The Hindu Business Line : Bannari Amman Spinning: Invest at cut-off

INVESTORS could consider subscribing to the initial public offer of Bannari Amman Spinning. At the upper end of the price band, the offer values the stock at about 16 times its earnings per share on post-offer equity, based on its existing operations. The new capacities that will come on-stream in FY-07 may ramp up substantially the earnings. With its expansion plans, Bannari Spinning hopes to overcome some of the problems of lack of scale. In its endeavour to become a fully integrated player, it will also enter more lucrative segments such as fabric processing and home textiles, subsequently de-linking itself from the commodity nature of the business.

The Coimbatore-based company is part of the Rs 1,200-crore Bannari Amman Group, which has interests in sugar, food processing, distillery and automobile distribution, to name a few. Bannari Amman Spinning is among the smaller companies in the cotton spinning industry with a turnover of Rs 75 crore. Located near the Tirupur cluster of knitwear exporters, most spinning companies based in Coimbatore have a ready market for their yarn.

As a smaller player, withstanding pricing pressure on the back of over-supply in the yarn market and competition from players with larger capacities is a challenge for Bannari Amman Spinning.

Having been for the most part focused on cotton spinning, its performance has been linked to the prices of cotton, which as a key raw material, affects operating performance and also influences the realisation of cotton yarn.

Over the past three years, profits have grown at a CAGR of 47 per cent, more out of operational efficiencies than growth in revenues. Given the commodity nature of the business, the company's performance has been marked by ups and downs rather than a steady growth in earnings. This could change with its plans to move up the value chain.

Expansion plans to drive revenue growth: With its plant operating at near-full capacities over the past three years, a capacity expansion is overdue. Bannari Spinning has charted out a Rs 290-crore expansion plan, which would be partly funded by the offer. Expansion of spinning and weaving capacities is already underway, funded by a Rs 175-crore term loan. The expansion will almost triple spinning capacities from current levels. As this division operates at 97 per cent utilisation levels, the expansion is likely to boost significantly the revenues, which have been growing at a modest rate in recent years. Strong demand from knitwear exporters of Tirupur and other areas is likely to ensure that the new capacities operate at optimum levels. The company's focus on superior quality yarn is also likely to improve realisations.

The company is also expanding its weaving division, which it set up in FY-05, and is putting up a processing facility and a division to manufacture home textiles — bed-sheets, tablecloths, pillow covers and the like. The new capacities, barring the processing facility, are expected to be operational in May 2006; the latter will be commissioned in 2007.

The entry into processing and home textile segments is expected to enhance margins; Bannari Spinning already enjoys healthy operating margins of about 23 per cent. There is a strong market abroad for home textiles; exports, currently about 25 per cent of the company's revenues, could get a boost. But with several players vying for entry into the segment, Bannari Spinning will need to gain design expertise if it is to stand out from the rest.

Over the medium term, gains could also come from the company's plans to augment wind power generation capabilities, which might lead to a substantial cut in power costs. Power and fuel expenses currently account for about 9-10 per cent of sales. It has already installed four windmills in FY05 and new windmills are expected to come up by March 2006. The company expects to meet nearly 70 per cent of its energy requirements through its captive wind power plants.

Lower cotton prices could also bolsters margins in the current fiscal.

Offer details: Seventy lakh shares are on offer. The price band is Rs 115 to Rs 135. The promoters' stake in the company post-offer is 55.6 per cent. The lead managers are IL&FS Investsmart and ICICI Securities. The offer closes on October 25.

Shanthi Venkataraman

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