The Hindu Business Line : Richa Knits: Avoid

With no distinct competitive advantage and a lack of scale, the company's ambitious expansion plans in the garments business might not translate into a commensurate growth in revenue and earnings.

Investors can avoid the initial public offer by Richa Knits. The offer price of Rs 30 values the company at about six times its FY-06 per-share earnings. With the equity base more than doubling post offer, however, growth in the per-share earnings is unlikely to keep pace with revenue and profit growth. The offer also comes with attendant risks.

The company is expanding in the knitted garments segment, where it is a relatively new player.

The segment itself, while registering robust growth in the export market, is witnessing intense pressure on realisations. With no distinct competitive advantage and a lack of scale, the company's ambitious expansion plans in the garments business may not translate into a commensurate growth in revenue and earnings.

Richa Knits is a relatively small player in the textile industry with its FY-06 revenues at Rs 45 crore.

It has a presence across the value chain, from knitting fabric to dyeing and processing fabric. It entered the knitted garments business in 2002-03, and has tapped the export market. Exports now account for about 15 per cent of sales.

Scaling up

India has been one of the top performers in the knitted garments export front since 2005. Exports of men's knit shirts to the US in the first six months of 2006, for instance, appreciated by more than 20 per cent, even as China's exports have declined. Realisations have, however, declined significantly, on the back of intense competition and pricing pressure from large importers.

The strong volume growth, however, appears to have prompted Richa Knits to expand aggressively in the garments business.

Rich Knits has just completed the doubling of its annual capacity to nine lakh pieces in December 2005, and is now embarking on its new expansion project, which will further triple its capacity. The company expects to operate at a 65 per cent capacity utilisation in 2007-08, which means it will have to quadruple its current production. Its ability to attract orders of this scale, however, is likely to be an uphill task.

At 27 lakh pieces, Richa Knits is unlikely to be a significantly large player in a fragmented industry where all players are expanding. Product lines such as knitted

T-shirts or track-suits are not as design heavy as fashion garments, making it difficult to build a competitive advantage. Even if it succeeds in bagging large orders, it will have to take a knock on pricing.

The company will also be expanding its knitting, dyeing and processing facilities, which would mainly serve its in-house needs.

The integrated nature of its operations will help contain costs. However, managing an increased work force could also pose a challenge.

The stock will trade at a market capitalisation of just over Rs 50 crore, at the issue price of Rs 30. As a small-cap stock, it is vulnerable to market risks.

Offer details: The company will raise Rs 27 crore through the offer of 90 lakh shares. The offer will partly fund a Rs 63-crore project to expand its knitting, dyeing and processing and garment capacities.

Post-offer, the promoter's stake will be about 56 per cent. The offer opens on September 13 and closes on September 19. The lead manager is KJMC Global Market.

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