A Mixed Bag

IPO REVIEW

In the post-quota regime, 11 textile companies went public but investors earned good returns only in high-end businesses like garments and home textiles.

Textile companies have been on an investment binge to become globally competitive; they have either been expanding their existing operations or moving up the value chain (such as fabrics or garments).

Some players, especially the unlisted ones, have also resorted to the primary market route (through initial public offers) to raise funds and get visibility among the global players. Since the beginning of 2005, 11 companies have mopped up about Rs 800-odd crore from the public.

Growing domestic market and the abolition of quotas have led to these expansions. On January 1, 2005, about $400 billion of the global textile market, reeling under the import quota system for 40 years, became free.

This major change opened a window of opportunities for developing countries like India, China and Pakistan, which have anyway been large producers of textiles.

But after their listing, stock prices of these companies have not moved in tandem. Five companies"�Provogue India, Gokaldas Exports, Alps Industries and Bombay Rayon Fashions"�have seen their market price soar to dizzying heights while others have seen values slip below the issue prices. 
 

WAITING GAME
Companies	Issue price	CMP Apr 13, 06	Chg	Financials 9 months ended FY06 (Rs crore)
				Net sales	OP	NP
Bannari Aman Spinning	135.00	98.55	-27.00	54.90	11.70	9.60
Ginni Filaments	22.00	18.45	-16.14	141.50	20.80	5.20
Nitin spinners@	19.05	16.85	-11.55	47.40	10.90	3.00
Raj rayon	65.00	53.95	-17.00	122.60	14.10	8.30
Shivalik Global	60.00	58.30	-2.83	131.10	18.60	5.70
Kewal Kiran	260.00	247.25	-4.90	68.90	15.50	9.80
@- half yearly

For example, Keval Kiran Clothing was down 5 per cent on its first day of listing on April 13, 2006. The recently listed Shivalik Global is also trading at a marginal discount of 2.8 per cent to its issue price.

Performance: Now and later
Clearly, there is a wide variance in the performances of textiles companies. According to Kapil Bagaria of Sushil Finance and Stock Brokers, one reason for the under-performance of companies like Bannari Amman Spinning, Ginni Filaments and Raj Rayon is that the positive effects of the expansions that they carried out will reflect in their financials only after a couple of years. While for the better performers, it is likely to start accruing in 2006-07.

Another positive factor that has worked in favour of the winners is their superior business model and underlying growth opportunities.

For example, Gokaldas Exports, the largest apparel exporter in the country, and Alps Industries, an emerging integrated home textile player, are expected to benefit as home textiles and garments are among the fastest-growing businesses at present. Exports of these items have grown more than 30 per cent in 2005.

Changing demographics and increasing purchasing power are making domestic markets equally rewarding. Companies such as Provogue India and Celebrity Fashions, which are engaged in retailing their own products, are other major gainers as retailing"�the final point in the entire textile value chain"�fetches the best margins.

In case of Bombay Rayon Fashions and Celebrity Fashions, the market is willing to bet that the expansion projects will yield successes as these companies made their IPOs in December and January respectively. Here is a closer look at the players. 
 

PERFORMING PLAYERS
Companies	Issue price	CMP Apr 13, 06	Chg	Financials 9 months ended FY06 (Rs crore)
				Net sales	OP	NP
Provogue (India) Ltd	150.00	347.90	131.93	117.00	14.70	8.70
Bombay Rayon Fashions @	70.00	137.30	96.14	98.30	14.40	10.40
Gokaldas Exports	425.00	672.00	58.12	645.40	68.40	45.80
Alps Industries Ltd	120.00	211.95	76.63	178.40	28.70	16.40
Celebrity fashion	180.00	191.00	6.11	119.30	8.60	7.50
@- half yearly

Provogue India
The Provogue stock price has more than doubled in less than a year since its issue in July 2005. The company designs, manufactures, and sells branded readymade garments and accessories under the 'Provogue' brand, through its own retail stores occupying retail space of 40,000 sq ft.

It plans to double this by opening 100 stores including six mega stores in metros by the end of 2006. With all the expansion plans going on-stream by FY07, full benefits will reflect in FY08. At Rs 346, the stock trades at 48 times for FY06E.

Gokaldas Exports
The stock has risen over 50 per cent since its issue one year ago. Analysts advise investors to stay invested in the company as it has a large scale of operations and, hence, the ability to withstand pricing pressure.

The company is the largest garment manufacturer and exporter with a capacity of 24 million pieces, which will be increased to 36 million pieces by FY07.

