CPS Shapers - SME IPO (Dermawear)

Stock Opportunities Untested - but worth a good look
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While SMEs might not be my usual focus, my time in Investment Banking from 2012 to 2016 exposed me to some remarkable stories. During those years, I witnessed the Indian consumer-branded space go through quite a transformation. Some SMEs managed to scale to great heights, while others faced setbacks.

Brands like Wildcraft, Go Fashion, etc. both got funded by Sequoia, which were relatively small players during that time and eventually attracted significant investments from various private equity funds. These funds seemed to savor the lion’s share of the valuation, leaving me intrigued.

What caught my attention in Dermawear, you ask? Well, it all comes down to something we can all relate to - the pressing issue of obesity in our country. In a world where we all strive to look and feel our best, Dermawear can seize the opportunity. Have a look at the TAM below. I have taken the male and female population in the age group of 15-49 and assumed INR 390 as the average selling price.

Let’s dive into what Dermawear is all about. This company specializes in crafting shapewear designed to make both men and women feel more confident. They make products like V-Shaper, Saree Shapewear, Active Pants, and ShapeX Denim. Dermawear chooses a special blend of cotton, polyester, and spandex for their compression garments. These materials are not only friendly to skin but also built to last. Moreover, they strategically layer these garments to create a gentle compression effect in key areas like the abdomen, hips, and thighs.

Here’s the kicker - most of the market, over 90% of it, is dominated by women, and the product they offer is the kind that never really goes out of style (one of the biggest challenges for women’s apparel brands).

So, why am I writing this article? It’s not just to explain why I’m bullish into this, but also to hear what you think. Whenever am in doubt I try to crowdsource and try to find anti-thesis. I did the same thing in 2016 with HLE Glascoat (HLE Glascoat - (Valuation gap with GMM Pfaudler)?). Can you come up with a good reason why I shouldn’t? Because if things go as I hope, this company could easily be worth much more than the current MCap of INR ~ 100 cr in the next few years.

Remember what Mr. Monish Pabrai says, “Heads I win, tails I don’t lose much.” With that in mind, I’m thinking there’s not a whole lot to lose at the current market cap.

Now, here’s why I’m excited about this opportunity. First and foremost, India has an inherent talent for crafting textile products. It’s in our DNA, you could say. Moreover, our textile industry remains largely decentralized, relying on the hard work of countless skilled individuals. As I delve into this company, I find that it has already achieved a commendable turnover of INR 37 crore, a strong indicator of the promoter’s ability to scale.

But there’s more to this story. I’ve got this sort of ‘sniff test’ checklist, and Dermawear ticks all the right boxes. Clues from places like EPFO, Satellite Data, LinkedIn, Google Trends, and Glassdoor/AmbitionBox all checked out.

Now, you might be thinking, “Wait a minute, aren’t there already some big shots in the game?” Well, you’re absolutely right. Giants like Victoria’s Secret, Zivame, Triumph International, SKIMS (Kardashian), Spanx, Hanesbrands, Jockey International, and Miracle Suit have a piece of the pie, no doubt about it. But here’s the twist - shapewear isn’t their main course; it’s more like a side dish.

See, these big players have their fingers in many pies. Shapewear might be on their menu, but it’s not the star attraction. And that’s where Dermawear has its chance to shine.

They rely on a range of raw materials, including fabric, elastic, zips, elastic adjusters, buckles, hooks, sliders, heat transfer labels, and more. What’s interesting is that most of these materials are sourced locally, primarily from India and China, as indicated in the RHP (Red Herring Prospectus).

However, when we consider any business venture, especially one as dynamic as the textile industry, we can’t ignore the potential risks associated with raw material procurement. It’s where I’d love to hear from experts and industry insiders. If you’re part of this industry or have insights to share, please feel free to drop your comments below.

Negatives, still in the process of finding out (This is WIP)

  1. Board Strength: One area of concern is the strength of the company’s board. A strong and diverse board can provide valuable guidance and expertise. It’s worth considering whether the current board composition aligns with the company’s growth goals.
  2. Royalty Payments: The royalty payments for brands after reaching a turnover of INR 50 cr could potentially be a hindrance. It’s essential to assess whether these payments are justified and if they might affect the company’s profitability.
  3. Legal Matters: While the IT cases mentioned might have a relatively small financial impact, they can still be a source of distraction and cost. It’s crucial to keep an eye on these cases and address them efficiently.
  4. Debt Reduction: Taking equity to reduce debt is a major turn-off for me
  5. Low CFO/EBITDA , am assuming this will improve

Lots of Unknowns

  1. Have surveyed limited Retailer and Dealer (only 5)
  2. Promoter is unknown to me (Anyone who has ever dealt with him can post their views)
  3. And many more that I don’t know as of today (i.e. Risk)

For some reason not able to upload the images and financials here, those who are interested can go to my blog CPS Shapers - SME IPO (Dermawear) - Himadri’s Newsletter

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I am not too sure of the market size, if I say so, particularly in the context of Indian women, unless they are urban and have not yet settled down (married). I don’t think married women, even the ones who work in corporate world are too concerned about how they look, from these products’ perspective, so I am guessing the growth so far might have come from metros and urban areas, I don’t know. I am not sure, if these are products that are bought and used discreetly irrespective of the place they live.

