The Hindu Business Line : Shivalik Global: Avoid

Presence in businesses with promise
Location likely to be a positive
Garment capacity to more than double
Change imminent in revenue profile.
Enhanced level of integration

Investors can give the offer of Shivalik Global a miss. At Rs 60, the offer is valued at about 16 times the likely FY-07 per-share earnings. The valuation appears stiff and the returns may not be commensurate with the risks. Our recommendation does not factor any gains upon listing.

Business interests

The Rs 165-crore Shivalik Global aims at establishing itself as a vertically integrated player with a presence in weaving, dyeing and processing of knitted fabrics and manufacture of knitted garments.

It also dyes and processes woven fabric and manufactures sewing thread.

Shivalik is present in the right businesses.

As a fabric processor located in the vicinity of large garment exporters in Delhi and the NCR region, Shivalik stands to gain.

Knitted garments, too, have registered a strong growth since the removal of quotas and have prompted the company's expansion plans.

Shivalik plans to substantially ramp up its annual garment capacity from 2.4 million pieces to about six million pieces. It is also expanding its weaving and processing capacities for knitted fabric to meet the higher demand from garment exporters as well as its own needs. The weaving and processing capacities will be operational in September, while the garment capacities are likely to go on stream in August 2007.

The expansion plans appear, however, ambitious, going by its capacity utilisation levels in the past.

A phased expansion of its garment capacity would have, however, inspired greater confidence in the company's ability to convert the higher production to sales. About 30 per cent of the project cost would be invested in expansion of garments; the division now accounts for less than 20 per cent of sales. The other divisions may be able to operate at healthy levels even post expansion, as the demand for processed fabric is likely to remain robust. It would, however, be another year before these divisions begin to meet their in-house demands and there is the risk of a significant amount of its capacity, post expansion, remaining idle during the intervening period.

Depreciation is also likely to strain earnings on an expanded equity base.

The principal risk to our recommendation is a sharper than expected increase in utilisation, which could lead to a more-than-proportionate growth in profits.

Background

The company is offering one-crore shares at Rs 60. The offer closes on March 14. The lead manager is Allianz Securities

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