Business of the Company
The group was promoted by Mr. Janardan Agarwal in 1986 and is engaged in the manufacture of variety of fabrics and garments. The group started as a manufacturer of fabrics and expanded into garment manufacturing mainly designer / fancy shirts to take advantage of the higher margins there. Currently 100% of garments are being exported and manufacturing facilities are spread across four locations at Navi Mumbai, Silvassa, Sonale in Thane district and Bangalore. Bombay Rayon has over 900 employees, has 140 weaving machines producing approximately 10.2 million meters of woven fabric per annum and 485 sewing machines with production capacity of 2.172 million garments per day.
Bombay Rayon’s strategy is to be present in the entire supply chain from yarn dyeing to fabric processing. This would give the company better control over quality, costs and timely delivery. The way to do is to implement the new project facilities. Bombay Rayon also intends to rapidly enhance garment capacity to be able to consume 30-50% of their own production. The company wants to position itself in the high end garment business and gain acceptance from the customers and make a foothold in this market.
Financials
The company carries a debt of Rs.27.25 crores up from Rs.4.02 crores last fiscal. The interest cost is 7.63% and the interest cost of Rs.2.64 crores in the last fiscal forms 36% of the Profit after tax. The interest cost as a percentage of Profit after tax has been high in this company as in the fiscal 2004 the interest cost was 1.19 crores on a PAT of 1.80 crores. However with the company taking loans under the TUFS (Technology Upgradation Fund Scheme ) scheme the interest cost is slated to come down further to 3.5% per annum.
The turnover of Bombay Rayon has consistently risen from Rs.17.39 crores in 2001 to Rs.127.51 crores last fiscal. There has been a massive jump in turnover in the last year as the turnover in fiscal 2004 was Rs.53.74 crores. The profit after tax has also jumped from Rs.57 lakhs in fiscal 2001 to Rs.7.26 crores in the last fiscal.
The EPS last fiscal has been Rs.7.57 and the return on net worth has been 15.95%.
Object of the Issue
Bombay Rayon is setting up an integrated facility of yarn dyeing, weaving, rocess house and garment manufacturing at the apparel park being developed by Karnataka Industrial Area Development Board (KIADB) in Doddballapur near Bangalore in two plots of land measuring approximately 20.16 acres. The estimated cost of the project is Rs.161.72 crores which includes Rs.17.42 crore as margin money for working capital requirement for the expansion of project. Out of this total requirement 101.72 crores will be raised from banks and financial institutions in the form of rupee term loans. The entire term loan will be eligible for a 5% interest subsidy under TUFS. There will be an additional subsidy of 10% on specified capital machinery.
Key Risks
The company has borrowed heavily from banks which have restrictive terms in their agreements. Further this leads to an increase in the interest costs which as it is, is a high percentage of profits. If the expansion project does not come around as predicted then the interest costs would weigh heavily on the company.
The company generates export orders from a few customers and as such is dependent on a small set of customers for export revenues.
With the removal of quota system all companies in the textile sphere are subject to intense global competition from countries in APAC and China and there is now increasing competition internally as well.
Conclusion
The company has priced its IPO between Rs.60 and Rs.70. Considering the fact that the promoters have been in the business for almost two decades now and that the issue is not too expensive at a P/E multiple of 9.3 at the higher end, investors who can deal with the volatility which the markets has seen in the past few days should go ahead and buy it. However more conservative investors can leave the market alone in these volatile times.
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