No scope for appreciation

Shekhawati Poly-Yarn Limited is launching its fixed price issue to raise Rs 36 crs through selling 1.20 cr shares. The issue opens on Monday the 27th of December and closes on Wednesday the 29th of December.

Business
The company is engaged in the business of manufacturing of Texturised and Twisted yarn. The company has 20 texturising machines with an installed capacity of 13,200 tons per annum. It also has 5 Twisting machines to produce 600 tons per annum of twisted yarn. These machines are installed over three different locations in Silvassa.
The company produces Texturised yarn and twisted yarn which are commodity products and the raw material is POY or partially oriented yarn. The suppliers of POY are companies like Reliance, Indo Rama, JBF Industries and Garden Silk Mills. Raw material is easily available and imports are also possible depending upon import parity prices. In short the availability of raw materials is not a concern.
The consumers of the finished product are weavers based in Mumbai, Bhiwandi, Surat, Ludhiana and many other weaving centres in the country. The selling price is very competitive and this business does not have long term contracts as raw material price and finished goods prices are highly volatile. This industry normally operates on cost plus basis and is a convertor industry and acts as an intermediate in the value chain of thye polyester industry.

Objects of the issue

The objects of the issue are as follows: –

Financials
The company reported net sales of Rs 7762.95 lacs for the year ended March 2009; Rs 8937.11 lacs for the year ended March 2009 and Rs 5757.46 lacs for the half year ended September 2010. The net profit after tax was Rs 117.43 lacs for March 2009, Rs 220.76 lacs for March 2010 and Rs 162.02 lacs for the half year ended September 2009. The margins have been very thin and were at the net level at 1.51% for the year ended March 2009, 2.47% for March 2010 and 2.81% for the half year ended September 2010.

Concerns
The company has two group concerns which are in the same line of activity. There is a group company Ruia Rayons Private Limited. The company is in the same line of activity as the company going public and had sales of Rs 4833.79 lacs for the year ended March 2009 and Rs 5644.71 lacs for the year ended March 2010. The net profit after tax for the period ended March 2009 was Rs 32.97 lacs and Rs 49.58 lacs for the year ended March 2010.
The company is now entering the highly competitive knitting industry where it has no experience and setting up 30 circular machines. Secondly the business of manufacturing texturising and twisted yarn is all about high volumes and the company is nowhere in terms of size. Margins in this business are thin but with the expansion and objects of the issue being to acquire a corporate office and repay the loan for the same; it appears that too much is being spent on non-productive assets.

Comparisons
The company has chosen to compare itself with three players namely Filatex India, Century Enka and Sumeet Industries Limited. The comparison is not with similar companies or scale as Century Enka is in the business of Nylon tyre cord manufacturing and Sumeet Industries has in March 2010 commissioned its direct spinning route through PTA and MEG and increased its capacity to 56,000 tons per annum. This expansion is a backward integration as far as raw material is concerned and forward integration is terms of capacity and helps in value addition. When compared with Filatex, its sales were Rs 400 crs for the year ended March 2010, its net profit Rs 17.19 crs and its net margin a healthy 4.29%. In terms of EPS it earned Rs 10.03 and quotes at price earnings multiple of 4.39 based on March 2010 numbers and even lower at 4.08 times based on half year annualised numbers of September 2010.
Very clearly the comparisons seem to be out of place.

Valuations
The company is offering shares at a fixed price of Rs 30 and the issue size is 1.2 cr shares while the present share capital is just about 1 cr shares. This dilution of more than the present capital is certainly a cause for concern. The company had earned a net profit after tax of Rs 117.43 lacs which is an EPS of Rs 1.17 for the year ended March 20009, Rs 2.10 for March 2010 and Rs 1.62 for the half year ended September 2010 or Rs 3.24 on an annualised basis for March 2011. The price earnings multiple for the share being offered is a staggering 30 times on a fully diluted basis based on March 2010 numbers and 20.41 times based on September 2010 numbers on an annualised basis.
One must also remember that the company has been very liberal in issuing itself bonus shares and has on 17th of April 2010 issued a liberal bonus of 7 shares for every 2 held. After the bonus issue of effectively 3.5 shares for every share held it has issued fresh capital of roughly 1/3rd its present issue on that same date of 17/04/10 at Rs 30 so that they could make a presentation that the promoters have invested at the same price as present share holders are being asked to.

Conclusion
The company offers no opportunity to prospective investors and therefore chose not to even have a road show for the investor community in the financial capital of the country Mumbai. The reason for not having a road show is to avoid reports from Mumbai which looking at fundamentals would not warrant a subscribe rating for investors. People are being lured into the issue with listing gains which is a sure shot way to losing money and getting trapped. I would advise investors give a complete skip to the issue and avoid the same and more important to not get carried away with some other issues which have done well initially and then tanked.

SEBI Disclaimer: – I do not intend to subscribe to the above issue.