The Hindu Business Line : Gangotri Textiles: Invest at cut-off

An investment can be considered in the follow-on public offer of Gangotri Textiles. The Rs 41-46 price band values the offer at about 16 times its likely per-share earnings for 2006-07. The valuation, while not attractive, is not too demanding from a long-term perspective.

The offer would be more compelling, however, if the price were fixed at the lower end of the band. Investment should be considered with a two/three-year perspective as the full benefits of the expansion are likely to be realised only in the second half of 2007-08.

The Rs 175-crore Gangotri Textiles operates mainly in the yarn business. It owns the trouser brand `Tibre', which, till now, had a southern focus. The garments business accounts for about 10 per cent of the revenues. Gangotri, however, appears to have found a good market for its mid-price brand. `Tibre' has grown by 40 per cent, albeit on a small base, over the past three years. Its contribution to operating profits is also set to increase.

Better product mix

The initial success in the company's trouser business has prompted Gangotri to expand capacities and not just in garments alone. The company plans to foray into fabric-making and has set up a weaving and processing facility with a capacity of about 50,000 metres a day. Its garment capacity will expand four-fold, post-expansion. Gangotri is also expanding its spinning facilities to cater to its requirements. The garment and weaving capacities are set to go on stream in October, while the spinning operations will come online in October 2007.

Post-expansion, Gangotri's product mix is likely to improve in favour of higher-margin products. Gangotri already enjoys relatively better margins than its peers as it also converts yarn from cotton waste, which is at a substantial discount to cotton prices.

It is also likely to derive a greater proportion of revenues from exports. It hopes to export 30 per cent of its fabric output in the first year of business. On the domestic front too, the fabric business has potential, as there is a shortage of quality fabrics Gangotri has big plans for the garments segment. As a small brand, `Tibre' is vulnerable to pricing pressure and offtake risks. It is, however, not without visibility and is retailed across 650 multi-brand outlets. Gangotri recently entered a joint marketing alliance with a $20- million Swiss brand, Trailer. Through Trailer, Gangotri will be able to expand its portfolio to include women's wear and men's shirts. More important, Gangotri will now be much better placed to export its garments to Europe, by tapping Trailer's customer base.

Risks

While the prospects appear bright, fabrics and garments will be relatively new businesses to Gangotri and will take time to stabilise. But over the long-term, Gangotri's thrust on fabrics and garments businesses would have to pay off for it to be able to service its debt levels.

About 75 per cent of the company's Rs 350-crore project is funded by debt; when the company is already heavily leveraged. With a two-year moratorium and interest subsidy from the Technology Upgradation Fund, the interest outgo is, however, likely to be contained in the near-term.

Offer details: About Rs 55 crore is to be raised from the offer of 1.34 crore shares of Rs 5 each. The offer closes on May 23. The lead manager is SBI Capital Markets.

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