Lacks shine
Current scale of operations too small to justify price
Bombay Rayon Fashions (BRFL) manufactures woven fabrics and readymade garments (mainly men’s shirts). The company’s 140 weaving machines are spread at three locations -- village Sonale in Thane district, Navi Mumbai and Silvassa -- producing approximately 10.9 million meters of fabric per annum. Two facilities in Bangalore produce around 6,000 garments per day.
BRFL is setting up an integrated yarn dyeing, weaving, processing and garment manufacturing facility at the apparel park being developed by the Karnataka Industrial Area Development Board (KIADB) in Doddballapur near Bangalore. The Rs 161.72-crore project includes Rs 17.42 crore for working capital. The company is raising Rs 101.72 crore through a rupee term loan under the Technology Upgradation Fund Scheme (TUFS), with 5% interest subsidy. The balance is to be raised through the present IPO.
Post- expansion, BRFL will add two new divisions -- yarn dyeing and processing -- apart from expanding its capacity in weaving and garment manufacturing. The yarn dyeing division’s capacity will be 2,000 kg per day, and the processing division’s 93,999 metres per day. The weaving capacity is to be increased by 48 machines to 198. The garment capacity will go up more than four times to 28,000 pieces per day.
The prospectus also mentions that, along with other intermittent expansions, the garment capacity will increase 10 times to 60,000 pieces per day by April 2006.
Strengths
- The abolition of the quota regime has opened new growth avenues for export-oriented garment companies such as BRFL.
- Besides expanding garment-manufacturing capacity, product portfolio is to be diversified to include ladies tops, kids wear, and bottoms for men and women.
Weaknesses
- The post-quota regime has lead to an increase in competition. This could affect the profit margin, going forward.
- Considering the current status, the expansion of capacity is unlikely to be completed and commissioned by March 2006.
- The project size and scope is larger than the current scale of operations.
Valuation
In FY 2005, BRFL reported a profit of Rs 7.26 crore with an EPS of Rs 1.5 on diluted equity. The P/E ratio stands 40 times the lower end of the offer price (Rs 60) and 47 times the higher end (Rs 70). On the other hand, Gokaldas Exports and SPL Industries, much better placed than BRFL, are trading at a P/E of 19 and 17 times, respectively.
The first quarter results of FY 2006 give an annualised EPS of Rs 3.9. Notably, the company merged two partnership firms with it on 1 March 2005, boosting the results. Considering this EPS, P/E will be 15 to 18 times. On the same basis, P/E on an annualised EPS of Gokaldas Exports and SPL Industries is 15 and 14 times, respectively.