Arvind International - Avoid

• For working capital requirements amounting to Rs 3 crore.
• To repay/pre-pay sundry creditors totaling Rs 1.18 crore, secured loans totaling Rs 4.9 crore and unsecured loans totaling Rs 2 crore, out of which unsecured loans of Rs 1.7 crore of the promoters will be repaid.
• Expenses towards the Rights issue, to an extent of Rs 34.50 lakh.

The total requirement amounts to Rs. 11.48 crore, and a shortfall of Rs 13.11 lakh would be met through a mix of internal accruals and debt.

Established in 1995, AIL’s manufacturing facility is situated in the Bagru Industrial Area on the outskirts of Jaipur. The company manufacturers foam products like PU Foam, rebounded foam, mattresses and pillows. AIL has a total installed capacity of 4200 metric tonnes p.a. of PU foam, 600 metric tonnes p.a. of rebounded foam and 15540 pcs of mattresses and pillows, respectively. That apart, the company has also forayed into the coal trading business beginning 2010.

As for the foam business, the company operates at very low capacity utilisation rate, which stood at 7.5 per cent for polyurethane foam and 13.85 per cent for rebounded foam in FY11. In its prospectus, the company has mentioned that this is because it has drastically reduced manufacturing commercial PU foam over a period of 3-4, years due to lower margins and the marketing risks associated with it. The company has concentrated on the production of premium foam, as it yields higher margins. 

However, we have observed that AIL has made no effort towards ramping up production for premium foam and boosting sales. Moreover, it is has not mentioned any initiatives taken towards eliminating the marketing risks associated with commercial foam. Based on these facts, we, at DSIJ, believe that AIL’s manufacturing business is on shaky ground, and reveals a gloomy picture about the company and the management on the whole.

With regard to its trading business, the company has not mentioned any rationale behind such a move in its prospectus. We believe that the sole objective of entering the coal trading business was to spike up sales, so as to make them look good in terms of turnover achieved and hype up the Rights issue offer. This is evident in its FY11 results, wherein of the total revenue of Rs 117.53 crore, the coal trading business contributed 80 per cent of the revenues, itself amounting to Rs 94.62 crore. However, on the operating profit level, coal trading contributed merely Rs 51.08 lakh. The management’s decision of venturing into a trading business in a completely different industry with no prior expertise, which offers low margins, highlights the fact that it has no clear vision or business outlook. 

On the financial front, there is really nothing to speak about. For FY11, the company reported sales of Rs 117.53 crore (Rs 22.18 crore), while profits stood at a mere Rs 77 lakh (Rs 75 lakh) during the same period. In Q1 FY12, the net sales increased to Rs 24.65 crore from Rs 4.84 crore in the same quarter of the previous year. The net profit stood at Rs 32 lakh, against Rs 17 lakh reported in the same quarter of the previous year. 

On the valuation front, the expanded equity after the Rights issue would be Rs 15.4 crore. This would be more than double of its existing equity of Rs 7 crore. Based on its TTM EPS of Rs 0.59, calculated on post issue equity capital, the offer price discounts the same at a whooping 23x.  

Besides, with a market cap of barely Rs 19 crore, and at very low trading volumes investors may not get an exit option. We, at DSIJ, also expect the price of the counter to fall below the offer price post issue closing. Hence, we advise our readers not to subscribe for the Rights issue and to stay away from this counter.

*Assuming that the Rights issue is fully subscribed