PRADIP Overseas IPO

Given average profitability ratio, negative cash flows, lack of progress on SEZ, investors can give Pradip Overseas a miss

IPO details

Price Band: Rs 106-116.6
issue size: Rs 100 - 110 crore
Date: MAR 11-15

PRADIP Overseas is the second textile company to come out with an initial public offer (IPO) in the past six months. Ahmedabad-based Pradip Overseas plans to utilise the proceeds of the issue for part-funding its new manufacturing facility in a textile SEZ (special economic zone), which is being developed by the company, and to meet the working capital requirement. The company is proposing an IPO of around 1.06 crore shares of the face value of Rs 10 each in the price band of Rs 100-110 per share. Excluding the reservation for the company employees, the net issue available to the public is 1.01 crore shares. The net issue would contribute 25% to the post-issue paid-up capital of the company.

BUSINESS    

Pradip overseas, a player in the home linen segment, was incorporated in 2007 through a restructuring of the promoters' businesses. As on December 2009, the company has an installed manufacturing capacity of close to 102.4 million metres per annum. Currently, the company is utilising over 90% of these capacities to produce both wider and narrow width home linen products. For FY09; the company earned nearly 47% of the revenue from exports, of which 32% came from the US. In the domestic market, the company's products are sold through 800 retail stores.

EXPANSION PLANS    

The company plans to expand its manufacturing capacity to 169.05 million metre a year to consolidate its position in the home linen market. The expansion is to be carried out in the proposed SEZ near Bhamasra in Gujarat. It has acquired 84.55. Recently, it acquired the marketing rights to 'Lucy B Linens' branded lines from a US company. It has also appointed a nationwide distributor for selling its products a network of 2,000 retailers in India and other countries.

FINANCIALS    

The company's topline has showed a CAGR of 73% in the past three financial years. A bulk of this growth has come from a CAGR increase of 61% in the indirect exports through dealers. The profit margins, however, have declined in FY09 and nine months ended December 2009. An equally paced growth in input expense and over 115% CAGR in the interest cost have limited the profitability. The operating cash flow remained negative for the past three fiscals, expanding by a CAGR of 35%. Inventories have shown a CAGR of 48% in the past three fiscals and, on an average, have accounted for 30% of net sales. Against this, Alok Industries, a textile major, demonstrated a CAGR of 6% in operating cash flow and 38% growth in inventories in the same period.

RISKS

The company is still to acquire 15.45 hectares of land, which is a necessary criterion for developing a SEZ. Due to this, the company is yet to place order for machinery worth Rs 57.05 crore, required for the expansion plan. It depends on suppliers for their input requirement of grey cloth, whose cost comprises
more than 70% of total sales value.

VALUATIONS    

Post issue, the company will be valued at 6.5times its annualised earnings for the first three quarters of FY10 at the higher end of the price band and 5.9 times at the lower end. The valuation looks reasonable compared to the P/E ratio of established player, such as Alok industries. However, given the average profitability ratios and slow progress of activities related to the proposed SEZ, the investors could avoid this issue.