Subscribe to Birla Cotsyn IPO with long term view: Keynote

Keynote Capitals has come out with a report Birla Cotsyn's IPO. It has recommended investors to subscribe the issue with a long term view.

The issue has opened for subscription with its initial public offering (IPO) of Rs 144 crore. The issue will close on July 4, 2008. The price band has been fixed at Rs 15 to Rs 18 per equity share.

Keynote's report on Birla Cotsyn's' IPO:

The acquisition and JV led to a growth in topline and bottomline from Rs 3.8 crore to Rs 53.5 crore and Rs 0.3 crore to Rs 2.6 crore respectively in FY07. EBITDA margins, however, declined from 8.9% in FY06 to 6.0% in 9 months to Dec 07.

It plans to become fully integrated with presence across spinning, weaving, processing and garmenting and will also foray into retailing by opening outlets under its own brand.

Under capex plan of Rs 320 crore, BCIL will set up an integrated textile project at Khamgaon and Malkapur, and dyeing & processing unit, ready-made garment manufacturing facility and establish retail outlets across India. This capex will be funded via a mix of equity, debt and internal accruals. Till April, 2008, it has raised funds of Rs 140Cr including promoter’s contribution of Rs 57 crore and term loans of Rs 78 crore.

Maharashtra Government has conferred ‘Mega Project’ status for the proposed project which makes BCIL eligible for various incentives.

Presently, BCIL exports to Yemen, Turkey, Middle East and Europe which are 20% of total sales. Going forward, it intends to have export sales of 50% to the US, UK, etc. by leveraging the expertise through tie-up with the Bhardwaj group, which is an international group.

Key positives are the synergies arising from fully integrated textile manufacturing and foray into retail. However, retail may remain a small portion of the business, given that only 20 no. of stores will be opened within the next 2 years. Promoters also are subscribing to the IPO at the same price, which is also a positive.

We view the increase in balance sheet size as a negative. Being an asset heavy business, it may require funding including working capital. Low promoter holding (36.3% post-issue) and low EBITDA margin of 6% are causes for concern too.

We believe the IPO’s valuation is a tad on the higher side, given that the company is a pure-play textile manufacturer. On an annualised basis, the IPO is price at P/e of 50.2xFY08, which is expensive compared to peers (Bombay Rayon Fashions P/e 17.7x TTM, Nahar Spinning P/e 5.8xTTM and Koutons Retail P/e 32.3xTTM). Till such time as its retail operations reach a sizeable scale, it would be premature to give retail valuations to this company. We therefore recommend investors to invest for the long term only.

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