Mandhana Industries IPO Analysis

Mandhana Industries (MIL) was incorporated as Mandhana Textile Mills Pvt Ltd in 1984 and was promoted by Purushottam Mandhana, Biharilal Mandhana and Manish Mandhana. Initially started as a textile trading company, the company has started processing in its fabric unit in 1993. Since then, the company has expanded its horizons to become vertically integrated textiles & garment manufacturing company with presence in yarn dyeing to garment manufacturing.

The company has current capacity of 3 million kg of yarn dyeing capacity, 1.8 million meters of fabric weaving capacity and 51.6 million meters of fabric processing capacity at Tarapur in Maharashtra. In addition to the above, the company has forward integrated into garmenting with two units in Bangalore and a smaller unit in Mumbai having an aggregate capacity of 3.6 million pieces per annum.

While textiles (including yarn & fabric) constitute major proportion of revenues and serve domestic market, exports of garments constitute a major proportion in the total garment revenue. In the nine months ended December 2009, textiles constituted 82% of the total sales while garment sales constituted 18%. In the domestic market the company markets its fabrics through a network of agents and sales offices located in Delhi, Mumbai, Bangalore and Chennai. On the other hand, exports constitute 93% of total garment sales in the period under review. In the overseas market, Europe accounts for major chunk of 78% of the export sales of the company followed by United States, Italy, UK, Turkey, and France.

The company has drawn up capex plans of Rs 207.39 crore. To part finance the same, the company is coming out with public issue of 83,00,000 shares of Rs 10 each at a price band of Rs 120-130 per share, to raise Rs 99.60 crore to Rs 107.90 crore (depending on the price band). The balance funds required will be raised through Rs 103.80 crore of term loans (which will be eligible for interest subvention, under TUFS scheme) and the rest (if any) through internal accruals.

It plans to set up new garment manufacturing facility with capacity of 4.7 million pieces per annum and to double its yarn dyeing & weaving facility at Tarapur with a capex of Rs 69.09 crore and Rs 102.79 crore, respectively. Subsequent to expansion, the total garmenting capacity of the company will more than double from 36 lakh pieces to 83 lakh pieces per annum and total fabric weaving capacity will double from 1.8 million meters to 3.6 million meters of fabric per annum. The capacity expansion will require Rs 171.89 crore and additional working capital will require Rs 35.50 crore, totaling to Rs 207.39 crore.

Strengths:

* The company maintained higher capacity utilizations in the yarn dyeing, weaving and garment divisions in 2008 and 2009.

* Capitalization on vertical integration of the company's operations can lead to reduction in cost of raw materials and enable it to achieve quality control thereby resulting in higher profit margins from the garment business. The company mainly focuses on mid to high-end segments, which also help in maintaining margins.

* The company's focus on strengthening apparel design and product development with the help of in-house design studio cum sampling unit will help in maintaining higher sales realization for the garments. Focus on the women-wear segment can also boost the company's revenues in coming years.

Weakness:

* The textile industry is cyclical and sensitive to the changes in the global economy. The garment sector is export oriented and is more vulnerable to forex fluctuations and global economic conditions, particularly in European market.

* Volatility in prices and non-availability of raw materials may have an adverse impact on operations. Of late, the pace of rise in yarn prices is the highest, followed by fabrics and readymade garments. So, processors and garment producers, especially smaller ones like Mandhana, are likely to be impacted, unless they are able to scale up revenues significantly and manage costs efficiently.

Valuation:

The company has posted a 14% increase in the total income from operations to Rs 463.26 crore and a marginal 3% increase in the net profit to Rs 36.48 crore for the year ended March 2009. Net profit for the nine months ended December 2009 stood at Rs 28.56 crore, covering nearly 78% of the FY 2009 bottom line. The annualized EPS for the nine months on post issue equity of the company works out to Rs 11.5. At the offer price band of Rs 120- Rs 130 per share, PE works out to 10.4 – 11.3 times. Meanwhile, KPR Mills is trading at 10.3 times on annualized EPS for FY 2010 and that of Bombay Rayon quoting at 15.3 on nine-month EPS.