The Hindu Business Line : Priyadarshini Spinning: Avoid

SHAREHOLDERS need not subscribe to the rights offer of Priyadarshini Spinning Mills (PSML). The offer price of Rs 25 is at a modest discount to the current market price. At this price, the offer is valued at about eight times its annualised per share earnings for FY-06, on an expanded equity base.

The company operates predominantly in the synthetic and blended yarns segment, where the operating environment over the past year has been difficult.

Rising raw material prices and a preference for low-cost cotton yarn had margins under pressure. In the near term, this situation is unlikely to alter significantly.

The current stock valuation appears reasonable. An expansion in capacities and a higher share of cotton yarn in the product mix could have a positive impact on revenue and earnings growth.

Shareholders could, however, postpone increasing their exposure to the stock till such time there is greater clarity on the demand front. There are superior plays in the textile space that have the advantages of scale and integration.

PSML makes a wide range of grey and dyed yarns — synthetic, blended and cotton — that enables it to cater to a broader clientele. Revenues, now at Rs 135 crore, have grown at a sedate pace in FY01-05. Exports contribute about 15 per cent of revenues. Profits have also traced a chequered path, with performance improving in FY-05 mainly on the back of a steep cut in interest cost.

The proceeds of the rights offer, which would amount to about Rs 10 crore, would fund additional working-capital requirements. PSML has recently embarked on an expansion project that would add about 30 per cent to its capacity.

With capacity utilisation at 98 per cent, the additional capacity, if absorbed, would provide room for revenue growth. The fresh capacities would become fully operational from the first quarter of FY-07.

Rising cotton prices could improve the prospects on the demand front for synthetic and blended yarn. A bumper cotton crop this season has, however, ensured that the rise in prices will not be too dramatic and cotton yarn might continue to remain competitive in the near term.

An inverted duty structure also continues to place synthetic and blended yarns at a disadvantage to cotton yarn.

PSML is increasing the share of cotton yarn in the product mix. Post-expansion, 35-40 per cent of 80,000 spindles would be capable of producing cotton yarn. This could provide a partial hedge for the company across cycles, bringing more stability to the revenue and earnings stream.

Offer details: Shareholders will be offered three shares for every five held. The equity base, post-offer, would be Rs 10 crore, a 60 per cent expansion. The lead manager to the offer is Fortune Financial Services and the offer closes on January 27.

Shanthi Venkataraman

More Stories on : Rights Issue | Recommendation

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page