Absence of long-term customer contracts, reliance on agencies for export orders and narrow product offerings make this issue unattractive
Pradip Overseas Ltd (POL) is an Ahmedabad-based company tapping the equity market with the initial public offering (IPO) to garner around Rs 106-116 crore on the lower and upper price bands of Rs 100-110. POL is a textile manufacturer with niche focus on home linen products of both wider and narrow widths. Around 53 per cent of the topline is contributed by the domestic market and the rest 47 per cent comes from exports. The current manufacturing capacity is 136.50 million metres per annum with an average capacity utilization of 92 per cent. POL plans to enhance its capacity to 169.50 million metres per annum in order to meet the expanding demand and further consolidate its position in the home linen market. The expansion project is being implemented at the proposed textile SEZ being promoted by it near Ahmedabad in Gujarat.
POL supplies to domestic and international markets. The revenue contribution from exports has come down from 52 per cent in FY07 to 47 per cent in FY09, and further down to 45 per cent for the nine-month period ended December 09. Exports, however, are almost entirely indirect, coming through procuring agents of foreign buyers. POL lacks direct relationship with the end-users, which may render POL to take immediate advantage of any move on part of the end-users to consolidate suppliers or step up sourcing from a single player.
POL concentrates on bed linen alone such as bed sheets, pillow cases, quilts, comforters and curtains, whereas the other peer companies in the listed space are diversified, supplying bath linen, fabric and garments to reduce dependence on a particular segment.
The funds raised will go towards expanding manufacturing capacity by 33 million metres in the new plant in its proposed textile SEZ. The SEZ is expected to be functional in the first quarter of fiscal 2011. The development of infrastructure of the SEZ is yet to start and finding occupiers for the zone can be undertaken once all required approvals are in place and may take a good while yet.
POL’s sales have more than trebled from FY07 to FY09 and stands at Rs 1269.84 crore, while net profits have just about doubled. Part of this growth can be attributed to a lower base effect, since the company was a result of restructuring exercise by the original company in 2007. While this growth may appear healthy, both operating and net margins have been declining primarily on account of raw material and interest costs. For FY07, the operating margin was at 12.4 per cent which saw a dip in FY09 to 10 per cent. However, the margins improved slightly to 10.3 per cent for the nine-month period ended December 09. Cotton, which forms bulk of the raw material, is on a price upswing and margins may thus be further pressurized.
The company lacks long-term supply contracts for procuring raw material. It has a set of weavers from which it procures material, which reduces its own capital expenditure when compared with bigger textile players who have integrated manufacturing processes. But this move could also mean that it has lesser control over costs of raw material.
[PAGE BREAK]
POL trades at a P/E of 7.30-8.09x for its FY10 earnings at its lower and upper price bands respectively compared to P/E of 6.65x of Alok Industries and 5.65x for Welspun India on a TTM basis. Investors may stay away from subscribing to the IPO of POL. Absence of long-term customer contracts, reliance on agencies for export orders and narrow product offering are reasons that dim the prospects of this offer.
