MY TAKE ON KOUTONS AT PRESENT:
The problem with Koutons is that after a not-so-good Q1 (Koutons posted net sales of Rs 161.5 crore in the first quarter of FY2011, down 58.1 per cent from the previous quarter and 19.9 per cent lower than the corresponding quarter last year. The reported profit after tax was Rs 5.5 crores, down 82.4 per cent from Q4 of FY 2010 and 52 per cent lower than Q1 of FY 2010), they have been hit by a working capital crunch and hence had to delay some interest payments and promoters needed to pledge more shares with the banks. A few directors left the organization, but I do not see much a correlation with that event.
But prior to this, if you see the balance sheet of the company, it has done quite good in the last 5 years and clocked an increase in sales, net profit and book value in every year for the last 5 years.
Kouton's shares fell because of panic and short selling. Let me explain. The delay was painted to media as default and then large investors like ING VYSYA, KARVY and INDIA INFOLINE sold off. KARVY's action is suspect because only 2 days back they were recommending people to buy KOUTONS. So price manipulation is going on for sure. Once large investors sold off, the stock became open to large brokerages for shorting games and that is what they have been doing. I suspect that many of the sell orders at present are short sell orders. Very soon, of course, they will need to cover the short sales and will need to buy the script.
Koutons has a healthy book value of 165. And at a P/BV of 0.7 and P/E of only 4.7 (industry average is 27.5), it looks very cheap.
Another thing to note is that today outstanding number of sell orders during intraday was nearly 7.5 lakh orders and now it has come down to 34000 only. So 'shorter's may be now fearing to short the script further.
I honestly think that with festival season buying having started some time back, KOUTONS will post better numbers in Q2 and Q3 and promoters will be able to make payments and reduce the number of shares pledged.
Technically, the script can go down to 95. Average only in small quantities only at present. Once it hits the bottom and stabilizes, go for the max averaging. An example: I purchased 700 shares of Koutons at 140, none at 130, 100 more at 117. I will pick 150 more at 105.84, making my average price as 128 and probably stop at that point and buy the rest at the bottom. Another strategy can be to average only after it touches the bottom, but then you will have to watch for the bottom closely.
Unfortunate things happen to companies, but do not think Koutons is another Vishal Megamart. It will not close shop so easily. Currently, Koutons Retails has 1196 stores that are operating across the length and breadth of the country. Out of these 62 are company operated. The company does not operate through MBOs. business model comprises a mix of company owned outlets and franchise outlets but the emphasis is on the latter. The company is consolidating it business by converting their standalone stores into family stores, which occupy a larger retail space, increasing their footprint across the country and diversifying by way of introducing new product lines that best define their expansion plans.
UPDATE FROM THE COMPANY ITSELF:
Financially troubled retailer says it can handle its problems and will have a share issue in 2 months. Koutons Retail, the Delhi-based apparel retail chain, plans to launch a premium brand soon as part of a plan to improve cash flows, a top company official said.Koutons follows a retailing model where it gives 50-80 per cent discounts on brands such as Koutons Menswear, Charlie Outlaw, Les Femme and Koutons Junior. "We are planning to launch a premium brand shortly for which we are in talks with various parties," Ajay Mahajan, chief financial officer, said in an e-mailed response.
Mahajan said the company was in the process of shutting 50-60 losing stores to improve cash flows. The company has shut nearly 200 stores in the past 18 months to stem losses. It now runs 1,196 stores across the country, mostly owned by its franchisees. It would also increase the capacity utilisation of the 18 manufacturing units and consolidate production for better efficiency, he said.
Analysts say the company has been facing inventory pile-up for some time, which suggested it was not able to sell its stock. "Their business model was good but there was a problem with operational management. Inventories were in the books for two to three years without stock runs. Mahajan said the company is classifying all operations in a grading system and manufacturing the inventories as needed. "We are reducing the stock keeping units at the store level and setting up regional warehouses to reduce transit inventory,'' he said.
Though there was a buzz about Koutons defaulting to a public sector bank and going for corporate debt structuring, the company has strongly denied this. According to Mahajan, the company has a debt of Rs 660 crore as against net worth of Rs 505 crore and a debt to equity of 1.3 times. The interest outgo is Rs 90 crore this year. "We are profitable enough to take care of our interest burden. Yet, there is some scope for efficiencies and savings in interest costs, as rates are relatively high at 14 per cent. We will work towards that,'' he said. On Monday, Kouton's chairman, D P S Kohli, said the company would be able to raise up to Rs 400 crores through a preferential share issue by the end of December. "We are in discussions with various private equity firms and hope to launch road shows soon," he said.
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