Fibre to Fashion to brands

FPO REVIEW

Foray into high-margin business such as dyed fabric and branded garments augurs well for a mid-sized player like Gangotri Textiles.

Starting his career as a cotton waste recycler and trader in late 80s, based in Kolkata, Manoj Kumar Tibrewal, managing director of Coimbatore-based Gangotri Textiles, deserves a lot of credit for catapulting the company to great heights.

He has successfully metamorphosed the company in 12 years into a mid-sized cotton yarn manufacturer with highest open-end spinning capacity of 5,904 rotors. From net sales of just Rs 5 crore in 1994, when it got listed, the company is likely to report more than Rs 100 crore of sales in FY06.

With an urge to scale higher, Gangotri plans to raise Rs 55 crore in the price band of Rs 41-46 through a follow-on public offer (FPO), which will be open during May 18-23.

The offer is at a discount of 18-8 per cent on the promoters' contribution in the form of convertible warrants at Rs 50 each and 25-16 per cent at its current market price of Rs 60.

The FPO proceeds will be a part of its Rs 351 crore greenfield expansion plan for setting up spinning, weaving, processing and garment capacities. The company plans to bring down the share of yarn business from about 90 per cent to 34 per cent in the next few years.

Says Tibrewal, "We plan to move towards high-value fabrics and garments as value addition is maximum in them. While the domestic garments industry is growing at 11 per cent, garment exports are expected to grow eight-fold, if the government's target of $25 billion garment exports by 2010 is to be achieved."

Besides open-ended spinning, it also has a small presence in ring spinning with roughly 17,400 spindles making counts ranging from 14s to 40s and 1,000 pieces of garments a day.

For manufacturing additional 3,000 pieces of garments a day, Gangotri is adding 50,400 spindles and installing a weaving and processing plant, having a capacity of 51,000 metres a day.

While 10 per cent will be for captive consumption, the rest will be sold in the domestic and international market in the ratio of 70:30. To check the power cost, the company plans to set up six 1.65-MW wind mills.

After making significant presence in the branded garments in the southern market through its 'Tibre' brand of trousers, the company targets to achieve a pan-India presence with wide variety of garments like women's trousers and men's shirts.

Adds Tiberwal, "Post-expansion, we will offer a proper blend of core and fashion products (like striped shirts)." It is also toying with the idea of opening exclusive retail outlets. However, it faces major competition from already well-established brands like Allen Solly and Peter England.

The company recently formed a joint venture with the $20 million Switzerland-based women's apparel brand "� Trailer "� that has sizable presence in Canada, Germany and Scandinavia. This move is expected to give the company some international presence and access to Trailer's designing skills.

The only concern lies in its high debt-equity ratio of about two times. This is before the addition of Rs 273 crore (78 per cent of total estimated project cost) to be borrowed under TUFS for the expansion. Nevertheless, the net interest cost (post-subsidy of 5 per cent) is about 3 per cent, which does not seem to be a major threat.

Analysts are also wary of its small capacity in both spinning and garmenting, even post-expansion. However, it almost equals its larger peers in operational efficiency. 
 

PEER COMPARISON
	Gangotri Textiles	GTN Industries	Precot Mills
Capacity (Spindles-FY05)	17,376	133812.00	121536
Capacity (Rotors-FY05)	5,904	-	1344
Net sales (Rs crore-9 months ended FY06)	111.21	149.70	175.4
PBDIT (Rs crore)	19.48	19.46	33.09
PBDIT margin ( %)	17.52	13.00	18.87
PAT (Rs crore)	6.28	5.13	10.91
PAT margin (%)	5.65	3.43	6.22
Trailing 12-month P/E	3.05	6.45	28.6

At the lower end of the price band (Rs 41), the stock trades at a P/E of 9.4 times and 10.5 times at the higher end on pre-issue equity for FY06. It trades at around 4.7-5.2 times respectively for FY08E.

Dipen Sanghavi from Pranav Securities, says, "The offer is attractively priced. The company is likely to clock a CAGR growth of 32 per cent and 98 per cent in net sales and profits respectively over FY05-08, albeit on a lower base. Margins are expected to be better due to future business mix in favour of high-margin products like dyed fabrics and garments."

Though the valuations look attractive, investors are advised to have at least a one-year horizon till 2008-09 to get the real benefit. In the nine months ended FY06, the company's net sales declined 20.5 per cent, mainly due to a 30 per cent fall in prices of coarser counts and change in product mix in favour of ring spinning. 
 

FINANCIALS
(Rs crore)	9 months ended
	FY06	FY05	%Chg
Net sales	111.21	139.87	-20.49
PBDIT	19.48	14.94	30.39
PBDIT margin (%)	17.52	10.68	-
PAT	6.28	3.67	71.12
PAT margin (%)	5.65	2.62	-

However, operating profit and net profit are up by about 30 per cent and 70 per cent respectively, and margins have also improved substantially.

The company has a sound track record of maintaining consistent profitability despite two textile downturns since its inception in 1989 and of rewarding its shareholders with dividend and bonus issues, recent one being in the end of year 2005 in the ratio of 1:1.