The company is present in all types of garments such as jackets, coats, suits and casuals like shirts, ladies blouses and dresses, bottom-wear shorts and trousers. At Rs 672, it trades at a P/E ratio of 14.6 times and 12 times for FY07E and FY08E estimated earnings respectively.

Bombay Rayon Fashions
The stock price has almost doubled since its issue in the March 2006 quarter. At Rs 137.9, the stock trades at a P/E of 15 times its FY07 earnings. The company, a manufacturer of woven fabrics and garments, plans to integrate backwards by adding 2000 kg a day in yarn dyeing and about 94,000 metres per day of processing.

It also plans additional capacities of 48 weaving machines to the existing 150 machines and increase its garment capacity to 28,000 pieces per day from the current 6,000 pieces per day. According to managing director Prashant Agarwal, "All of these expansion projects are expected to be commissioned by June 2006."

Alps Industries
The company has had an impressive performance on the bourses as it has given a return of over 70 per cent in less than six months.

The company is an integrated home textile player and also markets architectural and home decor products like curtain rods, wooden laminated floorings under the 'Vista' brand.

Deepak Jasani, head of retail research in HDFC Securities says, "The stock seems to be fairly valued after having a decent rise in the past month. Prospective investors should buy on declines at about Rs 170-180 levels and those holding it should book part profits." At Rs 211.9, the stock trades at 12 times its FY07E earnings.

Celebrity Fashions
The stock price has gone up about 14 per cent, since its IPO in January 2006. At Rs 205, it trades at 34 times for FY06.

The Chennai-based men's shirts manufacturer had raised funds to finance its acquisition of a trouser facility from Ambattur Clothing, set up 20 exclusive stores for its men's garment brand 'Indian Terrain' over the next three years and for the garment unit to manufacture tops with a consolidated capacity of 920 machines.

Executive director S Surya Narayan of Celebrity says, "The benefits of the acquisition of Ambattur Clothing, the commissioning of the garment plant and opening of three stores will be reflected in the financial performance in 2006-07."

Bannari Amman Spinning
The stock has reported the highest decline of over 25 per cent since its IPO in November 2005. At Rs 98, it trades at about 8 times its FY07 estimated earnings.

The company is a manufacturer of cotton yarn and woven fabrics, and after its expansion, its capacity will increase by 75,600 spindles from the current 29,232 spindles, and will have 88 looms from the current 28 looms.

It will also set up a processing unit with a 30,000-metre per day capacity. Most of these projects will be commissioned by May 2006, except for the processing unit which will only start in April 2007.

Ginni Filaments
Since its issue in December 2005, the stock has declined about 16 per cent. At Rs 18, it trades at 11 times estimated FY07 EPS. The company is an integrated Indian textile manufacturer with presence in spinning (cotton yarn counts 6s to 50s) and knitting of fabrics.

It plans to expand its spinning and knitting capacity and set up a garment unit with 15,000 pieces per day capacity. The company also plans to enter a new area of business"�non-woven fabrics business"�with an annual capacity of 12,000 tonne.

Although the company will be among the first-movers in the non-woven fabrics business, analysts are wary of its prospects as the domestic market is small in this segment. The benefits of the expansions will accrue only in FY07.

Nitin Spinners
At the current market price of Rs 16.8, the stock is almost trading at a discount of over 10 per cent to its issue price. The scrip trades at around 11 times FY06 estimated earnings.

The company is a 100 per cent EOU and integrated textile company based in Bhilwara, Rajasthan, with 27,216 spindles, 1,872 rotors and 15 knitting machines. It plans to increase its spinning capacity by 185 per cent, knitting capacity by 80 per cent and set up a captive power plant of 18.21 MW.

Raj Rayon
At Rs 54, the stock is trading at a discount of about 17 per cent to its issue price and it trades at about 8 times FY06 estimated EPS.

The Rs 155 crore-company is a manufacturer of polyester texturised yarn, which finds applications in home furnishings. To integrate backwards and part-finance its expansion plan of Rs 75.95 crore, the company came out with a follow-on public offer to set up a partially oriented yarn with a capacity of 60,000 tonne a year.

Although the under-performers Bannari Amman, Ginni Filaments, Nitin Spinners and Raj Rayon look attractively valued, they are commodity players.

Jasani says, "The gap between these companies and established players in similar businesses like Super Spinning, Precot Mills, Banswara Syntex and Sangam India is not very large. That is the reason these newly listed companies are not seeing any sustained buying."

Moreover, a lot of expansions are also under way in the segment. Thus, investors are unlikely to see major gains in these companies even after the new capacities start production.