And the growth in sales is coming from a segment in metros and urban areas, once the need for such products is vanished, there wont be another purchase, unlike other recurring clothing items that women purchase regularly. A woman may want to be appealing, but only until she finds her man.

Maybe, in a few years, the younger women population, all of them, living in metros and urban areas could become potential buyers for many years, and the sales may grow exponentially, but as you had mentioned already, if indeed that is the case, the bigger players, the companies with deeper pockets, might come and take away market share.

This is new company to me, never heard before, so my view is elementary, I don’t know what management has said about the growth and where it is coming from, and I could be, and perhaps I am, completely wrong. My initial thoughts before investing is about sales, sales growth, and a moat etc, hence replied.

Could be a trading bet for a few years.

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Thank you for sharing your perspective on this. It’s always interesting to hear different viewpoints. I agree with your assessment that the market for such products may vary significantly depending on various factors, including cultural and demographic ones.

You’ve highlighted an important point about the potential limited scope of this market among married women, especially in certain cultural contexts. It’s true that the growth of sales in this niche could be linked to specific demographics, such as younger, urban women.

Ultimately, the beauty of the market is its unpredictability, and there are often many variables at play. Your skepticism and cautious approach are entirely valid, however, in my thesis growth is least of my concern at the current scale of the company, and I appreciate your perspective on this matter. While I may not agree, it’s essential to consider a variety of viewpoints when making investment decisions, and your insights provide valuable food for thought.

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Nice details.

My short thread is as follows:

  1. Product is good and is being used by women left and right due to meetings/party/instagram/vlog culture where looks do matter. Plus the same is being recommended by even hospitals too post delivery for tummies.
  2. Since CPS shapers is focusing on this particular segment only, it has first mover advantage as these kind of products have their own learning curve to make it perfect.
  3. Financial growth looks good and in fact is expected little fast once textile sector bottoms out.
  4. Company is now focusing on exports too so that will add the topline.
  5. An interesting piece of information from their DRHP is
    To cater to the growing demand from our existing customers and to meet requirements of new customers, we intend to expand and upgrade our manufacturing capacities for existing products that we are in the process of developing and commercializing. We intend to increase our production capacity by way of installation of new plant and machineries atour existing manufacturing facility. We believe our investment in this plant and machineries will add on to our current installed capacity, thus, enabling us to cater to the growing demand from our customers and add new products in our
    existing product portfolio. This shall help us cater to expand our customer base and increase our revenue from operations.

Our Company aims to expand and diversify our product portfolio by increasing its product base and introducing new range of product lines. We plan to continue expanding our manufacturing capabilities in order to capture future growthtrends. We intend to explore opportunities to expand our operations by developing new products and services within ourexisting lines of business. Further expanding our service offerings will help us to build on existing diversification of our business. We believe that maintaining a variety in range of products in our business provides us with an opportunity to
cater to diverse needs of different customer segment.

Anti thesis

  1. Only one negative point i found so far is that Debt to equity ratio is 5 approx. which is high.
  2. The business has no MOAT although there will be a learning curve for newcomers and CPS will always have first mover advantage by then.

Disc: Invested and biased

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You’ve made a valid observation regarding the D/E ratio. In my personal view, the urgency to raise funds likely stems from the D/E ratio. Despite a robust sales growth of approximately 40%, it’s noteworthy that debtor days have decreased. This suggests that there wasn’t an artificial inflation of sales figures leading up to the IPO. Given the impressive capital efficiency with a RoCE exceeding 25%, it’s reasonable to suspect a high D/E ratio, although this is purely speculative without concrete evidence.

In an ideal scenario, the advisor could have recommended securing Private equity funding to reduce the D/E ratio and consider going public after a 5-year period. This approach, in my opinion, could have helped mitigate the general skepticism often associated with SME IPOs.

As for establishing a competitive advantage, it’s likely that this will develop over time. Building a strong distribution network and establishing a recognizable brand presence are key steps in achieving this.

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Hi, As per the DRHP, the company has two private limited companies under which the promoters seem to have control over and who apparently seem to be in the same line of business and have common directors- Dayal Hosiery Pvt.Ltd and CP&S Orthotics. Please refer to page 20 of the DRHP.

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I am certainly eager to see this matter resolved. Initially, I didn’t give it much attention as the financial transaction was only couple of lakhs. However, having prior experience with MSMEs in India, I am familiar with the strategic measures they often take in their business practices, lets not discuss that in public forum. It’s important to understand their perspective. In the SME space, many bankers lack the necessary expertise to provide strategic guidance, leading to challenges in navigating the path to an IPO. This stands in contrast to PE-funded companies, where these situations are typically less prevalent but they have other issues like aggressive revenue, operating margins etc