Sri Lanka Equities

John Keells Stock Brokers (Pvt) Ltd.

A JKSB Research Publication

IPO VIEWS
June 2010

Yolan Seimon yolan@jkstock.keells.com

ODEL LTD
Rs. 15.00
SUMMARY OF THE OFFERING Number of Shares Issued Issue Price per share Amount to be Raised Rs. Issue Opening Date Earliest Issue Closing Date 16,700,000 Rs. 15/250,500,000 5th July 2010 5th July 2010

SUBSCRIBE
Financial EBIT Year (Mar) (Rs. mn) 2008 212 2009 156 *2010 284 2011E 354 2012E 412 2013E 511 * Including exceptional items PAT (Rs.mn) 67 32 141 182 227 296 EPS (Rs.) 0.46 0.22 0.97 1.25 1.57 2.04 EPS Growth PER @ Rs. % 15/(11.15) 32.7 (51.55) 67.4 336.40 15.5 29.15 12.0 25.12 9.6 30.25 7.3 NAV Per Share 4.2 4.3 8.3 10.8 11.8 13.1 P/BV @ Rs. 15/3.58 3.45 1.82 1.39 1.27 1.14

Basis of Allotment Employees Retail Non Retail Total

No. of shares 1,200,000 3,000,000 12,500,000

Initial Public Offering

16,700,000

ODEL Ltd offers 16,700,000 ordinary voting shares at an initial public offering opening on the 5th of July 2010 at a price of Rs.15/- per share raising Rs. 250.5mn for the company. The funds are raised to fund retail branch expansion and will be used in the interim to reduce borrowings and improve the companys working capital up until new branch locations are finalized ODEL, which embodies high quality, after carrying out market surveys at ear exclusivity, an international aura and sophisticated style, has become an marked locations. essential shopping destination for both locals and tourists visiting the island The companys current issued capital each year with the ODEL brand now consists of 128.25mn shares which would patented across an increasing number of increase to 144.95mn shares upon full countries worldwide. subscription of the IPO with shares allotted as per the adjacent table. Whilst the flagship 46,700 square foot store in Ward Place is a key tourist shopping destination the company also Profile operates 11 more stores in the Western ODEL originated when founder and CEO Province. The company sources merchandise from over 500 suppliers Otara Del Gunawardene started selling and over 200 factories locally and clothes from the boot of her car to family globally, employing over 650 staff and and f riends, soon realising the vast providing indirect employment to over potential for retailing a range of high 500 people. The company now has a quality stylish clothing for an increasingly total of over 125,000 sq ft of retail space fashion conscious Sri Lankan consumer. across 12 stores in some of the best locations in the city and its outskirts. Growing from a modest start, off a 500 The inimitable value proposition ODEL sq ft store in 1990, Odel has advanced offers to the consumer in terms of the rapidly to become Sri Lankas premier fashion retailer and one of the countrys unique shopping experience and range of merchandise which evolved largely out iconic brands. of the creativity and style sense of its The company has grown in repute both founder and CEO has now been locally and internationally for the quality institutionalised with a management team with several years of experience in and range of its merchandise and the the company. The formal structures and unique ambiance created within its stores, offering a truly distinctive

shopping experience. ODEL operates at the mid to high end of the retail fashion market catering to the upper middle income groups offering a modern, world class retail environment coupled with a wide yet unique selection of local and imported products making its flagship Ward Place store, the only genuine department store in the country.

This document is published by John Keells Stockbrokers (Pvt.) Limited for the exclusive use of their clients. All information has been compiled from available documentation and JKSBs own research material. Whilst all reasonable care has been taken to ensure the accuracy of the contents of this issue, neither JKSB nor its employees can accept responsibility for any decisions made by investors based on information contained herein.

