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Wednesday, February 2, 2011

Jawed Habib Saloons Rs 60Cr IPO_an analysis

A week ago, the famed hair stylist Mr Jawed Habib's company filed for an IPO. Investors following Peter Lynch's philosophy of 'investing in what you know' may feel that this is a lifestyle business and will grow as per the 'demographic dividend' hypothesis. But reading the prospectus is essential, and in this case throws up some nuggets.  The foll are the red flags I noticed in the prospectus
  1. Unusual franchisee business model without adequate controls:- Usually, a franchisee operates on a royalty cum profit share basis. But the salons(majority of the company's salons) pass on their entire collections to the company which in turn pays them the agreed share. Though this may have the same economic effect, scope for fraud/embezzlement is more. And by the company's own admission, there is no foolproof mechanism to verify and ascertain the accuracy of reporting. However, their proposed ERP solution, if implemented right, promises to mitigate this risk.
  2. Conflict of interest by promoters:- Group Companies( Habibs Hair & Beauty Studio
    Private Limited and Jawed Habib’s Hair Xpreso Private Limited) shall operate under the same or similar name with simillar objects and business activities. There is no 'non compete' agreement. 
  3. Heavy promoter dependence:- While the company has standardized their training
    methodology and the franchisee operation, they still depend on Jawed Habib(as the name shows). Succession issues could be a problem here.
  4. Unfathomable independent directors:- An auto OEM promoter(albeit with CA degree), a Padma Shri awarded political cartoonist and a Reliance Broadcasting COO-are the 3 independent directors. What value would they bring to the company, is difficult to fathom. And more importantly, will they be able to protect the shareholder's interest?
  5. A 22 yr old compliance officer:- I'm not demeaning merely because of age but the company engaged a 22yr old ACS as its compliance officer. Considering the rapid expansion plans, and the possible related compliance issues, this decision is hard to stomach.
  6. Neither Director, Finance nor Head, Accounts are CAs:-Despite the Satyam aftermath, a CA's guiding arm helps in a company's finance and accounts function. And this company has neither
  7. Heavy pay disparity between non promoter director and others:- The Director(Franchising and Operations)-a 32yr old former consultant from ISB gets Rs 48 Lakh CTC but other senior management even 40-50yr olds get Rs 5Lakh-7Lakh. This disparity does not reflect well on the company and may induce attrition..
On the positive side, these are some good aspects
  1. Own training academy for staff:- All the general hair-stylists and salon managers in  salons are mainly sourced from their academies.
  2. Media promotion agreements:- Though ethically questionable, they have 'private treaties' with Brand Equity Treaties Limited(Times of India affiliate), which results in (more than deserved?) publicity for the brand. BETL gets Rs 18 crore worth advertising in return for Rs 6 crore cash & Rs 12 crore worth of equity.
  3. Promoter routes his brand ambassadorship through the company(!):- In Dec-10, the Promoter in the capacity of Managing Director of the Company became Brand Ambassador of Panasonic’s hair drier products. This action reflects some generosity on his part. 
My take
 Given this company's lack of control systems and 'small company approach', be aware that you are basically investing in a one-man-show. Also, given that the promoter's average cost of acquisition is just 4.74 per Rs 10(face value) equity share, inducement to exit may be there Given the fragmented business model and risks with expansion, better avoid for the time being.


SpitFire said...
This comment has been removed by the author.
Sunny said...

I get my hair cut here sometimes, good for a 99 bucks haircut...but i fail to understand the franchise model of passing the entire collections to the company and getting a fixed amount in return...there is no upside for the franchise...

They also note down everyone's name and phone number, maybe the company's way of checking any fudging...and btw a lot of women frequent the place, the price point is cheap for a womens haircut...

Anandh Sundar said...

Sunny, the service quality is good. I did not explore the women's haircut niche..but opens up interesting avenues. It is the controls which worry me. As you said, the franchise has a greater incentive to cheat. Noting down names/phone number allows for sample checks but still not fool proof.