The Hindu Business Line : Vijayeswari Textiles: Avoid

Investors can avoid subscribing to the offer of Vijayeswari Textiles (VTL). At the upper end of the price band, the offer values the company at about 12 times its likely FY-08 per share earnings, on an expanded equity base. While the export prospects for home textiles remain bright, intense competition has kept margins on a tight leash. Earnings growth is unlikely to keep pace with revenue growth in the medium term. The stocks of peers such as Welspun India and Alok Indutries, which enjoy scale advantage, are available at better valuations in the secondary market.

Vijayeswari Textiles (VTL) started out as a producer of high-quality yarns but gradually shifted its thrust to the lucrative home-textiles segment where margins are superior. It is now an integrated player with a focus on luxury bed linen. The strategy has worked well, with the home textiles business growing at an annualised rate of close to 30 per cent between FY-02 and FY-06. The latter accounts for 85 per cent of its revenues, which stood at Rs 100 crore as of FY-06. Margins also moved up significantly in FY-06 to 18 per cent from low single-digit. VTL has a narrow customer base with international retailers such as Macy's, Kohl's, Laura Ashley, T. J. Maxx and H Goods accounting for 90 per cent of its sales.

Background to offer

VTL hopes to raise Rs 90 crore through this public issue, which will help fund its Rs 260-crore expansion project. The company will be doubling its made-ups' capacity to 50 lakh pieces a year. This would also require VTL to significantly scale-up spinning, weaving and processing facilities.

The expansion will allow it to extend its product line to include quilts, coverlets and, eventually, living room furnishings and curtains. The capacities will become operational in a staggered manner through FY-08 and the revenues from fresh capacities are likely to kick-in only in the subsequent year of FY-09.

Scaling up challenges

The company's capacities, post-expansion, will still be smaller than the current size of Alok Industries and Welspun India. These players are also on an expansion mode and, despite their heavy investments, have faced challenges in scaling up utilisation in their new facilities to optimum levels. They have, however, managed to grab a foothold in the market through overseas acquisitions of facilities and branded retail stores. This makes them better-placed to capture the robust export market for home furnishings. VTL will be hard-placed to make similar moves in the global market without a strain on its balance-sheet.

Its yarn segment, where it appears to have carved a niche, is also likely to be diverted increasingly towards captive consumption and is unlikely to be a major revenue contributor. With increasing competition in the bed linen segment from Pakistan and Bangladesh, pricing pressures continue to persist. In this context, VTL's focus on the higher end of the market is a positive. However, its margins are unlikely to move past the current levels in the near-term.

Offer details: About 69 lakh shares are on offer at a price band of Rs 115-130. The offer will raise Rs 90 crore at the upper end of the price band. The proceeds will fund part of a Rs 260-crore expansion project. Rest of the project costs will be funded through debt. The offer opens on February 8 and closes on February 13. The lead manager is IDBI Capital.