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Shanthi Venkataraman

INVESTORS can avoid the initial public offering of SPL Industries. We have not factored in any gains on listing as the risks outweigh the benefit of taking an exposure. The Rs 60-70 price band values the stock at 13-15 times the expected FY-06 earnings on an expanded equity base.

With the average return on shareholder funds over the past three years at about 10 per cent, the valuation appears stiff.

Though there was a healthy growth in sales in the initial months after the removal of quota in international textile trade, pricing pressures could dampen earnings.

The situation is unlikely to stabilise in the near term, and medium-sized players such as SPL could find the going tough. Investors may be better off with stocks of larger players, who may be better placed to cope with a volatile pricing environment.

SPL Industries is an integrated player, producing knitted fabric and garments. It also has a presence in the home furnishings business.

The company now intends to expand its knitting and garment capacity by 40-50 per cent and broaden its range of home furnishing offerings. It is also to foray into yarn dyeing and making woven garments.

The capacity expansion comes in the wake of the removal of quotas on textiles and clothing, which has opened up previously restricted markets to India.

The knitted garments category, which SPL operates in, has seen strong growth in exports to the US and EU in the initial months of the post-quota period. The recent imposition of restrictions on Chinese products in this category also augurs well for Indian exports.

As a medium-scale player, however, SPL may find it difficult to secure orders compared to larger outfits, which are also on an expansion drive.

Buyers are likely to source their requirements from a few, large-scale export outfits. SPL's past track record, too, shows a rather modest growth in revenues. Capacity utilisation is not at optimum levels. SPL would have to ensure a sharp spurt in offtake for utilisation and profitability to improve.

The setting up of a yarn dyeing plant would be a further step towards integration and would help shorten the lead time. But its expertise in woven garments would have to be demonstrated.

In home furnishings as well, SPL would have to compete with established exporters such as Welspun India and Alok Industries.

Even if SPL witnesses a stronger growth on the revenue front, pricing pressure is likely to play spoilsport in the near term. Some of the categories in which SPL operates in — T-shirts, polo shirts, blouses — are, typically, volume-driven. Pricing declines in these items have been steep.

Offer details: Ninety lakh shares are on offer. The proceeds of the offer would be used to fund expansion plans.

The post-offer equity base would be Rs 29 crore and the promoter's holding, post-offer, would be 65 per cent.

The offer opened on June 29 and closes on July 5. The lead manager is Karvy Investor Services.

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