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Shanthi Venkataraman

Demand for quality fabric and furnishings could spur revenue growth, but maintaining margins at double-digit levels could be a challenge.

INVESTORS need not subscribe to the seasoned offer of Raj Rayon. The price band of Rs 55-65 is at a modest discount to the current market price of Rs 75. The offer is valued at eight to 10 times the annualised per share earnings for FY-06 on a fully expanded equity base.

Raj Rayon plans to set up a partially-oriented yarn (POY) facility with the proceeds of the offer and would be operating in a highly competitive environment.

Post-expansion, it would still not be a fully integrated player and would continue to be exposed to volatile prices of fibre intermediates. While its planned capacity is significant, it would be dwarfed by the likes of Indo Rama Synthetics, which is nearly doubling its capacity in the segment.

Raj Rayon makes polyester texturised yarn (PTY), which finds application in home-furnishing fabric, upholstery and saris. It has revenues of Rs 155 crore and is a medium-sized player in this space.

Its performance in recent quarters has picked up on the back of revenue growth and stable raw material prices. Margins, which were at 7 per cent in FY-05, have improved to about 10 per cent in the last two quarters.

The company now plans to integrate backwards with the manufacture of POY, the main raw material for PTY. The POY plant, which would be operational in March 2006, will have an annual capacity of 60,000 tonnes.

Half the capacity would be used for captive consumption; the rest would be sold in the market. Cost-savings from the integration should kick in through FY-07. There is, however, little visibility on the earnings that it could generate from the sale of POY itself.

Raj Rayon perceives a strong market for POY, as synthetic fabrics gain acceptance in the domestic market. The polyester industry is, however, coming off a tough operating environment.

Raw material prices have been rising on the back of soaring petrochemical prices. On the demand front, cotton prices declined in 2005, making it the fibre of choice for fabric makers.

In recent months, cotton prices have risen from their lows.

This could provide some relief for polyester companies and by extension, for producers of PTY. But a strong pick-up in demand over the medium term is unlikely as cotton prices may not rise dramatically in the year ahead.

In an industry where scale and integration hold the key, Raj Rayon would come up short on both counts. Post-expansion, it would still have to source polyester chips from the market, unlike its competitor, Indo Rama Synthetics, which is further integrated in the raw material supply chain.

Indo Rama's POY capacity upon completion of its expansion in June this year would be about four times that of Raj Rayon's. As an integrated player with significant scale, it is likely to be a price-setter for the POY market.

Offer details: Eighty-five lakh shares are on offer. The promoter's shareholding, post-offer, would be 23 per cent. Raj Rayon would raise about Rs 55 crore from the offer, at the upper end of the price band.

The proceeds of the offer would be used to partly fund the Rs 75 crore project as well as pay off some debt. The offer closes on January 18. The lead manager is UTI Securities.

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