Priced dearly

IPO REVIEW

Nitin Spinners' public offer seems to be priced on the higher side.

Higher export opportunities owing to removal of global textile quotas and government's favourable policy towards cotton textile players has encouraged many small textile firms to weave their growth plans.

Nitin Spinners plans to raise Rs 49 crore in the price band of Rs 18-21. Approximately 18 per cent will be subscribed by the promoters, 5 per cent by employees and the rest is for the public. A 100 per cent export-oriented unit based in Bhilwara in Rajasthan, Nitin Spinners is an integrated textile company with 27216 spindles, 1872 rotors and 15 knitting machines.

The company supplies its cotton yarn ranging from counts 4 to 40s to manufacturers of apparels,undergarments, terry towels, denims, medical fabrics, furnishing fabrics and industrial fabrics.

Exports of cotton yarn and knitted fabrics form about 70 per cent of company's net sales and are mainly to Asia (36 per cent), Europe (34 per cent) and Africa (16 per cent). In the domestic market, the company sells its cotton yarn to 7,000-odd fabric manufacturers in and around Bhilwara.

Nitin is planning a major expansion of Rs 150 crore to increase its spindleage by 85 per cent to 77,616 spindles, knitting capacity by 80 per cent to 27 knitting machines and to increase its power capacity for captive requirements to 11.68 mw from the current capacity 3.5 mw. The project is expected to be implemented by April 2007.

The company is well insulated in terms of availability of major raw material-cotton as it is easily available in surrounding areas in Rajasthan.

Its power cost per unit (second most important element for a spinning company) is at a discount of 35-40 per cent compared with power procured from State Electricity Board.

Improving financials
In the last few years, the company's profitability has been severely hit with net profit growing at a mere 7 per cent per annum between FY01-05.

R L Nolkha, chairman, Nitin Spinners attributes higher interest and depreciation for the poor performance. However, he adds that the interest costs have come down significantly from 9 per cent (net of subsidy) in FY03 to 7 per cent in FY05 and are expected to decrease further to 5 per cent in FY06 when the company gets listed. Usually, interest cost for listed companies is lower than unlisted companies.

In FY05, however, the company reported robust sales growth of 24 per cent to Rs 79.6 crore. Operating profit grew 15 per cent to Rs 14.7 crore. However, operating margin was under pressure owing to high raw material costs due to rising cotton prices.

Net profit got a boost with a growth of 112 per cent at Rs 2.8 crore owing to stable interest and depreciation charges even as net margin significantly improved by 140 bps.

In H1FY06, the company has improved its financial performance further by achieving 60 per cent of the turnover and 62 per cent of operating profit of FY05. It has achieved the full net profit of FY05 in first half of this fiscal. 
  

FINANCIALS
In Rs crore	FY04	FY05	% change	H1FY06
Net sales	63.90	79.60	24.50	47.40
RM to Net Sales (%)	59.30	60.10		59.10
Operating profit	12.70	14.70	15.30	9.10
OPM (%)	19.90	18.40		19.10
Net Profit	1.30	2.80	112.20	3.00
NPM (%)	2.10	3.50		6.30

According to analysts, the expected increase in cotton prices could be a cause for concern. Says Nolkha, "We have the flexibility to pass on the increase in raw material prices to customers. So margins should improve further aided by declining interest costs."

Expensive valuation
The issue is valued at price to earnings multiple of 20-23 times based on its annualised half yearly earnings (on post issue equity capital).

Analysts opine that the issue is valued on the higher side compared with its peers such as Ginni Filaments (10.9 times ) and Indo Count Industries (11.9 times). Largest spinning company, Mahavir spinning Mills is quoting at 8.9 times its annualised half yearly earnings for FY06.

Says Sejal Doshi of Angel Stock Broking, "Since the upside in the company's earnings will be visible only in FY08 after the new project is commissioned, investors should wait and watch the progress for a while."