The Hindu Business Line : Nitin Spinners: Avoid

INVESTORS can give the initial public offer of Nitin Spinners a miss. The price band of Rs 18-21 values the offer at 12-14 times its annualised per-share earnings for FY-06. As a small company, the scope for ramping-up the business is significant. Given the project's long gestation period, however, there are commensurate risks.

As the price band is within the reach of a wide cross-section of investors, there is the possibility of over-subscription and consequent gains upon listing and this is a risk to our recommendation.

Others who wish to participate in the growth of the textile sector can, however, look forward to better investment opportunities, as several companies in the sector are set to tap the primary market in the year ahead.

A Rs 80-crore outfit, Nitin Spinners exports yarn and fabric to Australia, China, Bahrain, Israel and, more recently, the US and Dubai. Fabric accounts for about 20 per cent of its business. Revenues have grown steadily at a compound annual growth rate of 23 per cent since FY01 and operating margins are at a healthy 19 per cent.

Its performance has, however, from time to time, been affected by rising cotton prices. The earnings growth has also been strained by debt that has been used to fund its expansion plans. Interest and depreciation costs have chipped away 15-20 per cent of sales over the past three years. In the current fiscal the benefits of expansion appear to have kicked in and the profits for the first half are already higher than that achieved in FY05.

Nitin Spinners is now embarking on a Rs 150-crore expansion project aided by loans from the technology upgradation fund and the proceeds of the equity offer. This would nearly triple its spinning capacity and expand the knitted fabric capacity considerably.

Nitin Spinners has thus far operated in a relatively low value-added segment with its focus on yarns of lower count. It, however, intends moving towards higher value yarns, which could translate into better realisations if quality is ensured.

It also intends setting up a captive power plant to meet its additional requirements. As a 100-per cent export-oriented unit (EOU), it is able to source power at 30-40 per cent lower than the price offered by the State Electricity Board. The rising prices of furnace oil may, however, continue to keep power costs at higher levels.

While these moves augur well for earnings growth, prices of certain varieties of cotton used for higher count yarn have increased considerably. As fresh capacities are likely to go on stream only in the first quarter of FY08, the possibility of rising cotton prices affecting yarn offtake is a significant risk.

As an EOU, Nitin Spinners has to necessarily export at least 50 per cent of its production. The company, therefore, may not be able to completely capitalise in strong demand trends in the domestic market. It also makes it more vulnerable to changes in the export environment, given that the pricing situation, post the abolition of quotas on textiles and clothing, is yet to stabilise.

The tax benefits that Nitin Spinners enjoys courtesy its EOU status would last till 2009. Its burgeoning loans could also pose a problem, though it is able to source new debt at lower interest rates.

The gearing is unlikely to improve even post offer, as most of the capital expenditure is to be funded by debt.

While high gearing could be a positive for a rapidly expanding company, high interest costs combined with a hardening of cotton prices could affect profitability more adversely.

Offer details: About two crore shares are on offer. Nitin Spinners hopes to raise Rs 49 crore from this issue, Rs 9 crore of which would be met by promoters. The promoters' stake, post-offer, would fall to about 55 per cent. The lead manager is UTI Securities. The offer closes on January 12.