Ginni Filament isn't cheap

IPO REVIEW

Ginni Filament's follow-on offer looks expensive even though it is priced at a discount to the prevailing market price

Removal of quotas and government's favourable policy has benefited the cotton textile industry to a large extent. It has not only encouraged the cotton textiles players to undergo modernisation and expansion but also facilitated forward integration in fabrics and garments. Ginni Filaments, a small player in the cotton yarn industry, plans to do the same, though a little late.

The company has come out with a public offer to raise Rs 48 crore through book-building in the price band of Rs 19-22. Based on this, the stock trades at a trailing 12 month price to earning multiple of 9.5-11.

Analysts feel that the stock looks expensive as even a large player like Mahavir spinning is quoting at a trailing 12 month price-earnings multiple of 8.6 times. So even though the offer price is at a 35-45 per cent discount to the prevailing market price of Rs 34, investors may simply give the issue a pass, analysts say.

Ginni plans to use the proceeds of the issue to expand its rotors capacity by 75 per cent, increase its spindles by 31 per cent and enter into value added segments like garments and non-woven fabrics. It plans to set up a garments facility of 15000 pieces per day and non-woven fabrics capacity of 12000 mts.

The estimated cost of the project is Rs 204.24 crore out of which around 71 per cent will be financed by debt under the technology upgradation fund (TUF) scheme with average finance cost of 3.25 per cent (net of 5 per cent interest rate subsidy under the scheme).

According to analysts, the loan will dent Ginni's balance sheet further as it already has a high debt equity ratio of 1.92 times. Rising interest cost will be a worry too.

Ginni is an integrated Indian textile manufacturer with presence in spinning and knitting fabrics through two manufacturing units in Uttar Pradesh with a capacity of 54432 spindles, 960 rotors and 27 knitting machines.

The company derives over 50 per cent of its revenues from exports mostly yarn to Europe, Middle east, Korea, Bangladesh, Hong Kong and Morocco. It mainly manufactures cotton yarn with coarser counts ranging from 6 to 50. It also manufactures knitted fabrics to produce single jersey, inter lock, rib terry, and lycra fabrics. In order to value add to its fabrics, the company commissioned fabric dyeing and bleaching in May 2005.

The company's entry into non-woven fabric industry is expected to be beneficial as there is a pick up in demand globally. The industry is expected to grow at an average rate of 4.8 per cent, according to some analysts estimates. Besides, capacities have been shifting to China and other low cost nations which again is good news.

The company is a pioneer in the market in terms of the latest Spunlace Technology. However, the industry is not export intensive and domestic market is at its infant stage. The garment business is highly competitive and thus its ability to sustain its margins will be an issue going forward.

Ginni will benefit from the expected decline in cotton prices in domestic market. However its knitted fabrics and non woven fabrics are expected to witness high raw material costs like polyester and viscose due to high crude oil and wood pulp prices respectively.

Ginni's financial performance has not been satisfactory. Its net sales have increased at a CAGR of 3.93 per cent in FY00-05. Operating and net profits have declined at a CAGR of 3.11 per cent and 12.57 per cent respectively. This has been mainly due to increase in raw material, power and other expenses. The company has not paid any dividend since last three years. 

FINANCIALS
(In Rs crore)	H1FY06	H1FY05	% Chg	FY05
Net sales	94.70	94.29	0.43	185.59
Raw material costs	55.80	65.25	-14.48	116.99
Raw material/Net sales (%)	58.92	69.20	-	63.04
Operating profit	13.51	9.11	48.30	22.73
OPM (%)	14.27	9.66	-	12.25
Net profit	4.18	-0.27	LTP	2.04
NPM (%)	4.41	-0.29	-	1.10
EPS	1.27	NA	-	0.48
Trailing 12-month P/E	9.5 - 11x

The company's return on networth has declined from 6.48 per cent in FY03 to 2.32 per cent in FY05. In H1FY06, the company's net sales increased by a paltry 0.4 per cent year-on year at Rs 94.7 crore. Operating profit improved by 48.3 per cent at Rs 13.51 crore mainly due to decline of 14.5 per cent in raw material (cotton) costs.

Thus operating margins improved by 461 bps to 14.2 per cent. Financials turned into positive territory with a net profit of Rs 4.18 crore as compared to a loss of Rs 2.7 lakhs during the same period in the previous fiscal.