The Hindu Business Line : Birla Cotsyn India: Avoid

The initial public offer of Birla Cotsyn India may not be suitable for conservative investors. The execution of the project could result in a significant ramp up in revenues and earnings.

While integrated textile mills are the way forward, the lack of a relevant earnings track record and uncertainty regarding the likely offtake for the newly installed capacities, peg up risks.

The scale of the project would impose a significant strain on the balance-sheet in the near term, with the equity base alone expanding seven-fold following the issue.

Investors can wait for further clarity on the execution front and the demand situation before considering investment.

At the upper end of the price band of Rs 15-18, the stock trades at 7 times its annualised FY-08 earnings, not factoring in the expansion in equity base. With textile stocks out of favour, stocks of several larger integrated players are now available at lower valuations in the market.

Offer background

Birla Cotysn is raising Rs 144 crore through this IPO to partly fund an ambitious expansion project to set up an integrated textile facility from spinning to apparel.

Initially engaged in cotton ginning, the company took over a synthetic spinning facility from a group company in 2006.

This helped revenues and profits jump manifold. As of December 31, 2007, the company had a revenue base of Rs 60 crore and profits of about Rs 2.5 crore. Given the change in business, the financial track record upto August 2006 is largely irrelevant.

This project, conferred “mega project” status by the Maharashtra Government, will be executed in three phases.

The first phase involves setting up of a 36,000-spindle cotton yarn facility and modernisation of the existing synthetic yarn facility. Full capacities will go on stream by December 2008. The second phase involves setting up an open-end spinning facility and will be fully operational shortly.

The third phase involves setting up of a fabric processing facility capable of processing 50,000 metres of fabric a day. This is expected to go on stream by July 2009. Besides this, the company also plans to foray into apparel manufacturing and retail.

Starting from scratch

The expansion is on an ambitious scale and could well change the nature of the business, if it successfully makes the transition from a cotton ginner to a fully integrated textile player.

The company’s existing facilities operate on a significantly smaller scale and the company is being built virtually from scratch at this point.

Fully integrated facilities with capabilities to market a wide variety of yarn — from polyester and blended yarn to pure cotton yarn — could stand the company in good stead over the long term. Successful execution of the project can result in a manifold jump in revenues and profits.

However, in a fragmented industry with low differentiation and uncertain demand conditions in the export market, significant offtake is not guaranteed.

The project could also pose considerable strain on the company’s financials. High interest and depreciation costs in the near term could curtail the company’s ability to service a substantially higher equity base.

A sustained rise in cotton prices (prices have risen nearly 40 per cent in the last four months) will not augur well for margins in the yarn segment either.

The offer opens on June 30 and closes on July 4. The lead manager is Allbank Finance.

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