2 l John Keells Stock Brokers (Pvt) Limited l ODEL Limited

Store Location
Dickmans Road Majestic City Ward Place Airport Ja - Ela Kohuwela Crescat Boulevard Nugegoda Mt. Lavinia Moratuwa Panadura Maharagama

Store Opening
Oct-90 Jun-95 Jul-95 Nov-05 Feb-07 Oct-07 Dec-07 Mar-09 Oct-09 Dec-09 Feb-10 Apr-10

Sq.Feet
1,165 831 46,741 1,599 2,953 12,245 745 7,814 8,444 9,377 18,743 16,548

streamlined operations across the company have enabled the company to seamlessly launch into an aggressive yet well thought out branch expansion plan that has already shown strong returns with all branches opened in the last year exceeding pre-launch average daily turnover estimates.

Group Structure
ODEL Ltd the holding company operates all retail stores whilst its 5 fully owned subsidaries offers peripheral support functions to the group. - ODEL Properties (Pvt) Ltd is a BOI company which owns a 52 perch property in Rajagiriya containing a 31,000sq ft building rented out to ODEL Ltd to carry out logistics and Head Office operations. - ODEL Information Technology Services (Pvt) Ltd provides IT infratsructure and maintenance services for ODEL group companies. - ODEL Apparel (Pvt) Ltd is a garment factory which manufactures exclusively for ODEL Ltd. - Otone (Pvt) Ltd operates a Gym and Spa located at ODEL Ltds flagship Ward Place store which also makets its own branded sports clothing line sold at ODEL outlets. - ODEL Lanka (Pvt) Ltd is a BOI approved company incorporated to plan activities required to construct a high rise shopping mall complex at the Ward Place store location. Expenses in relation to initial designs and feasibility studies have been prudently impaired with a loss of Rs. 37mn in FY10, which may be reversed should the project be reactivated.

Shareholding Structure
The companys share holding pre and post IPO is as follows :
Name Ms. O.D. Gunewardene Mr. A.D. Gunewardene Phoenix Ventures Ltd Mr. L.W.A. De Soysa Mr. R. Gunewardene Mrs. A.M. De Soysa Mr. A.J. De Soysa Public Pre IPO No. of shares 80,833,100 40,416,900 3,000,000 2,775,000 1,000,000 150,000 75,000 % holding 63.03% 31.51% 2.34% 2.16% 0.78% 0.12% 0.06% Post IPO No. of shares 80,833,100 40,416,900 3,000,000 2,775,000 1,000,000 150,000 75,000 16,700,000 % holding 55.77% 27.88% 2.07% 1.91% 0.69% 0.10% 0.05% 11.52%

TOTAL

128,250,000

100%

144,950,000

100%

Outlook and Future Plans

With the cessation of the war, the Companys medium term focus is on expanding retail reach. ODEL has successfully entered into several suburbs in the outskirts of the Colombo city filling in a void of quality high end retail stores. The company intends to leverage on the strength of its brand to take advantage of untapped market potential for mid to high end clothing in urban cities in the western province and outstation cities following market surveys and feasibility studies conducted in ear marked locations. Our forecasts have only factored in 3 new branches in the current financial year, although several more may be opened in FY12 and beyond. The company is expected to benefit significantly from the upturn in domestic demand and the expected increase in spending power of the Sri Lankan consumer which would filter down to increased footfall at stores and an incremental increase

John Keells Stock Brokers (Pvt) Limited l ODEL Limited l 3

in average basket values. This is already apparent with successive new stores opened having recorded average daily revenues above initial pre-launch estimates. The company intends to carry their own line of clothing in the new stores along with a range of innovative and stylish merchandise retaining the brands identity with the same elegant interiors and exteriors and unique ambience created at its flagship store.

