Stiff valuation and high dependence on the distributor channels are key concerns for the Pradip Overseas IPO.
After a decline, India’s textile exports have shown initial signs of recovery in the recent past. Textile exporter – Pradip Overseas has reasons to cheer as it derives around half of its revenues from exports. The company’ main forte is the manufacture of home linen products. It processes grey fabric and manufactures home textile made ups like beds-sheets, curtains, quilts, duvet covers, pillow covers and mattress covers. To derive benefits in the export segment, Pradip Overseas plans to set up a manufacturing facility within its proposed textile SEZ. To part finance the project, the company has come out with an IPO to raise around Rs 116 crore. The proposed SEZ-based facility would enhance the installed capacity to 169.5 million metres from 136.5 million metres as on December 2009.
Order driven
While the company’s business model is order driven, its output comprises narrow width and wider width fabric. Over the last two years, the company has been adding more of wider width linen capacity which enjoys premium pricing. In the overall pie, wider width segment contributes two-thirds of its revenues. In addition, it has been focusing on value-added products like quilts, organic cotton and aims to enhance its currently small presence in apparels, dress materials and bottom wear fabrics. Thus, the company’s overall sales realisation per metre basis has been an uptrend in last few years.
Pradip Overseas has consistently operated at higher utilisation of 90 per cent, with nearly a quarter of new capacity expected to be added by 2010-11 end. Besides growing in the current markets like India, US and Europe, the company plans to explore markets in West Asia, East Africa and Russia, to sustain demand for the enhanced capacities. Besides widening its export base, the company could do well if it is able to improve the sales pie by improving on its distribution model which is largely indirect. This could improve profitability and reduce the dependence on external intermediaries. For instance, in 2008-09, of the total export sales 93 per cent was through agents of international retailers.
Since grey cloth forms bulk of raw material cost (about 80 per cent of sales) and given that cotton prices have started to rise recently, it would weigh on the company’s margins. Besides, the company does not have long-term supply contracts for procuring raw material, indicates lesser control over costs of raw material. In spite of healthy cash profits and moderate capital expenditure in the past, the company has a debt-equity ratio of 2.5 on account of high working capital borrowings, which though is largely in line with peers. Absence of long-term customer contracts, reliance on distributors for export orders and limited product range are some pitfalls.
The additional capacity is expected to be operational by fourth quarter of 2010-11 in the SEZ. Thus, given the high utilisation rates currently, growth rates in 2010-11 may not be as high as in the past. Also, in 2008-09, the high growth in topline was aided by trading income of Rs 225 crore, which in turn suppressed margins. A similar trend has been seen in 2009-10 so far. Hence, going forward, ability to increase proportion of direct sales, revenue contribution from own capacities and sustain share of value-added products will influence margins.
| GROWTH SANS MARGINS | |||
| in Rs crore | FY08 | FY09 | FY10 * |
| Total income | 693 | 1,210 | 1,693 |
| EBITDA (%) | 12.7 | 9.8 | 9.9 |
| PAT | 38 | 41 | 68 |
| EPS (Rs) ** | 12.9 | 13.9 | 22.9 |
| P/E (x) @ Rs 100 | — | 7.2 | 5.9 |
| P/E (x) @ Rs 110 | — | 7.9 | 6.5 |
| * All FY10 figures are based on annualised numbers of 9 mth period ended Dec'09 ** EPS for FY10 is based on pre-IPO equity; it would stand at Rs 16.9 on post-IPO equity Source: Company | |||
Conclusion
At the upper price band, the IPO is priced at a PE of 6.5, which is similar to other well-known larger listed players like Welspun India and Alok Industries. Taking cognisance of it being one of the larger plays in its segment, probable tax benefits expected to accrue from SEZ facility along with additional rentals (from space it leases out to others in its SEZ) and better return ratios, expect growth rates to remain healthy. However, valuations aren’t tempting enough.