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4 IPO reviews

December 19, 2005 15:40 IST
Bartronics India, Educomp Solutions, Celebrity Fashions, Ginni Filaments IPOs are on way. Here's a low down on them. 

Bartronics

Bartronics India, one of the leading players in the booming business of automatic identification and data capture (AIDC) is entering the capital markets with an IPO of 65,00,000 shares of Rs 10 each.

The price band for the issue has been fixed at Rs 63 to Rs 75. Based on the FY05 EPS of Rs 5.47, the issue commands a P/E of 11.52x at the lower end of the price band and 13.71x, at the upper end of the price band.

The company intends to deploy the net proceeds of the issue for funding the capex requirements for setting up the R&D technology centre, establishing branches in India and abroad and for repaying high cost loans.

'Killer application': Bartronics started its business in the field of bar coding and smart card technology, following which it entered into the AIDC segment. Bartronics' main business is the AIDC segment, where it currently has a 25 per cent market share.

AIDC is the industry term used to describe the identification or direct collection of data into microprocessor controlled device such as a computer system or a programmable logic controller, without the use of the keyboard.

According to industry sources, it is already being talked of as the next 'killer application.' The technology increasingly prevent in retail and manufacturing segment eliminates errors associated with identification and data collection and accelerating the throughput process.

The key application of the technology is in supply chain management systems, viz, tracking and traceability of products, product identification, sorting, security & access control, inventory management etc.

The company has over 1000 clients, most of them in the manufacturing segment. The client list includes such companies as ITC, HLL, Tata Steel, Tata Motors, Rnabaxy, Compaq, Ispat etc. The projects primarily involve inventory & logistics management, time and attendance and asset tracking systems.

Bartronics acts as a complete solution providers in the segment, including supply of equipment. 20 per cent of the revenues are generated from after sales functions. 60 per cent of the revenues come from repeat business. The company also has provides logistical support to important pilgrimage centres such as Tirupati Devasthanam and Vaishno Devi.

The Indian market in the bar coding segment is estimated to be about Rs 100 crore (Rs 1 billion) in FY05. The market has been growing at an estimated CAGR of over 50 per cent over the past few years. According to Sudhir Rao, managing director and CEO of Bartronics, the bar coding industry is likely to witness a 30-40 per cent growth in the coming years.

The company is betting big on the next technology revolution in the segment, viz, radio frequency identification (RFID). The company is the market leader in this segment and has a 90 per cent market share.

According to analysts, the RFID market is expected to jump from $1.4 billion annually this year to as much as $6.1 billion by 2010. In advanced economies such as US, the use of RFID technology is widely prevalent in government as well as big retail such as Wal-Mart, which is an indication of the market potential.

Financials: The company reported a 43.60 per cent rise in sales in FY05 to Rs 18.05 crore, while operating profit advanced 24 per cent to Rs 2.64 crore. Net profit for the year stood at Rs 2.39 crore. The company is well on the way to beating the FY05 numbers this fiscal.

For the half year ended September 30, 2005, it has posted a sales of Rs 12.77 per cent and a net profit of Rs 2.68 crore. Given the estimated growth rates the issue valuation at 11-13x at both ends of the price band looks pretty attractive.

The company has a strong brand equity among its clients. Analysts also note that apart from competition in the unorganized segment, there is no other company which provides the range of solutions offered by Bartronics.

Also, the national IT task force has laid down a clause, making the use of barcodes mandatory for all products within a time frame of five years. Thus the growth in the segment is an opportunity waiting to be tapped. Another positive factor is the big growth witnessed in the retail segment over the past few years.

The retail segment is a big customer for bar code applications and the continuing growth in the sector is only expected to add to the business momentum.

However, on the downside, technology obsolescence as well as entry of global players in to Indian markets could prove to be a set back for the company, which is yet to attain the scale to withstand big shake outs.

Educomp Solutions

While education is not a commodity, there is no disputing the fact that it has become good business. Given the government's increasing focus on bridging the digital divide, corporates are increasingly looking at the segment as a potential growth opportunity.

