Birla Cotsyn, part of the Yash Birla group companies, is into manufacturing of synthetic and cotton yarns. It got into manufacturing of synthetic yarns after the acquisition of assets of Khamgaon Syntex, one of the group concerns in
August 2006.
Before the acquisition Birla Cotsyn, on a standalone basis, was a very small entity with a profits of less than Rs 30 lakh. The acquisition of much bigger entity had resulted in increase in the manufactured sales from Rs 2.68 crore in FY06 to Rs 46.81 crore in FY07.
The company has now floated a public offer to raise Rs 144.18 crore for setting up an integrated textile plant in Malkapur, Maharashtra in a joint venture with Polytex a PB Bharadwaj group company. The total cost of the project would be Rs 320.20 crore. This includes a term loan of Rs 154.59 crore. The plant includes installation of cotton-based looms, dyeing processing unit and garmenting facility. After the commissioning of the plant, the company would establish garment retail stores. It would get various tax benefits other than TUFF (technology up gradation fund) like seven year tax holidays and indirect tax incentives.
Financials
The total income and net profit of the company as on December 2007 stands at Rs 63.92 crore and Rs 2.51 crore, respectively. In the FY07 it was Rs 56.15 crore and Rs 2.57 crore respectively. From the total revenues 25% comes from exports. Due to comparatively low quality cotton yarn, exports market is restricted to only Turkey and Yemen.
Being a textile player, Birla Cotsyn s? faces stiff competition with various bigger players in the industry. In addition to this the margin is very less. The margins declined post acquisition. For the nine month period ending December 2007 operating and net profit margins are at 7.86% and 3.92%, respectively.
Valuation & concerns
On the valuation front, the post issue annualised fully diluted earning per share is around Rs 0.35. Considering the lower and upper price band, the P/E ratio works out to 49 times and 50 times. Post issue, the equity capital would increase more than seven times of the present equity capital. Experts reckon that due to significant dilution and steep valuation there is more downside than upside. Some of the established garment retail players are commanding higher valuation. Birla Cotsyn?s valuation is rarther stiff considering the fact that it would take more than a year to enter the retail market. Moreover, the intended project is much bigger than the scale of operations handled by Birla Cotsyn, and remains one of the major concerns. The depreciation and interest cost of the new project would impact the margins of the company. The higher costs may turn the company into net loss for some quarters in the coming quarters.
Other than this, it is known that as a part of restructuring exercise in Yash Birla Group companies, Birla Cotsyn could get merged with one of the group concern Birla Transasia Carpets a listed entity on BSE and NSE exchange. Birla Transasia is a loss making company and for the past ten years has miniscule revenues.
It has filed for Board for industrial and Financial Restructuring (BIFR). The exact date and the swap ratio are not yet disclosed. If the merger happens, it may turn negative for Birla Cotsyn shareholders post-listing. Investors must consider these factors before investing