Financials
. The company reported earnings of Rs. 141mn for FY10, which we estimate to amount to Rs. 112mn excluding exceptional items that included capital gains from the sale of land and impairment losses from ODEL Lanka Pvt Ltd. We expect the company to post earnings of Rs. 182mn for FY11 stemming from increased sales volumes stemming from a sharp rise in tourist arrivals to the Ward Place and Airport stores as well as increased domestic spending across the range of stores in the suburbs of Colombo. We have factored a modest 5% increase in local footfall each year and an 8% inflationary increase in average basket size for our revenue forecasts. The Companys holds an extensive freehold land bank including 219.21 perches in Ward Place, Col. 07 and 52 perches in Rajagiriya and leasehold property amounting to 112.2 perches in Ward Place Colombo 07 and 35.69 perches in Rajagiriya. At an issue price of Rs. 15/- per share the counter trades a P/E multiple of 11.97x FY11E, which amounts to a 16.7% discount to market. We have prudently retained gross margins at 34% for our forecasts. An improved product mix and reduced need for promotional and discount sales would likely result in GP margin improvement. Our forecasts indicate a 27% increase in EPS above our forecasts to Rs. 1.52 for FY11E for a 200bp improvement in gross margins.We recommend SUBSCRIBE Key Forecast Assumptions :
Broad Assumptions Growth rate in Tourist Arrivals Increase in Local Foot Fall Increase in domestic spending Increase in foreign spending Growth in rental and other income Tax Rate Annual Increase in Employee costs Annual increase in Administration Expenses Annual increase in Selling and Dist. Expenses Annual Increase in Advertising Expenses Increase in Electricity Charges Staff Sales Commission WardPlace Sales Commission Sales Tax (BTT) Accessories % Cost of Sales Stock write off % Cost of Sales 2011E 35% 5% 8% 3% 10% 35% 15% 10% 10% 20% 5% 1.5% 1.5% 1.0% 2.0% 2.0% 2012E 25% 5% 8% 3% 10% 35% 15% 10% 10% 20% 6% 1.5% 1.5% 1.0% 2.0% 2.0% 2013E 20% 5% 8% 3% 10% 35% 15% 10% 10% 20% 6% 1.5% 1.5% 1.0% 2.0% 2.0%

4 l John Keells Stock Brokers (Pvt) Limited l ODEL Limited

INCOME STATEMENT Net Turnover Cost of Sales Gross Profit Other Income Distribution Costs Adminitrative Expenses EBIT Net Finance Income/(Cost) Profit Before Tax Income Tax Expense Profit for the Year Profit Excluding Exceptional Items Shares in Issue (mn) EPS P/E Ratio at Rs. 15/Turnover Growth YOY GP Growth YOY GP Margins
BALANCE SHEET As at 31st March ASSETS Non-Current Assets Property, Plant and Equipment Intangible Assets FIXED ASSETS CURRENT ASSETS Inventories Trade and Other Receivables Income Tax Refund Due Amounts due from Related Parties Cash and Bank Balances CURRENT ASSETS Non Current Asset Classified as held for sale TOTAL ASSETS EQUITY AND LIABILITIES CAPITAL AND RESERVES Stated Capital Retained Earnings Revaluation Reserve Minority Interest TOTAL EQUITY NON CURRENT LIABILITIES Interest Bearing Loans and Borrowings Deferred Tax Liabilities Other Deferred Liabilities Non Interest Bearing Loans NON CURRENT LIABILITIES CURRENT LIABILITIES Trade and Other Payables Advance Payable to Odel Properties Income Tax Payable Dividend Payable Interest Bearing Loans and Borrowings CURRENT LIABILITIES TOTAL EQUITY AND LIABILITIES

2007 Rs. Mn 1,684 (1,096) 588 35 (129) (327) 167 (56) 111 (36) 75 75

2008 Rs. Mn 1,941 (1,270) 671 52 (124) (388) 212 (77) 135 (68) 67 67

2009 Rs. Mn

1,951
(1,314) 637 70 (95) (456) 156 (92) 63 (31) 32 32

2010 Rs. Mn 2,417 (1,575) 842 172 (148) (582) 284 (72) 211 (71) 141 112

2011E Rs. Mn 3,591 (2,358) 1,233 84 (200) (763) 354 (46) 307 (126) 182 182 144.95 1.25 11.97 49% 46% 34%
2011E Rs. Mn

