Venturing into value addition products based on core competence – subscribe only if you have patience. 

Jindal Cotex Limited has entered the capital markets and the issue is currently on. After attending the broker/analyst meet in Mumbai and reading the red Herring Prospectus (RHP), lot of confusion arose about the issue. On speaking to the management I realised that the best thing would be to take time out and visit the facilities of the company in Punjab and ascertain for myself the reality and take a call on the company. Accordingly I visited the facilities over the weekend to see for myself. This article is post the visit and therefore the delay in writing about the issue.

Clearly a very bad job of presenting the company, and some inadvertent errors in the document have created confusion and made many investors confused. The company was set up in 1998 as a spinning unit with 6912 spindles. This capacity has been steadily expanded and by 2006 had reached a level of 23,472 spindles. The company is in the process of expanding its capacity further by more than doubling the same by adding 28,800 spindles under Phase I of expansion. The construction of the building for the same is almost complete and machinery installation is under progress. This unit is expected to commence production by October 2009.

In Phase II the spinning capacity is being further expanded by 21,600 spindles adjoining the phase I expansion and work on this would begin in September 2009 and is likely to get commissioned by early 1st quarter of 2010-2011. The expansion of Phase one and two would treble the capacity from the existing 23,472 spindles to 73,872 spindles. Side by side the spindles expansion in Phase II, the company is also setting up 6 tons per day dyeing plant and a 3,000 pcs per day garment unit.

The company was set up and is being managed by a first generation technocrat Mr Sandeep Jindal and the promoters include Mr Sandeep and his family.   

Objects of the issue  

The money being raised from the public is for investing in the equity of two 100% owned subsidiaries of the company M/s Jindal Medicot Limited and M/s Jindal Speciality Textiles Limited.  M/s Jindal Medicot Limited is setting up a project to manufacture Medical Textile Products such as absorbent cotton wool and its products, cotton crepe bandage like stretch bandage and crepe bandage cloth. The capacity of this plant is 5000 tons per annum.  

M/s Jindal Speciality Textiles Limited is setting up a facility to manufacture PVC laminated products for applications like frontlet banner fabric, backlit banner fabric, inflatable fabric for boats etc, tent fabric, tarpaulin fabric and truck siders etc. This facility is being set up with a capacity of 60 million square metres per annum. 

Both these projects are being set up in district Una, in Himachal Pradesh. The cost of these projects is Rs 88 crs and Rs 151 crs respectively. The total cost therefore comes to Rs 239 crs with an equity contribution of Rs 81 crs. It is primarily for this equity contribution that the money is being raised.

Business

In the present spinning business there is roughly 17-18% wastage during the process of carding and combing which is sold at roughly Rs.30,000 per ton. This would be used as raw material in Jindal Medicot and the entire requirement of 5000 tons per annum would be met from the present and enhanced spinning capacity of the company. Similarly the fabric manufacturing requires yarn and the entire requirement of the same would also be met entirely.

Valuations

The valuations of the company based on March 2009 numbers are certainly not comparable with industry peers in any way. This as of today is a spinning unit which is trebling its capacity in roughly six to eight months without using IPO proceeds and then setting up two value added, high technology products which have 5 years exclusive contracts with the technology partners in place. To compare with spinning peers and investing on historic earnings is strictly not desirable.

Any project involves risk and this project is no exception. The risk is not in the execution and completion of the spinning expansion but the two new projects being set up. I believe there can always be a delay in completion, but the project is for products which already have a ready market and are widely accepted. It is only that there are no large manufacturers as of today and no listed companies in the space. Investors, who are prepared to wait for a twelve month period and are looking for substantial appreciation after the waiting period, only should apply.