Mahavir Spinning: Cashing in on the textile story

Mahavir Spinning is betting big on capex

In order to gain market share from China since the abolition of quotas, the Indian textile industry has been busy ramping up capacities. Mahavir Spinning Mills is the latest to announce its capex plan of Rs 1,600 crore.

This plan is broken into two parts "" Rs 540 crore for expanding and modernising its existing capacities of spinning, weaving and fabric processing in Himachal Pradesh and Punjab, and a Rs 1,075-crore investment for doubling its fabric processing capacities and setting up additional facilities for spinning and weaving In Madhya Pradesh. This announcement helped the stock gain almost 5 per cent to Rs 319 on Thursday.

Considering the company's cash flow (net profit plus depreciation) of Rs 119.05 crore in the first half of FY06, it will need additional capital for this expansion. This expansion is also substantial compared to its FY05 gross fixed assets of Rs 1486 crore and Rs 783 crore in FY04.

Its FY05 debt-equity ratio is less than one, but it will still need to raise equity, say analysts. The company board had earlier approved an FCCB issue up to $60 million (approximately Rs 270 crore).

The company is already undergoing an expansion of its fabric capacity, prior to this announcement. In FY05, the company's production of fabric was 31.51 million meters and that of processed fabric was 28.47 million meters.

Mainly a yarn manufacturer, Mahavir has been focussing on the high-margin fabrics business since the past two years. The demand for fabrics from user industries like apparel manufacturers had been strong in the September 2005 quarter and it helped the company's fabric business to double segment profit to Rs 11.01 crore.

Analysts highlight that in the post-quota regime, Indian garment exporters are attempting to remain competitive with Chinese players via higher value products. This trend is expected to ensure strong demand conditions for Mahavir's higher value fabrics in the medium term.

Mahavir's exports increased almost 50 per cent to Rs 413 crore in FY05. There was also a 28 per cent y-o-y growth in the sewing threads revenues, though its mainstay""the yarn business""declined 8 per cent in the September 2005 quarter.

The company's overall operating profit margin expanded almost 360 basis points to 18.54 per cent in the September 2005 quarter. The current is expected to be completed by 2007-08, and will impact earnings to an extent in the short term due to higher interest costs and depreciation. Nevertheless, the stock appears reasonably priced at about 12 times estimated 2005-06 earnings.

VisualSoft: New focus

New investors seem to have brought in a new focus at VisualSoft. The company has merged AppLabs Technologies Pvt Ltd and eSolutions Pvt Ltd with itself. It has also realigned its business areas on product development services, VisualSoft's core area, and software testing services, where Applabs is a strong player.

VisualSoft's financial performance has been far from impressive; its topline growth has not matched up with its peers and its operating profit has only declined. Its revenues increased by 22 per cent in FY05, while its operating profit fell by 8.45 per cent. In the first half too, operating profit fell 9 per cent on a topline growth of 16.7 per cent.

AppLabs Technologies, a privately held company, specialises in software testing and certification services including quality assurance consulting.

This company is expected to have revenues of $22 million (about Rs 100 crore) this year. eSolutions is an enterprise solutions company with expertise in supply chain, retail, trading and service management. This company is much smaller, and will have revenues of $1.2 million (about Rs 5.4 crore) this fiscal.

VisualSoft has attracted investors like Softbank and ilabs earlier this year from some of the previous investors, who have been instrumental in the new strategy.

The stock price has almost doubled since Softbank acquired a stake in the company in August. For its existing shareholders, the merger, which is on a stock swap basis, is a good deal as they will benefit from future growth.

The management expects software testing revenues to more than double to Rs 220 crore in FY07, while product development services will be Rs 180 crore in FY07, with a net profit of Rs 70 crore. At the current price of Rs 252, the estimated FY07 P/E works out to 12.