The Hindu Business Line : Minar International: Avoid

Higher value-addition could lead to superior profitability and earnings growth. The company, however, lacks experience in running a fully integrated unit. The expansion costs could put a strain on earnings growth.

Investors can avoid the initial public offer of Minar International. The price band of Rs 108-115 values the offer at 18-19 times its 2005-06 per share earnings, on a fully expanded equity base.

The valuation appears stiff compared to listed peers such as Welspun India, Alok Industries and Abhishek Industries, which operate on a larger scale and at higher profitability levels.

These companies also appear better-placed than Minar to capture customers in the export market in the absence of quotas. The company's track record is also not encouraging.

The Rs 350-crore Minar operates in the lucrative home textiles segment, which includes bed and bath linen, furnishings, kitchen and table linen and so on. Minar exports bed linen, where India is strong, although it has stiff competition from China and Pakistan.

The company's good performance in the export market allowed it access to a larger quota, which enabled it to export more when textile trade was still subject to quantitative restrictions.

Since 2005, however, these restrictions have been removed and the export market is open to greater competition and pricing pressure. Minar will have to market itself more aggressively in the absence of quotas. Importers now choose vendors who operate large, integrated facilities.

This has prompted Minar to invest Rs 80 crore in setting up a fabric processing unit. The project will be funded entirely by the offer proceeds, with the equity base set to expand by about 40 per cent.

This will lower its high gearing and bring it down to more comfortable levels. The facility is expected to go on stream in May 2007.

Minar, till now, merely bought processed fabric, which was then stitched into quilts or pillowcases and exported.

The scope for value addition has, therefore, not been much. Minar's operating margins have been around 4-5 per cent, with raw material accounting for more than 80 per cent of sales. Peers such as Welspun and Alok Industries enjoy margins closer to 20 per cent.

Higher value addition could lead to superior profitability and earnings growth. The company, however, lacks experience in running a fully-integrated unit.

The costs of expansion could put a strain on earnings growth, a problem that appears to be plaguing its competitors as well.

Minar also has to overcome the setback of a temporary ban, until November 2007, on its exports to major markets such as the US, the EU and Canada.

The US accounted for 90 per cent of its exports. Unlike its competitors, it will not be able to directly export its products to international retailers in these countries. The ban will result in its losing time and market share.

In the light of these risks, investors may give this offer a go by.

Offer details: About 69 lakh shares are on offer. The company has made a pre-IPO allotment to Sunham Home Fashions and Bristol Associates, US, at about Rs 150 a share. Post-offer, the promoter's stake will be 71 per cent.

The offer opens on September 25 and closes on September 29. The lead manager is Keynote Corporate Services.

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