The Hindu Business Line : Mohit Industries: Invest

The expansion is at large scale and low utilisation levels post- expansion is a concern. The company is confident of operating at 80 per cent levels even after expansion.

Earnings growth to be faster on a lower base
Texturised yarn capacities diverted for captive use
Fabric business may take longer to stabilise
Higher contribution from fabric will expand margins

Shareholders of Mohit Industries can consider subscribing to its rights offer. The offer price of Rs 20 is at a modest discount to the current market price of Rs 22. There is, however, scope for growth as the company is scaling up its capacity substantially.

The stock now trades at about 15 times its likely FY07 per-share earnings on an expanded equity base. While the new capacities are likely to go on stream in July 2006, the full benefits of the expansion is likely to kick in only in FY08. Mohit Industries is a manufacturer of texturised yarn and synthetic grey fabrics. Texturised yarn is a raw material for synthetic fabrics, which in turn are used for the manufacturing of sarees and dress materials. There are several players that operate in this business and Mohit is a relatively small player with revenues of about Rs 50 crore. On its small base, however, the ramp up in earnings is likely to be faster. Revenues have grown at a compound annual growth rate of about 15 per cent since 2001. Its performance in the first nine months of FY06 has been robust, on the back of expansion.

Fund expansion plans

With the proceeds of the offer, the company will partly fund its aggressive expansion plans and meet additional working capital requirements. Mohit plans to expand its texturising capacity by about 70 per cent, while its fabric capacity will more than triple. The company has managed to translate new capacities to revenues in the past.

But this time, the expansion is at a much larger scale and low utilisation levels post-expansion is a concern. The company, however, appears to be confident of operating at 80 per cent of its capacity even after expansion. This may be possible in the case of its texturised yarn segment, as it will be increasingly used for captive consumption.

It might take longer for the fabric business to stabilise, given the ambitious nature of the expansion. That the company operates out of Surat, a major hub for synthetic fabric makers, is a positive. If the company succeeds in gaining a market for its fabric business, the latter will be able to make a greater contribution to revenues. This could lead to better margins as compared to the 5-6 per cent that is prevailing now.

Offer details

Three shares will be offered for every two shares held as on March 20. The offer, which opened on April 4, closes on May 3. The lead manager is Meghraj SP Corporate Finance. The registrar to the issue is Adroit Corporate Services.

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