KPR Mills — IPO: Avoid

Investors can avoid the initial public offer from KPR Mills as the offer price appears stiff. At the price band of Rs 225-265, the offer is valued at about 12-14 times its 2006-07 per-share earnings. On an expanded equity base, the multiple works out to 15-17 times. Although the company’s large scale and better margin profile are positives, a weak export environment, the strong rupee and persisting pricing pressures pose challenges to its ability to significantly ramp up its garments business. There are also superior investment options already available among listed textile companies.

Knitwear exporters constitute the bulk of the company’s domestic customers. Thus, any further pressures on the export front could affect KPR’s domestic business as well. Investors can, therefore, wait for the cloudy picture on the export front to clear up, before considering exposure to the stock.
Business

The Rs 500-crore KPR Mills is located strategically at the Tirupur belt, making it well-placed to cater to the demands of knitwear exporters in the area. KPR has a presence in spinning, knitted fabric and garments. Yarn contributed close to half its FY-07 revenues, while garments accounted for about 25 per cent. KPR attributes its superior operating profit margins, at close to 25 per cent, to efficient sourcing of cotton and the use of captive wind power plants that have substantially cut its power costs.

KPR is raising about Rs 150 crore from the market to fund an expansion project at Arasur near Coimbatore that it initiated in 2005. About Rs 90 crore from the offer proceeds will be deployed chiefly to expand its garmenting and fabric processing facility, and invest in a new knitting facility. The project, expected to be completed by the end of the fiscal, is set to double the company’s capacities across segments.
Foray into US

Post-expansion, KPR plans to foray into the US, which is likely to be a competitive market. India’s knitted apparel exports to the US have been increasing, although the growth has come at the expense of realisations. KPR hopes to cater to volume buyers, which could entail some sacrifices on pricing and, thus, on margins. An appreciating rupee would compound margin pressures. With the company also heavily leveraged, we expect profit growth to trail revenue growth.

The offer closes on August 7. The lead manager is Kotak Mahindra Capital.