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.
Very informative article, well written. Thumbs up. :)
ReplyDeleteHi Captain, thanks for the commendation. I'm going to soon post on Odel valuation which I'm working on at the moment.
DeleteWelcome you thoughts in the future as well. :)
Nice Work
ReplyDelete