Jindal Cotex IPO Analysis

Ludhiana-based Jindal Cotex is a textile company promoted by Sandeep Jindal and his family. The company manufactures acrylic, polyester, and polyester-viscose, polyester cotton, combed and carded yarns. The yarns produced are used for made-ups in the apparel, hosiery and garment industry. The installed capacity is 23,472 spindles of acrylic, cotton blended and polyester yarns with a manufacturing capacity of 7,000 tonnes. The company has a 1,250-KW windmill and entered into agreement with Ajmer Vidut Vitran Nigam for sale of electricity for 20 years.

To diversify and venture into technical textiles, Jindal Cotex has established two fully owned subsidiaries, Jindal Medicot and Jindal Specialty Textiles in Himachal Pradesh. Jindal Medicot is to manufacture medical textile products like absorbent bleached cotton wool and its products and cotton crepe bandages and cloth, with a capacity of 5,000 tonnes. On the other hand, Jindal Specialty Textiles is mobilised for manufacturing PVC laminated products, tent fabrics, and truck sliders, with an estimated capacity of 60 million sq meters per annum.

Jindal Cotex plans an equity infusion of Rs 30.01 crore in Jindal Medicot and Rs 51.01 crore in Jindal Specialty textiles. This equity infusion will help Jindal Medicot to raise Rs 58.00-crore term loan and Jindal Specialty Textiles to raise Rs 100-crore term loans. In addition, it has plans to set up a new facility for manufacturing cotton yarn, yarn dyeing and garments (phase I and phase II) at an outlay of Rs 134.79 crore. The total project cost including the project outlay of subsidiaries is Rs 373.81 crore.

To part finance the same, Jindal Cotex is coming out with a public issue of 1,24,53,894 shares of Rs 10 each at a price band of Rs 70 to 75 per share. Accordingly, the company will raise between Rs 87.18 crore to Rs 93.40 crore in the upper and lower band, respectively. The balance will be raised as term loans by the company and its subsidiaries.

Strengths

* Technical textiles, particularly specialty textiles and medical textiles, are growing at a faster rate. So, there will be relatively lower competition and higher growth market.

Weaknesses

* The textile Industry in India is fully fragmented. With the abolition of the quota system from 1 January 2005 many companies have ramped up their capacities, increasing competition among players in the textile industry.
* The promoters do not have experience in the proposed new projects of manufacturing garments and technical textiles.
* There has been delay in the implementation of projects.

Valuation:

At a price band of Rs 70 – Rs 75, PE on fiscal year ended March 2009 EPS on post-issue equity works out to 40.3 - 43.2, which is extremely high for a textile company.