Do it before it’s too late

I start this post by taking you back few years to 2010 to talk about a Sri Lankan company the story of which fascinated me for the entrepreneurial success, success as an equity IPO and a classic example of how the power of capital markets be used. Under the prospectus dated 26 May 2010, Odel Limited offered its shares to the public (offer was open for subscription from 5 July 2010). Unfortunately, I can’t find a link to the prospectus now. (If you need a copy I can share it though!) Odel offered 16.7 million shares (11.52% stake of the company) at a price of LKR15 to raise LKR 250.5 million. (thereby valuing the entity at LKR2,174,250,000 post-IPO and founder Otara’s stake at LKR1.2 billion, Believe it that this was an investment by her of LKR475,000, pretty amazing!). The objectives of the offering were manifold:

Investment in expansion (branch network) of c. LKR150 mn;

Settling debt, c. LKR100 mn; and

Expected to also benefit from the listed status, in the form of brand improvement, broaden ownership, marketability to shares and access to capital markets. 

The funding was supposed to be utilized by the end of 31 March 2011.

The Company, Zero to two billion revenue in 20 years

Odel is a venture started by Otara Gunawardene. I extract some stuff here directly from the prospectus “The Odel story began when Otara Gunewardene started selling clothes from the boot of her car to family and friends. Although she stumbled upon the fashion retailing industry accidentally, Otara saw the potential for retailing a range of stylish clothing to the fashion conscious Sri Lankan, and in 1990 she launched Sri Lanka’s most innovative brand – Odel, which is a combination of her first name, Otara, with her middle name, Del.”

The first store of the company was started in 1990.

As of 2010, “From the beginning, the brand has grown along with the business. The initial staff of 2 has expanded to more than 650, and Odel provides indirect employment to more than 500 individuals. Over 500 suppliers and 200 plus factories locally and globally supply Odel with a wide range of products.”

As of the IPO date, the company had 12 stores encompassing 125,000 square feet.

Summary financials of the company as they were presented in the Prospectus is reproduced to give some more details as to how it was performing financially.

Timing of the IPO

May 2010, just one year after the end of the conflict in Sri Lanka, the market was rallying (probably the best rally the market had ever seen) and valuations were pretty good, was the perfect time for anyone to list. On top of that Odel was a very well-known brand around in the main cities and hence marketing the IPO was not a very difficult task.   

Almost all the stock brokers were also of the view that at LKR15.00 a share, Odel was a BUY.  (was is it a good call at the time?) Have a look at the below table for some of those:

The shareholding pre-IPO and post-IPO were as follows:

IPO pricing

Unfortunately, by 2010 I didn’t do a valuation of Odel Ltd and hence I don’t have the chance to re-look at it (may be after writing this post I will be able to follow Odel, hopefully!) Anyway, let’s do some post-mortem on the pricing at the time of the IPO.

Let’s look at the performance of the company for the 5 years from 2006 through 2010.

Odel posted 11% 5 year CAGR of revenue and achieved 8.84% average EBIT margins (after adjusting for non-recurring gains in FY2010). In terms of NP margins, the company hit a 5 year average of c.2.82%.

As far as the information is concerned Odel was founded by Otara, Ajith Gunawardene and D.S Gunawardene with capital injection of just LKR 1.425 million. That converts to 142,500 shares issued at LKR10.00 per share (split equally among the three founding members). What was most impressive was that the company grew to be LKR1.2 billion by 2010 (that’s 20 years from its inception in 1990). You can see the growth in shareholders’ funds as per the graph.

Further, over the same period Odel managed to earn ROIC of 15.13% on average with an average Debt-to-Capital ratio of 1.37 times.

On the IPO year the gearing increased significantly on account of expansion as well as significant dividend payments (which I assume was debt funded immediately prior to the IPO and the IPO funds were utilized to settle debt which was almost equivalent to LKR148.3 million paid as dividend, pretty good ha!. This I’m guessing was paid out to Otara and Ajith with c. LKR99 million to the former and c. LKR49 million to the latter).     

The relative pricing table below gives an account of the pricing of Odel before adjusting and after adjusting for the IPO (on trailing FY10 figures).

Odel as a listed vehicle

Let’s look at Odel’s story as a listed entity. The price-volume chart below shows the behaviour of ODEL.N0000, the ticker for Odel PLC. Also by the side of P-V chart is the Return chart and it is evident that the stock has always provided positive returns to investors. (note that this is not the total returns)

Currently, Odel consists of 20 stores (up from 12 in 2010), which converts to 2 new stores a year since listing the company on CSE.  As opposed, to 125,000 sq.ft. of retail space by the time of IPO, currently the retail space with Odel encompasses c. 150,000sq.ft. The total staff strength, of Odel at present of 1,000, contrasts with 650 in 2010.

