Richly priced
Potential will be realised only after the completion of expansion and diversification
Bannari Amman Spinning Mills (BASM), part of the Rs 1200-crore Coimbatore-based Bannari Amman group, manufactures cotton yarn and fabric. Its 29,232 spindles manufacture cotton hosiery yarn in the count range of 20s and 40s and has a weaving unit with 28 looms. A wind-based 5-MW captive power plant meets its power requirement.
BASM plans to add 75,000 spindles to take the spinning capacity to 1,04,832 spindles and 60 looms to take the installed capacity to 88 looms. The capacity of the windmill is to be increased to 15.4 MW. Moreover, the company intends to set up a processing capacity of 30,000 metres per day and a home textile/ garment capacity of 8 lakh units. While the expansion in the processing capacity will be completed by April 2007, the other expansion and diversification are expected to be over by May 2006.
The expansion cost of around Rs 290 crore is proposed to be met partly by debt and equity. UTI Bank has sanctioned a term loan of Rs 175 crore under the Technology Upgradation Fund Scheme(TUFS). The remaining portion is to be financed by the present IPO and internal accruals.
Strengths
- BASM's focus on cotton is in tune with India's strength in this area of textiles. Lower cotton prices have improved the business environment.
- The increase in the capacity of the windmill plant from 14.80 million units to 41 million at a cost of Rs 50 crore will meet 68% of the total power requirement.
Weakness
- The post-quota regime has opened various opportunities for the domestic textile industry. However, exports form only 24% of the revenue of BASM. In fact, export contribution has come down by 11% year-on-year from Rs 19.07 crore in FY 2004 to Rs 16.90 crore in FY 2005.
- BASM claims that it will be an integrated unit after the current expansion. But the weaving unit has a capacity to consume only 3,500 kg of the 45,000 kg of yarn that will be produced by the spinning unit. This means only 8% of the yarn produced will be used in the next stage and the remaining sold in the market.
- At present, BASM exports only yarn. Though the specialised fabric it produces is not exported, the company intends to participate in international trade fairs in future.
Valuation
BASM made a net profit of Rs 11.53 crore on sales of Rs 72.17 crore in FY 2005. EPS on post- IPO equity works out to Rs 7.3. The shares are being offered in a band of Rs 115 to Rs 135 at a P/E of 16 to 18 times against the sector TTM P/E of 13.5. Till the projects are commissioned and expected benefits materialise, the market price may not sustain above the offer price even at the lower band.