SPA Securities neutral on Birla Cotsyn IPO

SPA Securities has come out with a research report on Birla Cotsyn (India) IPO. It has recommended a neutral rating on the issue.

Birla Cotsyn (India) has opened for subscription with its initial public offering (IPO) of Rs 1441.8 million. The issue will close on July 4, 2008. The price band is between Rs 15 to Rs 18 per equity share.

SPA's report on Birla Cotsyn (India) IPO:

Investment Positives:

The expansion project has been awarded the “Mega Project” status by Maharashtra government which will result in tax benefits, electricity duty exemption, Industrial promotion subsidy equivalent to 100% of the eligible investments made etc. The company is planning to be a fully integrated textile company with its scope of operations ranging from ginning, to spinning to fabrics, readymade garments and further owning its own retail shops.

Investment Concerns:

Birla Cotsyn is looking at aggressive expansion plan and is aiming at becoming integrated textile company. Textile sector is currently out of favor due to unfavorable business conditions such as rising cotton prices, yarn realizations under pressure due to tough competition, huge competition from china and other exporters in export market coupled with risk of forex fluctuations. As the company is funding its plans through this IPO, it will put a lot of strain on its balance sheet as the post issue equity base is going to 7x of pre-issue.

Valuation:

The stock is available at a P/E of 50x on its upper band of Rs 18, which is the highest in the peer group. The margins recorded by BCL at EBITDA and PAT level are also on the lower side when compared with its peers. The risk of executing such large projects is high. The rise in cotton prices might impact the margins of the company. Since BCL intends to export 50% of their production (currently it exports ~25%) it will be exposed to forex fluctuations. Promoter & PAC stake post dilution will be below 30%. BCL intends to market its products to the premium and middle segment of the consumers. The promoters have extensive experience in this industry. We expect that BCL‟s retail operations will help in improving the margins. Investors with long term prospective can invest in this issue. Hence, we recommend "Neutral" to the issue.

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