By the end of 31 March 2014, Odel managed to almost double its revenue to c. LKR4.5 billion as compared to c. LKR2.4 billion in FY10 (that’s in just 4 years after the IPO and a 4 year CAGR of 17.43%).

Even though the store expansion had helped Odel to boost its revenue (per square foot revenue has grown from LKR19,334.00 in FY10 to LKR30,633.00 by FY14), it didn’t come cheap! A government imposed VAT mechanism impacted ominously to the GP margins over the last two financial years.  As Odel added more and more stores to the network, admin costs have increased significantly.

In my opinion, I presume that some of the suburban stores must be eating in to profits at other well-established stores like Alexandra Place. Further, it is also noted that the three stores that came up in the second half of the financial year has not been in operational full cycle (however, drop in Adj. EBIT & EBITDA margins has started from FY13).

The drop in margins is also explainable from the industry perspective. For instance the competition in the retailing (clothing) has intensified such that there are many options available for customers right now. From my own experience, I know that Odel Battaramulla store is empty every time I go past it. However, the competitor, “Cool Planet” which is located just couple of miles from Odel is full at any given time. These retailers serve different segments in the market. Further, Odel may not be the option for the market segments in the suburban areas. I also know from day to day conversation with people that the suburban people perceive Odel as offering the same stuff that the local retailer offers at a higher price. There may also be one off expenses incurred by the company on behalf of the development projects that they have planned (going to be rolled out with the money raised through the rights issue in 2012. But such information is not disclosed).

This development may also be explicable from theoretical perspective under the concenpt of "Marginal Efficiency of Capital" which was advocated by Keynes (1936). The table above looks at the qaulity of growth of Odel. If you look at the marginal ROIC it has dropped starting from 2012. it has in fact turned negative. As you can also see from the quality of growth line, the costs of delivering growth (in revenue) have gone up meaning that LKR100 of marginal capital has only generated LKR12.39 of marginal revenue in FY14.    

The first exit

Odel’s story was further winched as Singapore based retail operator Parkson Retail Asia Limited bought a 41.82% stake in Odel via a sell down by the founding shareholders.  Here again Otara pocketed out close to LKR 1 billion. Post sell-down, Odel went ahead with a 1:1 rights issue to raise c. LKR2.9 billion although they ended up raising LKR2,543,588,620.00 on 17 December 2012. The monies were raised to go ahead with a mega expansion plan which to date has not happened and the money is just sitting in financial investments. (however, they bought a land adjoining their Alexandra Place store which may be used in the future for such planned expansion). Ideally, they should have raised this capital in a staggered manner through different equity structures like warrants, calls, etc. If that was the case there wouldn’t have been this much money stuck for almost two years.  Their ROIC ratio is negatively affected due to all these as you can see from the below graphs.

The second/full exit

In September 2014, the promoters of Odel took a decision to fully exit from the investment and similarly Parkson also decided to fully exit from their short-lived investment. Otara sold her entire stake in Odel to Softlogic at a price of LKR1,778,328,200.00.

Entrepreneurial success

I extract again from Odel’s 2014 Annual Report, “Otara has the distinction of being the first female entrepreneur to take a company public in Sri Lanka. When Odel launched an IPO in July 2010. Following the entry of Parkson Retail Asia 2012, Otara retains a 29.7% stake of Odel PLC. Her entrepreneurship was globally recognized in 2010 when she was named the best female entrepreneur at the seventh US Stevie Awards for Women in Business”.

To put it in to perspective, simply in language that I understand, I did a quick IRR calculation of her investment in Odel. Please bear in mind this is only based on the available information and certain approximations of timeline as I don’t have exact dates of cash flows. Also the fact that I don’t have info for a period of 15 years when the venture was privately held. Bearing all that in mind I wouldn’t say no to returns like that (IRR of 43% or more) and walking away with LKR1.8 billion in cash.

I think it's time to wrap this post up and I promise that in my next post I will look to value Odel. Then I can have a look at Odel as an investment given its current status.

Bottomline

Entrepreneurial success is not just start of successful ventures but it also encompasses the successful exit at one point. No matter how best a company is brought up in its life cycle, there is a time when it needs to be passed on to the next generation (may be to start a new cycle or to die as the company reaches decline stage). Further, the capital markets got the enormous strength to create wealth and push a business to heights which were not possible before. Moreover, it is a good place to smoothly exit. Odel is a best case study for Sri Lankan entrepreneurs as well as capital markets participants.