The Hindu Business Line : Rajasthan Spinning: Hold

DESPITE a sedate growth in revenues, Rajasthan Spinning recorded an impressive jump in profits for the quarter-ended June 2005. Stable raw material prices and improved operating efficiencies translated into a healthy bottomline.

The Rajasthan Spinning stock has appreciated 50 per cent since January. At Rs 130, it trades at 14 times its trailing four-quarter earnings, and appears to have priced-in most of the near-term benefits. But while Rajasthan Spinning remains largely a conventional textile player — operating mostly in blended yarn segment and suiting fabric — it may be viewed as an integrated player as it expands its product mix to garments and home textiles. This augurs well for profitability and, over the long term, may improve.

With crude prices showing no signs of abating polyester fibre prices will remain firm. The new capacities that become operational this quarter would boost revenues.

Cotton, however, continues to be a low-cost alternative; this could affect the offtake of blended yarn in the near-term. Thus, the scope for quick appreciation of the stock appears limited. Investors with a long-term perspective can hold on to the stock.

Strong first-quarter performance

In the April-June quarter, the revenue growth was a modest 7 per cent. Profits, however, grew an impressive 60 per cent. The operating margin improved strongly, by about 200 basis points to about 9 per cent. Raw material costs remained stable and other operating costs under control. With depreciation expenses also flat, the company reported a strong growth in earnings. Margins have improved since the fourth quarter, following the cut in the import duty on polyester. But hardening polyester prices can play spoilsport again.

The company is looking to improve its margins by integrating its facilities. Rajasthan Spinning will be merging with itself Jaipur Polyspin, another blended yarn player, and Mordi Textiles, a processing unit. This may improve operational efficiencies and partly offset the impact of higher raw material prices.

Expansion-led revenue growth

The operating environment has been difficult for Rajasthan Spinning. The demand for blended yarn has been flagging, as cotton yarn has proved a good alternative. There has, however, been an improvement in demand and prices in the fag end of the second quarter. This could augur well for revenue growth. The company has completed the expansion and modernisation of four of its units. The full benefits of the additional spinning capacities should come in by the third quarter. The focus on specialty yarn should pay off, with the rising demand for sophisticated fabric.

Rajasthan Spinning is also focusing on exports, which now account for 40 per cent of revenues. It is keen on improving fabric sales and has a presence in the domestic suiting market through its brand, Mayur.

Towards integration

Towards becoming an integrated player, the company is setting up a garment facility. It is also to invest Rs 220 crore in a terry-towel facility, which may be commissioned by FY-07.

The expansion cost could strain profits in the near term. That the company is on investment mode and is foraying into more profitable avenues should keep investors interested.

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