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Shanthi Venkataraman

INVESTORS can avoid the initial public offering of Nandan Exim ((Nandan). The company, a trader and exporter of fabrics, plans to foray into making grey fabric and denim to capitalise on the opportunities in the export market. The lack of a track record in manufacturing fabric and the small scale of operations would, however, place it at a disadvantage vis-à-vis other established, large-scale players. At an offer price of Rs 20, the stock is priced at about 18 times the expected per share earnings for FY-06 on an expanded equity base of Rs 13.9 crore. This recommendation does not factor in any gains from flipping the stock upon listing.

The offer proceeds are to be utilised to finance the setting up of capacities to make grey fabric and denim. The facilities are expected to be operational by June 2005. Given the buoyancy in demand on the export front, contracting orders may not pose too much of a problem. Nandan has already commenced production of grey fabric on a small scale. For the nine months ended December 31, 2004, the sales of its own fabric accounted for about 30 per cent of its total revenue of Rs 43 crore. Nandan's group companies, which are engaged in processing of grey fabric, are also likely to absorb some of the company's production.

The transition to manufacturing is, however, likely to bring on a different set of challenges for Nandan. Margins in this business would be low, with grey fabric being a low-value add product. The offer document does not indicate how much of its future revenues are likely to be driven by this segment. It plans to sell 40 per cent of its production in the domestic market and the balance would be processed and exported.

The company would also have to grapple with the commodity nature of denim. The demand for denim has been known to be rather fickle. The price of cotton, its chief raw material, is also subject to volatility. Currently, neither demand for denim nor raw material prices is an issue, as denim is back in fashion and cotton prices are ruling low on the back of a bumper crop. But a change in either the demand for denim or the prices of cotton could impair performance.

The company's ability to withstand pricing pressures is another concern. It would be a much smaller player when pitted against the likes of established players such as Arvind Mills and Raymond. These players, with their larger scale of operations, are likely to be more cost-efficient. They are also foraying into garments in an attempt to improve margins and offer a one-stop shop for importers. To maintain its margins, Nandan is likely to be far more dependent on export incentives, which undergo frequent changes. In light of these factors, investors can avoid this offer.

Offer details: Nandan Exim is offering 60 lakh shares at Rs 20. The stock is to be listed on the BSE. The post-offer equity would be Rs 13.9 crore. The promoter's shareholding would be 57 per cent. The lead manager is Centrum Capital. The issue opens on May 12 and closes on 20.

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