The Hindu Business Line : TT: Avoid

The offer price of Rs 20 is at a 20 per cent discount to the current market price. The stock trades at about five times its one-year forward per-share earnings.

While the valuation is inexpensive, an increasing focus on cotton exports exposes the company to higher risks due to fluctuations in the cotton cycle.

While the near-term trend for cotton and yarn exports appears bright, there is not much room for expansion in operating margins, which are low. Investors can consider superior options in the textile space.

Business

TT, formerly Tirupati Texknit, started off as a manufacturer and exporter of yarn, knitted fabrics and hosiery. About 70 per cent of its revenues is derived from exports.

The ongoing rights offer would raise Rs 21 crore, which would help fund a Rs 116-crore expansion project. Loans amounting to Rs 90 crore have been taken at low effective interest rates, thanks to a subsidy from the Technology Upgradation Fund.

The project involves expansion of its spinning facilities in UP, setting up of a new cotton ginning and spinning mill in Gujarat, besides putting up windmills and captive power plants.

Most of the projects are operational; only the spinning mill in Gujarat is expected to go on stream in March 2007.

A bumper cotton crop in recent years has led to a sharp jump in cotton exports. India has now emerged as the second largest exporter of cotton, replacing the US as the primary supplier to China's spinning mills.

TT has been able to capitalise on this trend. In FY-06, its revenues from cotton exports have expanded nine-fold and now account for about 50 per cent of the business, from just 10 per cent a year earlier.

Sale of cotton and cotton yarn accounts for 90 per cent of the overall revenues.

Prospects

While the near-term prospects are bright, a growing bias towards the cotton segment could introduce lumpiness in performance over the long term, as revenues would be vulnerable to crop output.

TT would have to improve its performance in the knitted fabrics and garments segment, where revenues have stagnated.

These value-added segments contribute a mere 10 per cent of revenues. The increasing emphasis on low-margin businesses could act as a drag on profitability.

Operating profit margins in FY-06 dropped by 100 basis points to about 5 per cent. As current trends do not suggest a substantial improvement in realisations, margins are likely to remain low.

Offer details: Shareholders are entitled to subscribe for one share for every one held. The offer closes on October 26. The lead manager is Allianz Securities.

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