Not so good cover

IPO REVIEW

Small capacity, limited market presence and current volatility in equity market makes Vigneshwara Exports' public offer less attractive.

The global market for home textiles is estimated at around $70 billion and the US and European markets, which together account for around 70 per cent of the global market, are growing at more than 5-7 per cent each. India is among the top three suppliers of home textile products to these markets.

Nevertheless, the country faces competition from its neighbouring countries like Pakistan and China, which are equally strong "� though in the lower segment of the market.

One company, which dares to beat them by providing value and total customer satisfaction, is Mumbai-based Vigneshwara Exports (VEL).

A 20-year-old company, a two-star export house that mainly exports home textiles, VEL is the largest exporter of bed linen to the European Union.

It not only supplies woven, printed, embroidered and special stitched bed linen but also ancillary products such as cushions, bed spreads, quilts and sofa throws. Earlier, the company also used to do trading and exporting of gems and jewellery.

Backward integration

In a bid to partly integrate its operations backward, the company plans to raise about Rs 58-67 crore in the price band of Rs 121-140 per share through a net public issue of 44 lakh shares (92 per cent of the total issue) starting June 7.

The issue will constitute 46.21 per cent of the total paid-up equity capital of the company, post-issue. It will also make up about 35 per cent of its total estimated cost of project at around Rs 194 crore. The company has already placed its equity with Kinzler GMBH and Co KG for Rs 5 crore.

It plans to set up a weaving unit to produce 15,480-metre wider fabrics per day for its captive consumption to take care of its extremely expensive and value-added products.

However, the company is investing more on higher value-added processing and setting up of a plant with a capacity of 1.2 lakh metres of fabric per day, of which, about 85 per cent of the grey fabric will be procured from outside.

Largest exporter but limited presence

Bed linen is one of the fastest-growing segments in the global home textiles space. And the EU is a larger market than the US with a total bed linen market size of $2.4 billion (26 per cent more than the US "� the second-largest and fastest growing market).

The UK, Germany, Italy, France, Spain, the Netherlands and Belgium are the important markets in the EU. The company caters to the higher and middle segments in the EU with well-known clients like Kinzler GMBH and Kaufland Warenhandel GMBH & Co KG. Germany contributes about 85 per cent of its total export revenues.

According to analysts, economic downturn in the region and exposure to the risk of a single foreign currency may not augur well for the company's growth prospects.

However, VEL Director Mahendra Poddar defends this saying, "We don't foresee this as a major threat as the EU has the biggest market share in bed linen and is growing on a consistent basis. And, there are different countries in the EU, which are large enough to target."

According to the company, its brand, Trademark Home, launched in January 2006 in the UK, has received a warm response.

The company claims to have the pricing power, even in case of competition or rising input prices. Unlike other domestic exporters to the EU, which pay 10-12 per cent anti-subsidy duty, VEL enjoys a competitive advantage as its products attract much lower duty at about 4 per cent up to early January 2009.

By this time, the imposition of quotas on Chinese bed linen will be lifted. However, an unnerved Poddar says, "Our products are made for product and design-driven market of the EU, where people are quality-conscious. With the beginning of the post-quota regime, our clients who started sourcing from China came back to us as they didn't find value in the low quality Chinese products."

VEL also enjoys the advantage of the EPCG (Export Promotion Capital Goods) scheme, which allows it to import machinery without being subjected to normal import duties.

In its attempt to increase its presence worldwide, the company plans to enter the US market and has, for the purpose, identified leading players like Springs, Colts/ Colby, JC Penny , Hemtex and QUC.

However, it will take time for the company to develop in the US the same kind of reputation it has currently in the EU.

Core forte yet to reflect in financials

In FY05, VEL's net sales grew 49.5 per cent. Operating and net profit also rose over 100 per cent and 200 per cent respectively. Both operating and net profit margins expanded despite rise in raw material costs. 
 

FINANCIALS
Rs crore	FY04	FY05	Chg (%)	First 9 months of FY06	As % of FY05
Sales	98.34	146.98	49.46	114.04	77.59
Raw material to Sales (%)	59.14	65.64	-	56.15	-
Operating profit	3.44	7.41	115.72	12.08	163.02
OPM (%)	3.49	5.04	-	10.60	-
Net profit	1.15	3.59	212.17	7.75	215.88
NPM (%)	1.17	2.44	-	6.80	-

However, if its trading business of gems and jewellery, which formed about 40 per cent, is excluded, the top line grew only 17.4 per cent at Rs 89.1 crore.

Also analysts feel that due to the inclusion of low margin trading business, VEL's margins are subdued at 5 per cent. Domestic home textiles players usually have operating margins in the range of 15-20 per cent.

In the first nine months of FY06, despite the share of the gems and jewellery business being brought down to 26.5 per cent, profits have exceeded the FY05 numbers. In FY07, analysts expect its sales and profits to improve only marginally owing to zero contribution of its discontinued gems and jewellery business.

However, they expect the company to do well in FY08, post-expansion, as it would save substantially on power costs through a captive power plant and reduce wastage of output from 21 per cent to 6 per cent on the strength of backward integration.

Based on all these factors, analysts expect considerable improvement of at least 900 bps in VEL's margins. They also expect a CAGR of 37 per cent in FY06-08.

Again, on the negative side, VEL's capacity of about 43.2 million metres a year, post-expansion, is still going to be lesser than the capacities of established players like Welspun India (45 million metres, post-expansion) and Alok Industries (85 million metres, post-expansion from current 60 million metres).

Reasonable valuation but...

At the lower end of the price band of Rs 121, the issue is valued at 5.4 times its annualised pre-issue EPS of FY06 and 6.25 times at the higher end. On a diluted equity, analysts expect it to trade at 9.3-10.8 times and 6.7-7.8 times for FY07 and FY08 respectively.

This looks reasonable. But, the biggest risk in subscribing to the issue is the company's small presence in US and dominance of polyester-based products, while 100 per cent cotton made-ups are growing rapidly, say analysts. Above all, the mood in the current volatile market is enough for investors to treat VEL's issue with caution.

Issue closes on June 13, 2006