Sharp pricing
The processor plans to increase focus on garment exports, but offers shares at PE comparable to the best garment exporters
Shivalik Global (SGL) is engaged in dyeing, printing and processing of woven fabrics; knitting, dyeing and processing of knitted fabrics and yarn; manufacturing of readymade knitted garments, mainly T-shirts; and manufacturing of sewing threads at Faridabad, Haryana.
SGL plans to raise readymade garment manufacturing capacity by 36 lakh pieces, from 24 lakh pieces to 60 lakh pieces, with a capex of Rs 16.60 crore; dyeing, printing and processing capacity of woven fabrics by 90 lakh meters, from 360 lakh meters to 450 lakh meters, with a capex of Rs 5 crore; fabric knitting capacity by 1,000 million tonnes, from 1,150 million tonnes to 2,150 million tones, with a capex of Rs 2.76 crore; dyeing and processing of knitted fabrics by 1,500 million tones, from 4,000 million tonnes to 5,500 million tones, with a capex of Rs 6.24 crore; dyeing and processing of yarn by 500 million tones, from 1,400 million tones to 1,900 million tones, with a capex of Rs 2.50 crore.
Besides, the IPO will address additional working capital requirement of Rs 10 crore, and contingencies and issue expenses of Rs 2.90 crore and Rs 4 crore, respectively. Also proposed is repayment of term loans of Rs 10 crore. The entire project is to be completed by August 2007.
Around 80% of SGL’s turnover comes from dyeing, printing and processing of knitted and woven fabrics. The balance is generated through the garment business. However, when the new garmenting facilities get fully operational in August 2007, the share of the garment business is expected to go up to 45%. The company exports its entire garment production to internationally renowned buyers.
Strengths
*After the completion of the project, SGL will become more evenly integrated and value addition will improve. Contribution from garment exports is targeted to reach 45%, from the current 18%.
Weakness
- The new garment capacities will be fully commissioned in August 2007. However, trade restrictions on China will also get lifted from 2008, thereby giving rise to severe competition that can impact margin.
- Shyam Tex International (almost half the size of SZL) is a promoter (J P Agarwal) group company engaged in the same line of business as SGL. Therefore, conflict of interest is not ruled out. The promoter also has a number of companies engaged in variety of business. This could lead to diversion of attention.
Valuation
SGL made a net profit of Rs 6.09 crore on sales of Rs 176.66 crore in FY 2005. EPS on post- IPO equity works out to Rs 2.5. Even current nine months’ annualised EPS on post-IPO equity works out to Rs 3. The shares are being offered at a price of Rs 60 at a PE of 24 times FY 2005 EPS and 20 times annualised FY 2006 EPS.
Only large and the best garment exporters can enjoy these kind of PEs. Near comparable company, Alok Industries, which is more than six times SGL’s size, is trading at a TTM PE of around 11 times. Even the industry composite TTM P/E is around 13, making the offer highly expensive