Birla Cotsyn IPO Analysis

Birla Cotsyn (india) is a constituent of the Yash Birla group (YBG) and was originally incorporated in 1941 by R. D. Birla under the name and style of M/s Jamod Ginning Company Private Limited. On conversion to public limited company the name of the company has been modified to Birla Cotsyn (India) (BCIL) with effect from May 2006. On 9th December 2006 Yash Birla Group signed a joint venture agreement with P.B. Bhardwaj group (PBG) to combine their resources and expertise and carry on the business of manufacturing, marketing and distribution of the products in India as well as other places. As per the JV the total promoter’s equity of BCIL would be taken up in the ratio of 50:50 between the PBG and YBG.

The company has been engaged in cotton ginning, pressing and oil expelling and after the acquisition of assets of Khamgaon Syntex, a wholly owned subsidiary of Zenith, one of the group companies of YBG with a spindle capacity of 18,304 spindles with effect from August 2006, has entered into the manufacturing of synthetic yarn.

The company is coming with an IPO to part finance the expansion of an integrated textile project at Khamgaon and Malkapur at an estimated cost of Rs 289.19 crore, setting up a garment manufacturing plant at Rs 25.21 crore and establishing retail outlets at cost of Rs 5.80 crore.

The company plans to implement the integrated textile project in three phases. During Phase I the spindle capacity of 18,304 spindles of Khamgaon Syntex is envisaged to be enhanced to 19,040 spindles along with the modernization and upgradation of facilities with part replacement of existing machinery and setting up of a 36,000 cotton spindle yarn manufacturing unit at Malkapur. During Phase II the company plans to manufacture open end rotor based cotton yarn with an installed capacity of 1,728 rotors at Khamgaon and weaving of grey fabric with 114 looms at Malkapur. During phase III the company plans to set up a dyeing and processing unit for manufacturing of finished clothes with an installed capacity of 50,000 meters per day. The expansion plan under phase I is estimated a cost of Rs 131.34 crore and subsequent phase II and phase III together has been estimated at Rs 157.85 crore.

In addition the company plans to forward integrate and set up facilities for garment and apparel manufacturing and also to establish retail outlets all over the country for marketing of the products at an estimated cost of Rs 31.01 crore.

The government of Maharashtra has decided to offer the status of ‘Mega project’ to the proposed project. Accordingly the company shall receive benefits of electricity duty exemption for a period of seven years from the date of the commencement of the project, 100% exemption from payment of stamp duty, industrial promotion subsidy equivalent to 100% of the eligible investments made and 75% reimbursement of expenditure incurred on account of employer’s contribution towards ESI and EPF for a period of 5 years but limited to 25% of the fixed capital investment.

Strengths

1. The company is into complete forward integration, i.e. right from ginning and pressing upto manufacture of fabrics, readymade garments and also to opening of retail outlets of its own which is expected to give considerable savings on margins.
2. Khamgaon is the centre of cotton production and there are about 35 ginning units in and around this place. Hence good quality raw materials like cotton are easily available.

Weaknesses

1. The textile industry is highly competitive and fragmented. With abolition of quota system from January 1, 2005 many companies have ramped up their capacities increasing competition among players in the textile industry.
2. The company is having negative operating cash flows for the nine months ended December 2007.
3. Financial and stock market track record of Yash Birla group companies is not encouraging.

Valuations

At the price band of Rs 15 - Rs 18, the annualised EPS for the nine months ended December 2007 on post-issue equity works out to Rs 0.3- Rs 0.4 and PE works out to 49.1-50.3. TTM PE of Textiles-spinning/Cotton/Blending Yarn sector is 10.9. However once the company’s plans for forward integration in garment and apparel manufacturing and setting up of retail outlets are implemented successfully, it may get higher P/E than 10.