The Hindu Business Line : Morarjee Textiles: Invest

Shareholders can subscribe to the rights offer of Morarjee Textiles. The price of Rs 55 is at a 20 per cent discount to the current market price. The offer proceeds will be used to repay high-cost debt and fund working capital requirements. The cut in the interest outgo is, however, likely to have only a mildly positive impact on profits.

While performance is likely to improve on the back of capacity expansion and acquisition of facilities, the earnings growth is unlikely to keep pace with the more than two-fold expansion in equity base (post-conversion of warrants) in the near term.

A turnaround spin

Morarjee Textiles was listed on the BSE in 2005, following a restructuring of group operations. Peninsula Land, formerly Morarjee Realties, transferred its entire textile business to Morarjee Brembana, now Morarjee Textiles, to focus on the realty business in 2004. With its textile facilities fully relocated to Nagpur from Mumbai, Morarjee Textiles also replaced its high-cost debt with low-cost foreign currency loans.

The sharp cut in the interest outgo that resulted, coupled with a thrust on higher-margin products and low raw material costs, helped the company turnaround in 2004-05.

Morarjee produces high-value shirting fabric and premium voiles. About 55 per cent of its Rs 180-crore revenues are derived from exporting printed fabric used in fashionable clothing to fabric suited for Arab dressing.

In the domestic market, the company sells shirting fabric to Zodiac Clothing, Raymond Apparel and Louis Phillippe. Interestingly, its products have earned better realisations in the export market. An increasing thrust on exports has helped improve margins, which is about 14 per cent compared to 10 per cent prevailing two years ago.

Improving prospects

Through the rights offer, Morarjee will be able to improve its gearing to more comfortable levels. This makes it better placed to expand its capacities.

It is investing about Rs 40 crore in expanding spinning, weaving and garment facilities; its 85 per cent garment subsidiary, Integra Apparels, has scaled up its revenues six-fold in 2005-06. It proposes to fund this with a loan from the Technology Upgradation Fund.

Challenges

Expansion plans augur well in the context of the buoyant export market. Securing orders will, however, be a challenge for Morarjee, given the fragmented nature of the industry.

Morarjee plans to use the acquisition route to gain scale quicker. It took a 49 per cent stake in a fabric processing company, Just Textiles, recently for Rs 8 crore. It is also looking at taking over an Italian brand, Men's Club, which is a loss-making company with an estimated turnover of Rs 25 crore.

Such acquisitions could provide access to facilities and new markets and have the potential to scale up revenues significantly. There could, however, be integration issues. Aggressive acquisitions funded by debt could also heighten risks.

Offer details: Shareholders will get three shares for every four held at Rs 55 per share as well as two warrants that can be converted into equity at a price of Rs 100 after 12 months and before 36 months from the date of allotment.

The offer will raise Rs 95 crore, including the sum received from the conversion of warrants. The offer closes on October 10. The lead manager is Enam Financial Consultants.

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