next few years. However, about 70 per cent of the upcoming stores are expected to be franchisee outlets (which are an asset light model). This brings down the risk for the company. Despite the expansion plans, EBOs are expected to constitute only a smaller share in the direct to customer sales channel, as is currently the case. The company has been seeing walk-ins in EBOs converting to sales in multi brand format stores, helping raise the average selling prices across-the-board.. It is riding on this consumer behaviour to improve realisations in the future too.

It does not entirely follow an asset light strategy for manufacturing like many footwear players do. About 9 per cent of uppers and 37.5 per cent of soles are made in-house. Assembly of shoes is 100 per cent in-house. This gives the company two advantages – one, its time- to-market is less and two, its scores on costs when competing with international brands which follow a fully outsourced manufacturing model.

Financials  

Revenues have grown from ₹590 crore in FY19 to ₹710 crore in FY21. In 9MFY22, it touched ₹839 crore. While profits dipped to ₹27 crore in FY21 (₹38.6 crore in FY19), it stands at ₹84.8 crore in 9MFY22.  About 20 per cent of the raw material is crude oil linked. The company has taken two price hikes in the last year. Operating margins in the last three fiscals has been at 16-18 per cent.

Inventory turnover has come down from 5 times in 2019 /20 to 2-3 times now and inventory cycles are 90-100 days vs 65-75 days earlier due to the need to hold higher inventory for online sales. The company is working on optimizing this holding period. However, DSOs (day sales outstanding) has come down to 35-37 days in 9MFY22 compared with 62-99 days earlier. This has helped shorten the cash conversion days cycle. Its debt-to-equity ratio stands at 0.43.

With competition being quite high especially from international brands, Campus may cater to the aspirational Indian customer. But brand visibility as well as perception will be a deciding factor. Towards this, advertising spends have inched up sharply to 7.7 per cent of sales in 9MFY22 from the 3-5 per cent levels earlier. The company expects it to average out at 6-6.5 per cent, with about 30 per cent of it for digital marketing. It remains to be seen how much of a market share rise Campus can see from here.

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