Mandhana Industries IPO Review

Investors can subscribe to the Initial Public Offer of textile player Mandhana Industries. At the upper end of its price band (Rs 120-130), the offer values the company at 11 times the annualised FY-10 earnings per share, at a slight discount to peer Bombay Rayon Fashions.

The offer holds merit on grounds of sustained growth in domestic and export sales in a taxing year for most textile players, strong relationships with clients, capacity expansion on the cards and in-house design capability.

Background

Mandhana makes readymade garments and fabric. The former is slated for exports while the latter is sold in the domestic market. The mix between the two in total revenues is rather fluid, but domestic sales make up the chunk. Mandhana has an integrated manufacturing process, with capacities for dyeing and weaving of fabrics, and garments.

Sales recorded a 37 per cent compounded annual growth while net profits grew 44 per cent over a three-year period. Operating margins are on the healthy side at 19 per cent in FY-09, up from the 10 per cent three years earlier due to controls in manufacturing and administration costs.

Manufacturing expenses dropped from eating 14 per cent into revenues to 8 per cent in FY-09, primarily a result of its garment manufacturing plant kicking off production. Administration costs dropped to 3.5 per cent of sales in FY09 from the 7.3 per cent three years earlier. On the same grounds, margins further improved to 21 per cent for the nine months ended December 09. The company has no plans of moving into the retail sector, unlike a good many of its textile peers, which could help sustain margins at higher levels.

Client base

Clients include those in the retail and apparel segment such as Tommy Hilfiger, Pepe Jeans, Valentino, and so on in the international market and Pantaloon, Aditya Birla Nuvo, Raymonds and so on in the domestic space. Repeat orders from such clients and their established presence provide a stable base.

Catering to the premium and the mid-priced segment in domestic and international markets provides a degree of diversification and risk mitigation besides flexibility to capitalise on opportunities in both segments. With clients numbering over 700, client concentration is not a risk. Mandhana plans to achieve a nominated supplier status with more clients, making it an exclusive supplier to them . It currently holds this status with a couple of suppliers. Direct relationships with most clients, both domestic and international, allows it to respond quickly to changes in requirements. Besides direct supplies, large-scale distributors and agents are also used to route sales. Mandhana has in-house design capacities; it works with clients to create designs, besides selling its own.

European markets constitute 77 per cent of exports — a risk addressed to an extent by virtue of stable clientele which hold brand presence, direct and strong client relationships built and diversified segment presence.

Manufacturing capacity

With global retailers aiming at consolidating suppliers in cost control efforts , manufacturers with ability to scale up production fared well. Mandhana benefited from this trend, growing exports by little over a third in 2008-09, a period when overall textile exports were sliding and consumer spending waned.

Mandhana plans to use most of the funds raised to increase garment manufacturing capacity to 83 lakh pieces a year from its existing 47 lakh pieces and to double weaving production capacity to 360 lakh meters a year. The plants will be functional towards end-FY11, and revenues from the same will flow in from FY-12 onwards. Land for both has already been acquired.

Besides capacity expansion, funds raised will be used for working capital. Turnover of working capital stands at 2.8 times for FY-09, down from the 3 times a year earlier but still above industry peers.

Debt-equity ratio, post-issue, stands at 1.7 times, but most debt is under the Technology Upgradation Fund Scheme, which carry lower interest rates and longer repayment periods. Interest cover is at a good five times.

Net margins slid to 8 per cent in FY-09 and further to 6.5 per cent in the nine months ending December 09, primarily on account of forex losses and depreciation. Margins are likely to remain subdued, given that capacity-addition will increase depreciation. Forex fluctuations are likely to persist.

Rising prices of cotton is also of concern. While Mandhana may have bargaining power by virtue of its size with its suppliers, it may eventually have to take on increase in prices. Its ability to pass on such price rise to its clients will have to be gauged.

Offer details

The offer is open from April 27-29. The lead managers are Edelweiss and Axis Bank. Given its small-cap status , investors are advised to limit exposure to the stock.

via BL