Moving up the value chain

IPO REVIEW

The growth prospects of KPR Mills look more promising than those of SEL Manufacturing.

The rupee has appreciated by 8.9 per cent and 5.6 per cent against the dollar and euro respectively since January 2007, which has adversely affected Indian textile exporters.

Also, textile exports to the developed markets like the US and the EU have declined by $2 billion to $17 billion in FY07 thanks to appreciating rupee and competition from other low cost countries like China, Bangladesh and Sri Lanka. The performance of listed textile stocks has been poor except for a few, as margins are under pressure.

However Indian textile companies, especially the smaller ones, are unperturbed by the roadblocks and are bravely going ahead with their expansion plans by raising equity and debt.

They are going for backward integration to save costs and maintain quality by taking advantage of favourable government policies like the TUF (Technology Upgradation Fund) scheme and increase in duty drawback rates.

Two companies south-based KPR Mills and north-based SEL Manufacturing are tapping the primary market. Both export 100 per cent of their garment production, but to different markets.

Both companies are going for expansion and backward integration. Further, both companies' IPOs have been reasonably priced. However, analysts do not have the same view on both companies.

They are more bullish on the prospects of KPR Mills due to increasing share of garment business in future. Let's have a closer look at the IPOs.

KPR Mills: High margin play
Coimbatore-based, integrated garment manufacturer, KPR Mills plans to raise Rs 133-156 crore in the price band of Rs 225-265, out of which Rs 97 crore will be spent on expansion while the rest will be used for other corporate purposes.

The company is already undergoing a capex plan of Rs 472 crore funded by 74 per cent debt, 11 per cent private equity and the balance through internal accruals. 
 

KPR MILLS: WEAVING VALUE
Rs crore	FY06	FY07	% chg (y-o-y)
Net sales	421.50	481.60	14.26
Total exports	340.00	361.40	6.29
Operating profit	81.50	120.20	47.48
OPM(%)	19.34	24.96	562 bps
Net profit	63.00	58.00	-7.94
NPM(%)	14.95	12.04	-290bps

This project will be ready in the second half of FY08, and double its spinning capacity to 212,064 spindles. Its windmill capacity will go up from 19 MW to 39 MW, and meet all its entire future power requirement.

The current expansion will triple its garment capacity to 37.9 million pieces and with the IPO proceeds, it will increase garment capacity to 63.8 million pieces, which will come up in late FY09. The post-IPO expansion will start contributing entirely in FY10 with partial contribution in FY09.

While yarn and fabrics are sold in the domestic market, 100 per cent of knitted garments (like T-shirts, jerseys and sweat shirts) are exported to retailers like Carrefour, Mother Care and Penneys (Primark) in Europe. KPR's plant location in Coimbatore"�one of the biggest clusters for textile industry especially for knitted fabrics and garments"�augurs well for its yarn and fabric business.

Besides Europe, KPR plans to enter the US market. On currency risk, P Nataraj, managing director, clarifies, "Due to high-end fashion garments, the company is able to negotiate prices depending on the relationship with the customer."

In FY07, KPR's net sales rose 14 per cent to Rs 481 crore, and operating profit jumped 47.5 per cent to Rs 120 crore. However net profit declined marginally by 8 per cent to Rs 58 crore as interest and depreciation costs went up due to its expansion.

Going forward, the operating margins of around 25 per cent are going to improve further due to increasing contribution from high-end and high-margin garment business (which currently forms about 27 per cent of net sales) and full integration and also due to an increase of 3 per cent in duty drawback rates.

Despite substantial fund raising though debt, the company's debt to equity ratio stands comfortably close to 1:1, which is likely to be maintained after the IPO.

KPR Mills is valued at 11.8-13.9 times its FY07 (pre-IPO) earnings at the lower and upper end of the price band. Analysts feel that the company is rightly priced especially at the lower end.

Issue opens: August 2
Issue closes: August 7

SEL MFG: Unfavourable revenue mix
A relatively smaller player from the north, the Rs 200-crore SEL Manufacturing, is also planning to expand its current garment capacity of 6 million pieces to 7.5 million pieces while integrating backwards by adding 25,200 spindles and 3,000 tonne to the fabric capacity to its existing 49,056 spindles and 4,050 tonne knitting capacity. 
 

SEL MFG: HARD SELL
Rs crore	FY06	FY07	% chg (y-o-y)
Net sales	146.20	206.28	41.09
Total exports	126.60	173.51	37.05
Operating profit	19.60	32.77	67.19
OPM(%)	13.41	15.89	248 bps
Net profit	13.60	22.82	67.79
NPM(%)	9.30	11.06	176 bps

For this, the company plans to raise Rs 33-37 crore in the price band of Rs 80-90 per share. The benefits of the expansion will start accruing from H2 FY08 onwards.

In January 2008, the company will go for another expansion, which will take its total capacity to 149,856 spindles, 7,050 tonne of knitted fabrics, 6,500 tonne of processed fabrics and 7.5 million pieces of garments.

In the past two-three years, SEL Manufacturing has grown both organically and inorganically by merging group companies and also through acquisitions. In FY07, while net sales grew 41 per cent to Rs 206 crore, operating profit and net profit grew at a faster clip of 67 per cent each to Rs 32.77 crore and Rs 22.8 crore.

However, going ahead, it will be a challenge for SEL to maintain such high growth in profitability as increasing debt is likely to lead to higher interest costs and the ongoing projects will ensure high depreciation.

On the other hand, the relatively low-margin products like yarn and fabrics, will contribute half its revenues, so margins will remain restricted. Moreover, 100 per cent of its garments are exported to Russia and UAE, which exposes the company to concentration of revenues and also deprives it from high volume market like the US and the EU.

SEL's debt-equity ratio of 1:1 is likely to rise further due to the post-IPO expansion funded through debt under TUF and internal accruals. The IPO is priced at 3.7-4.2 times its FY07 earnings, which is attractive.

However, given the unchanged revenue mix between yarn, fabric and garments, its future business prospects do not look as promising as for KPR.

Issue opens: July 26
Issue closes: July 31