The Hindu Business Line : Birla VXL: Invest

As the company remains heavily leveraged, interest costs will continue to be a drag on profitability in the immediate term. It might take a while before the company makes a complete turnaround.

Mr S. K. Birla, Chariman and Promoter, Birla VXL.

Shareholders can subscribe to the rights offer of Birla VXL (BVXL).

The offer price of Rs 10 is at par. One can also take advantage of the higher price in the secondary market and sell a portion of their holdings.

This way, shareholders can reduce the cost of acquisition and at the same time limit their exposure to the company.

About Rs 25 crore will be raised from the rights offer. The company is tapping its shareholders for funds for the restructuring process that has been initiated to turn the company around.

Background

Birla VXL, part of the S.K. Birla group, is a manufacturer of worsted/woollen fabric and sells under the brand name Digjam.

The brand has a 10 per cent market share and has a brand recall. The company also has a readymade garment unit. It exports about 40 per cent of its production.

At a capacity of six million metres, it remains a relatively small player compared to market leader Raymond, which has a capacity of close to 30 million metres.

BVXL expanded massively in the mid-1990s; this did not yield results.

Surplus capacity, input pressures and a difficult demand environment affected profitability. Accumulated losses completely eroded its net worth by June 2004. Shortly afterward, ARCIL (Asset Reconstruction Company India) took over debt from some of BVXL's lenders. The securitisation outfit, which now owns 54 per cent of the pre-issue share capital, has begun to restructure its Rs 400-crore debt.

Restructuring initiatives

As part of the restructuring process, the Amritsar facility, which manufactured the OCM brand of worsted fabrics, was carved out into a separate division, OCM India, as a 100 per cent subsidiary. Loans worth Rs 160 crore were transferred to the division.

BVXL's entire shareholding in OCM India was recently sold to US buy-out firm, WL Ross, for about Rs 170 crore. The proceeds were to be used to pay off loans that had been transferred to the division. BVXL has also divested its other subsidiaries Masuzawa Punjab silk and VXL Technologies; it exited from its joint venture with Dormeuil Freres of France end of September.

About Rs 50 crore worth of debt will be paid off through the disposal of non-core assets, which have been allocated to a separate investment division. About Rs 25 crore has been converted into equity.

Post-conversion and the carving out of OCM India, the share capital of the company stands reduced to Rs 43 crore from about Rs 100 crore. Long-term debt, even after the restructuring initiatives, however, remains at about Rs 150 crore.

Outlook

The company has managed to make profits in recent years on an operational level. It plans to increase its margin profile by increasing the share of readymade garments in its overall revenue.

It plans to focus on the premium segment of the market. But competition will be tough with larger players, such as Raymond and Reid & Taylor, not to mention international ones.

As the company remains heavily leveraged, interest costs will continue to be a drag on profitability in the immediate term.

Earnings growth will be curtailed as a result of an over 50 per cent expansion in equity base. It might take a while before the company makes a complete turnaround. Shareholders will have to be patient.

Offer details: Four shares are being offered for every seven held. The promoters will subscribe to their full entitlement.

In addition, they will bring in an additional Rs 10 crore in the event of renunciation of rights by shareholders or under-subscription.

In such an event, the promoter's holding post offer would be at 33 per cent against 18 per cent currently. The offer closes on January 9.

The lead manager is Keynote Corporate Services.

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