A fine stitch but...

IPO REVIEW

Garment maker Shivalik Global should see decent growth going forward, but the offer is not cheap.

With China looming large in the global textiles and garments industry with its enormous economies of scale, Indian companies, too, are being forced to scale up or ship out.

Shivalik Global limited, a Faridabad-based Rs 130-crore garment exporter and supplier of processed fabrics to domestic exporters, intends to raise Rs 60 crore to augment its garment capacity by 150 per cent and expand its knitting capacity by 87 per cent.

The offer is of one crore equity shares, 70 lakh to the public, of Rs 10 each at a premium of Rs 50 per share. The issue opened on March 9 and will close on March 14.

The company has been profitable since its inception in 1998-99 despite the ups and downs witnessed by the Indian textile industry. In the nine months ended December 2005, Shivalik reported a turnover of Rs 103.65 crore and operating profit of Rs 12.6. It made a net profit of Rs 5.69 crore in the same period and is expected to make Rs 7.6 crore this year on the basis simple annualisation. 
 

FINANCIAL
(Rs crore)	FY04	FY05	% Change	9 mnths  ended Dec '05
Net sales	111.70	123.92	10.94	103.65
Other operating income	34.27	40.48	18.12	27.48
Operating Profit	9.92	14.13	42.44	12.58
OPM (%)	6.80	8.59	-	9.59
Net profit	2.37	6.08	156.54	5.69
NPM (%)	1.62	3.70	-	4.34
EPS	1.67	4.27	155.69	3.99

Therefore, at Rs 60, the stock is valued at a price of about 11 times its expected earnings this year. However, the valuation, post-the IPO-discount and the risk associated with a small company, is not cheap as its peer Alok Industries is trading at 13.4 times in the market currently. In addition, Shivalik's sales were just one-tenth of that of Alok Industries, which is its direct competitor.

The company's financial performance is expected to be better in the future than in FY05 and this will bring down the valuation to 9 times its FY08E. The company has achieved 80 per cent of its turnover and operating profit and 90 per cent of the net profit reported in FY05.

While most of the IPO proceeds will be used to fund the expansion, the company also plans to use Rs 10 crore to repay some of its high-cost debt. Through the expansion, it plans to augment its garment capacity from 2.4 million pieces to 6 million pieces and expand its knitting capacity by 87 per cent at 2150 million tonne a year. It is also expanding processing capacities of knitted and woven fabrics, albeit on a small scale. 
 

EXPANSION PLAN
MT-Million tonne	Current capacity  (per anum)	Post  expansion	Commercial production
Readymade garments (Million pieces)	2.40	6.00	Aug '07
Dyeing, printing and processing of woven fabrics (million metres)	36.00	45.00	Sept '06
Knitting of fabrics (MT)	1,150.00	2,150.00	Sept '06
Dyeing and processing of knitted fabriocs (MT)	4,000.00	5,500.00	Sept '06
Dyeing and processing of yarn (MT)	1,400.00	1,900.00	Sept '06
MT-MIillion tonne

Shivalik's main business consists of dyeing, printing and processing of woven and knitted fabrics, which together form over 75 per cent of its total revenues. It supplies its printed and processed fabrics to garment exporters such as Orient Craft, Gokaldas Exports, India Export House and Modleama, among others in and around Delhi, in the north.

Garment exports form about 20 per cent of total revenue and the company's clientèle includes some of the international buyers such as PVH Arrow, Mary's, Seers and Wrangler in Canada, the US and Europe. The company has its own design studio with a team of 25 designers, who design and develop the products in accordance with the customer needs.

Dismissing concerns that the company may be hurting its own interest by selling fabric to other garment manufacturers, S K Agarwal, executive director of Shivalik Global, says, "We have our own infrastructure and are well integrated unlike 250 garment exporters, who are our customers. We don't really see them as competition."

However, going forward, garments will be the main focus and the company expects this business to contribute about 25 per cent and 30 per cent to its FY07 and FY08 toplines, respectively.

Agarwal says, "Our garment business is bound to grow, as we are into value-added garments. We do a lot of beading and embroidery work for women's garments and colourful or floral designs for children."

Despite good financials, analysts feel that the increasing contribution of garments in the total revenue is expected to put pressure on prices and margins. However, Agarwal assures, realisations will improve after the shift to value-added products.

According to Priya Ayyar of IDBI capital, "The issue looks a bit expensive considering the company's scale of operations and the holding period for reaping full benefits of the expansion plans."

Says Sejal Doshi of Angel Broking, "The stock valuations do not look comfortable, and prospective investors will have to wait for a longer time for the performance to get better."

However, the valuations are expected to turn favourable as the company's profits reflect the results of the current expansion. The company expects the full benefit of its expansion to show up by FY08.

According to an analyst, even on the expanded equity base, the company is being offered at 9 times its expected FY08 earnings. This, however, is still more expensive than Alok Industries which is trading at 5.8 times its FY08E earnings.