Spinning yarn globally

PENNY WISE

Spentex Industries' strategy of growth through acquisitions puts it on par with Mahavir Spinning, India's largest cotton yarn manufacturer.

Delhi-based cotton yarn player, Spentex Industries is the latest to join the bandwagon of companies going on an acquisition spree. The Rs 350 crore spinning major has made four acquisitions since the beginning of calendar year 2006 even while expanding its existing capacities.

The result: it has pipped its closest rival and hitherto the largest cotton yarn manufacturer in the country Mahavir Spinning to emerge on top. With a capacity of approximately 5.7 lakh spindles, up from 55,440 in March 2006, Spentex now has the largest capacity in India.

The acquisitions give Spentex an opportunity to catch up with Mahavir in terms of revenues sooner than later. Better still, Spentex has acquired its targets at relatively cheap valuations, which means rewards could be richer.

The acquisition route to growth

Spentex has spent Rs 800 crore in expansion and four acquisitions. 62.5 per cent of this has been funded through equity and internal accruals while the rest is financed through debt, primarily term loans from banks at about 9.5 per cent interest rate. Spentex currently has a debt-equity ratio of 2, which looks quite high.

This year, the company acquired the assets of a non-operational Tai Chonbang Textile Industries based in Ahmedabad for Rs 34 crore; 84 per cent stake in Indo Rama Textiles (IRTL) for Rs 220 crore; 52 per cent in a 100 per cent export-oriented cotton yarn maker and loss making Amit Spinning for Rs 19 crore; and assets of Uzbekistan-based textile company Tashkent Toyetpa Tekstil for Rs 380 crore.

Says Mukund Chaudhary, managing director, Spentex Industries, "Our strategy of growing inorganically will kickstart our growth and add more value as the cost of setting up a new facility is high and it takes three years to complete one. All the acquired companies have good potential in terms of profitability and will give us higher market share."

Spentex is open to acquisitions in India as well as in cotton-producing countries. Unlike rival Mahavir which is focussing on forward integration into processed fabrics, Spentex is betting solely on cotton yarn.

The company has no plans to integrate forward at least for the next two years considering that demand for cotton yarn is expected to be robust.

Competitor Mahavir Spinning, however, is pursuing the organic path to growth. Currently, this Vardhaman group company has a capacity of 5 lakh spindles, which will be scaled up to 8 lakh spindles by FY08.

Further, to enhance its margins, Mahavir is expanding its processed fabric capacity from 13 million meters to 90 million meters in the next two years.

Says Neeraj Jain, corporate general manager, Mahavir Spinning, "We don't intend to look for overseas acquisitions as there is enough scope within the country."

Benefits

Spentex has not only gained size and scale but also added new range and markets to its current product portfolio apart from a wider geographical presence thanks to the acquisitions.

For example, with the acquisition of IRTL, a blended yarn player manufacturing polyester-viscose and polyester cotton yarn among others, the company now has a substantial presence in synthetic yarn segment. Its customer base has grown to include manufacturers of garments and home textiles.

The acquisition of both IRTL and Amit Spinning would boost its exports further. The Uzbekistan deal gives it a considerable presence in the overseas markets.

Uzbekistan is the world's fifth-largest cotton producer, with a four per cent share of the total output. Apart from its proximity to Eastern European markets, manufacturing costs in Uzbekistan are lower by 10 per cent thanks to cheaper labour, power and other fiscal benefits provided by the government.

Growth on fast track

The company incurred net losses for the last six years preceding March 2005. However, this fiscal, when consolidation will be complete, Spentex hopes to close its books with a turnover of Rs 1,200 crore and EBIDTA of about Rs 135 crore with Tashkent Toyetpa Tekstil and IRTL contributing the highest in terms of turnover and bottomline.

This is a huge leap from Rs 350 crore of turnover and Rs 10 crore of net profit reported in FY06. The full benefits of the acquisitions will be reflected in FY08. In the recently-concluded quarter (June 2006), the company's net sales doubled y-o-y to Rs 75 crore and operating profit stood at Rs 1.2 crore.

The company incurred a loss of Rs 2.45 crore compared to a profit of Rs 3.3 crore in the same quarter in the previous year due to higher interest costs owing to acquisitions.

While costs related to the acquisitions have started to dent the company's performance, the benefits will start accruing from the coming quarters.

Says Priya Ayyar, analyst, IDBI Capital, "Spentex has acquired companies at good prices. So, the return on capital employed will be high."

All the companies acquired by Spentex are worth more than the revenues they are capable of generating given Enterprise Value (EV)/sales of less than one. 

ATTRACTIVE VALUATIONS
Valuation (x)	FY07		FY08
	EV/Sales	EV/EBIDTA	EV/Sales	EV/EBIDTA
Taj group	0.57	7.20	0.52	3.49
Indo rama	0.83	9.43	0.70	4.67
Amit spg	0.97	10.74	0.83	5.52
Uzbekistan	0.75	5.12	0.63	2.53

Though valuations look a bit on the higher side for FY07, on another valuations multiple, EV/EBIDTA, they appear reasonable for FY08.

According to Dhawal Doshi, analyst, Stratcap Securities, "Spentex has been successful in acquiring stressed assets with good revenue and profit potential."

The share price of Spentex has risen 41 per cent in the past six months and the stock trades at a trailing 12-month price-to-earnings multiple of 22x. According to analyst estimates, excluding the Uzbejkistan deal, the stock trades at about 7x FY07 earnings and 6x FY08E.

Though analysts are positive on Spentex at least for the next couple of years, they prefer an integrated player for the long term as they enjoy better margins. One will have to wait for FY08 numbers to see if Spentex proves them wrong.