An investment can be considered in the initial public offer of Indus Fila (IFL). At Rs 185, the upper end of the price band, the offer values the company at close to 17 times its annualised FY 07 per share earnings, on an expanded equity base. The valuations are in line with that of the largest garment exporter, Gokaldas Exports. The offer is a bit stiffly priced, considering the risks of undertaking an ambitious expansion project at an early stage of its garment business, especially with the export market as a target. As the expansion is likely to happen intwo phases spanning the next two years, exposure needs to be considered from a long-term perspective.
Indus Fila is a manufacturer of fabrics and ventured into apparel about two years ago. Export of garments now account for about 25 per cent of sales. IFL's track record over the past three years has been impressive. Revenues have grown from Rs 7 crore in FY-03 to Rs 90 crore in FY-06 on the back of expansion in capacities. Changes in product mix towards garments have also improved profitability. In the first half of FY-07, IFL recorded a profit of Rs 10 crore, double of what it recorded in FY-06. The company recently acquired a processing unit near Mysore, which has completed its integration from yarn dyeing to apparel.
Ramp up in garments
IFL will raise about Rs 90 crore from the offer, which, along with Rs 75-crore debt, will fund its 170 crore-expansion project. The company will be expanding its yarn dyeing facilities six-fold. The facility would be used mainly for captive consumption and would go on stream by June 2007. Expansion in weaving, processing and garments would take place in two phases, with the bulk of the capacity becoming operational in April 2008. Its garment capacity, for instance, will double to 18,000 pieces a day by June 2007 and further expand to 30,000 pieces by the first quarter of FY-09. At 10 million pieces a year, post-expansion, going by current capacities of players, it would be a mid-sized player.
IFL produces men's shirts and women's tops. It counts as its customers, names such as Arrow, Levi Strauss and Armani Exchange and plans to diversify its product portfolio by including bottomwear, sportswear and swimsuits.
Prospects
If the expansion project is commissioned on schedule and IFL manages to ramp up its production correspondingly, there is scope for substantial revenue and earnings growth. Its track record so far in putting through expansions has been good. However, the scale of expansion this time around is substantially higher.
Given the nascent presence in the garments business, it might take longer than expected to secure large orders. This is a risk to our recommendation. IFL is counting on its focus in design and its relatively lower turnaround time to work to its advantage. The company also intends to focus on the mid-high end of the market, which is likely to encounter less pricing pressure.
Offer details: About 49 lakh shares are on offer at a price band of Rs 170- Rs 185. The lead manager is Anand Rathi. The offer opens on February 12 and closes on February 14.