2012E Rs. Mn 4,380 (2,875) 1,505 121 (235) (979) 412 (30) 381 (154) 227 227 144.95 1.57 9.56 22% 22% 34%
2012E Rs. Mn

2013E Rs. Mn 5,120 (3,360) 1,760 133 (270) (1,111) 511 (19) 492 (196) 296 296 144.95 2.04 7.34 17% 17% 34%
2013E Rs. Mn

2007 Rs. Mn

2008 Rs. Mn

2009 Rs. Mn

2010 Rs. Mn

859 2 861

899 22 921

903 18 920

1,576 14 1,589

1,618 13 1,631

1,588 12 1,600

1,602 10 1,612

337 127 25 14 503 1,364

411 65 23 12 511 1,432

409 81 9 30 21 550 38 1,509

654 81

862 122

1,051 149

1,229 174

25 759 2,349

35 1,019 2,650

21 1,221 2,820

6 1,408 3,021

1 547 548 0 548

1 606 607 (1) 607

1 629 630 (3) 627

1 619 576 1,196 1,196

251 738 576 1,565 1,565

251 885 576 1,712 1,712

251 1,078 576 1,905 1,905

283 34 13 6 335 296 20 1 163 481 1,364

187 31 16 5 239 277 22 1 287 586 1,432

113 28 21 0 162 339 1 1 379 719 1,509

143 41 32 215 483 30 423 937 2,349

143 43 33 219 718

143 45 35 223 762

43 47 37 127 891

148 867 2,650

123 886 2,820

98 989 3,021

John Keells Stock Brokers (Pvt) Limited l ODEL Limited l 5

CASHFLOW STATEMENT As at 31st March 2010 CASHFLOW FROM OPERATING ACTIVITIES Net profit before Income Tax Expense Net Cash From/(Used in) Operating Activities Cash Flows from / (used in) Investing Activities Acquisition of Property, Plant and Equipment Acquistion of Intangible Assets Net Increase in Capital Work in Progress Proceed from disposal of Fixed Assets Investment in Subsidiary Proceeds from Disposal of Investment Investment Income Received Net Cash Flows from (Used in) Investing Activities Cash Flows from (Used in) Financing Activities Repayment of S.T. interest bearing borrowings Proceeds from S.T. interest bearing borrowings Repayment of L.T. interest bearing borrowings Proceeds from L.T. interest bearing borrowings Proceeds from IPO Lease Rental Paid - Vehicle Loan Settlement Dividends Paid Net Cash Flows from/(Used in) Financing Activities Net Increase/(Decrease) in Cash & Cash Equivalents Cash & Cash Equivalents at beginning of the year Cash and Cash equivalents at the end of the year

2007 Rs. Mn 111 97 (47) (3) 2 1 (46)

2008 Rs. Mn 135 55 (56) (21) 0 1 (76)

2009 Rs. Mn 63 84 (43) (2) 1 (38) 1 (81)

2010 Rs. Mn 211 125 (138) (2) (17) 84 (14) 40 4 (43)

2011E Rs. Mn 307 198 (88)

2012E Rs. Mn 381 90 -

2013E Rs. Mn 492 262 (50)

(88)

(50)

(105) 21 (95) 50 (104) 37 (83) 159 (0) (2) (86) (35) (92) (127) (1) (7) (53) (74) (127) (201) (5) (8) (80) (77) (201) (278) (148) (73) 10 (278) (268)

(275) 250

(25) -

(25) (100)

(64) (89) 21 (268) (247)

(80) (105) (14) (247) (261)

(104) (229) (16) (261) (278)

John Keells Stock Brokers (Pvt) Ltd.

130 Glennie Street Colombo 2 Sri Lanka T. 9411 2421 101-9 F. 9411 2326 863, www.jksb.keells.lk
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