Nothing to spin around

PENNY WISE

Rajasthan Spinning's grand plan to emerge as an integrated textiles company has set the stock on fire.

The manmade fibre industry had a tough time last year. Since crude prices surged over 50 per cent in fiscal 2005, polyester filament yarn (PFY) and polyester staple fibre (PSF) for which crude is the primary ingredient shot through the roof.

Also lower domestic cotton prices and government's liberal policy towards cotton-based products affected demand for manmade fibre and blended textiles. One company which weathered such tough times is Rajasthan Spinning and weaving Mills.

Though the company was marred by the spiralling raw material costs, which ate away its operating profits, which declined by 19.2 per cent, it managed decent sales growth. For the record, the company's revenues increased by 13.7 per cent and exports grew by 39.4 per cent in FY05 despite the trade barriers and a bad industry climate.

Riju Jhunjhunwala, joint managing director of the company is bullish. He says, "Softer input costs (mainly polyester) driven by the capacity additions in polyester and polyester feedstock and our foray into value-added business such as garments should help us earn better realisations."

The Rs 730 crore company is the flagship of the Rs 2,000 crore LNG Bhilwara group. It is a leading Indian integrated textile player present in the entire textile value chain right from the yarn stage to the fabric stage. To add value to its fabrics business, the company acquired a textile processing house Mordi Textiles and Processors.

The company sells its fabrics under the flagship brand "Mayur" in the domestic market. It is also a leading exporter of textiles mainly yarn with overall exports forming about 43 per cent of total revenues. The company exports to around 60 countries while its main markets are Europe, North & South America and Middle East.

Yarn business forms about 85 per cent of the total revenues. In fact, it is the largest producer and exporter of synthetic spun yarn supplying almost all variety of blended yarns such as polyester-cotton and polyester-viscose among others.

The company recently underwent modernisation and expansion to increase its spindleage by 27 per cent to 2,14,000 spindles. Last fiscal, the company acquired Jaipur Polyspin which is still awaiting certain approvals. The acquisition would take its spindleage to 2,42,000 spindles.

The grand design
To de-risk its yarn business from adverse prices of manmade fibre feedstocks (raw materials), the company ventured into production of 100 per cent cotton yarn, which currently forms about 15-20 per cent of the total yarn production.

It also plans to increase the share of higher ended yarns such as melange yarn and finer count cotton yarn (around 40s) in its total yarn production.

Though the company plans to maintain its focus on yarn business, it has left no stone unturned to grab opportunities of the quota removal. The company has earmarked Rs 400 crore for its robust growth plans, of which 82 per cent of the capital outlay will be financed under textile upgradation fund (TUFs).

It plans to spend Rs 37 crore to set up a garment plant to make trousers in Bangalore with an initial capacity of 2000 pieces per day and gradually increase it to 13,000 pieces per day. Commercial production is expected by Q4FY06.

It plans to enter specialised varieties of denim business with a capital outlay of Rs 190 crore at Banswara plant with a 20 mn mtrs facility to be commissioned by April 2007.

To save on power costs, which is a significant cost after raw material costs, the company plans to set captive thermal power plant of 48 mw at a total investment of Rs 160 crore by March 2007. While the company's growth plans look ambitious, analysts question the fruitfulness of its expansion.

The numbers
The company's net sales increased at a CAGR of 11.37 per cent and net profit posted a lower growth of 4.14 CAGR in FY00-05 largely owing to mounting cost pressures. Jhunjhunwala expects the company to grow at a CAGR of 20 per cent in FY06-08. He expects the garments and denim business to contribute Rs 150 crore and Rs 200 crore in FY07 and FY08 respectively.

The company plans to bring the share of yarn business to about 60 per cent in next four years with the introduction of value added products. He also expects at least 40 per cent savings in power costs due to captive plants from FY08 onwards.

In H1FY06, net sales increased by 11.8 per cent at Rs 379.26 crore. Operating profit increased by 36.9 per cent to Rs 34.37 crore owing to softening of raw material prices. Raw material to net sales declined by 394 basis points to 60.7 per cent.

Thus operating margins improved by 140 bps to 9.99 per cent. Net profit increased at 49.5 per cent to Rs 10.45 crore and net margins improved by 70 bps at 2.76 per cent. 
 

FINANCIALS
	H1FY06	H1FY05	% change	FY05
Net sales	379.30	339.40	11.80	725.90
Operating profit	34.40	25.10	36.90	51.90
Operating margin (%)	9.10	7.40	-	7.10
Net profit	10.50	7.00	49.50	48.80
Net Margin (%)	2.80	2.10	-	6.70
EPS	4.80	3.20	49.50	8.10
Debt Equity Ratio				1.95
Trailing 12 month P/E (times)				12.30
Source : Capital Line

What analysts say
A textile analyst with a leading Mumbai-based brokerage firm is skeptical about the company's denim and trousers (garments) business. He feels that the withdrawal of restrictions on Chinese textiles items trousers and denim in 2009 by US and EU is likely to aggravate pricing pressure for Indian players.

Also there is not much scope of value addition in making trousers, unlike shirts or women garments. The company is expected to face competition in the fabrics business from the unorganised players and market leader like Raymond. However, Jhunjhunwala feels that the market is big enough to absorb the capacity.

But analysts feel that the company's entry into denims may be ill timed as large existing players such as Arvind Mills are already witnessing pricing pressure.

Moreover, the garment and denim business is unlikely to contribute substantially to the total turnover soon. Also the company's high gearing ratio at 1.62 times (FY05) is a cause for concern. The metric will only worsen further after the company avails the Rs 330 crore loan under TUFs. Surely, this will eat into the company's bottomline.

At the current market price of Rs 130, the Rajasthan Spinning stock trades at a trailing 12-month price to earnings multiple of 12 times. Priya Ayyar from IDBI capital says the positives seems to be priced in the stock and there is no additional hidden value to be unlocked.

Though the demand for all kinds of yarn including blended yarns is expected to improve, realisations are likely to improve only marginally.

Kapil Bagaria of Sushil Finance Consultants echos the same sentiment. He says that the company is fully priced, thus, it may not be the right time to enter the stock though existing investors may hold on to the stock for a while.