Delhi-based Educomp Solutions, one of the leading providers of technology-enabled education solutions and services for K12 (kindergarten to class 12) schools is entering the capital markets with a 100 per cent book building IPO of 4 million equity shares of Rs 10 each.

The price band for the issue has been fixed from Rs 110 to Rs 125 per equity share. On an FY05 EPS 0f Rs 5.29 (post issue of bonus shares and preferential allotment), the issue is valued at a P/E of 20-23x.

Given the size of the education market and the growth potential, the issue is fairly priced, say analysts. Educomp has registered a growth of over 25 per cent over the last few years.

The company plans to deploy the proceeds from the IPO for funding the capex required for its Smart_Class project, education infrastructure projects executed under the BOOT (build, operate, own and transfer) model, content development facility in Bangalore and the facility in New Delhi for online tutoring project.

Educomp also plans to invest in US subsidiary towards enhancement of sales and marketing and funding the proposed M&A activities.

Educomp Solutions, set up in 1994, is in the business of providing digital contents & IT education to schools, online tutoring, professional development, retailing of educational & games CD-ROMS, and providing ERP solutions to schools. Educomp employs 900 professionals and has presence in 27 locations across the country and has a fully-owned subsidiary in the US.

The company enters into a contract, usually for 3-4 years, with a school wherein it provides an end-to-end solution. It is also responsible for setting-up the infrastructure in the school required to run the Smart_Class.

The schools make payment for the whole package usually on a quarterly basis over the tenure of the contract. In India most of the schools do not have computers in classrooms and the schools do not have enough resources to make upfront investments in setting up such infrastructure.

Thus, Educomp's business model helps the schools to set-up infrastructure without having to invest upfront. The main risks to its business model is payment defaults by schools, apart from risk of piracy.

Analysts are bullish on the prospects of the education market in India. Also with the government pushing hard on the education policy front, companies like Educomp are expected to benefit in a big way. India is one of the largest education markets in the world in terms of the number of students.

Overall there are over 10,00,000 schools in India with over 202 million students enrolled. The number of privately run schools in India are over 30,000. The government spends more than 14 per cent of its total expenditure on education. Analysts also note that the thrust on technological literacy is a core objective of India's education policy.

Over the next year Educomp's major focus area will be expansion of its global business with a focus on the world's largest education market, the United States of America. According to estimates, the US market has a K12 content spend of over $10.2 billion (as of 2004), an online tutoring market spend of over $4 billion and an assessment market spend of $2 billion.

Though the potential sounds impressive, analysts have a different view on the US scenario. They note that the US market is highly competitive with the presence of large dominant players.

Thus the company may find it difficult to establish a foothold in US markets. The company failed to record any revenues from US in FY05. One advantage going for the company is the price advantage that it enjoys over its US competitors.

Educomp clocked revenues of Rs 29.18 crore in FY05 and Rs 5.35 crore in the second quarter of FY06. Net profit surged 332 per cent to Rs 6.32 crore in FY05, on the back of an expansion in operating margins from 24.8 per cent to 42.97 per cent.

Total expenses went down 9.53 per cent during the year, mainly due to a 50 per cent reduction in cost of goods sold. ICT solutions segment accounted for 44 per cent of the company's FY05 revenues, while professional development segment accounted for nearly 35 per cent. Educomp is looking to increase total turnover to Rs 51 crore, in FY06.

At the lower end of the price band the stock commands a P/E of 20.79. Though there are no comparable peers as it has a unique business model, the leading player online education segment, NIIT is ruling at P/Es of 28x.

Issue closes: December 22, 2005.

Celebrity Fashions

The Indian economy has been growing steadily on strength of fundamentals and the world is increasingly looking at India as a sourcing destination. Stock markets are touching new highs every other day. It has been a rally spanning all sectors and the textiles sector is no exception.

To capitalise on the immense opportunity in the post-quota regime after January 2005, Indian textile companies have been on an expansion spree, making a beeline to tap the markets for funds. Provogue, Bannari Amman, Bombay Rayon Fashions and the list goes on and on.

Now Chennai-based Celebrity Fashions, a manufacturer of men's shirts, is coming with an issue of 45.5 lakh equity shares of face value Rs 10 in the price band of Rs 160-180. The company hopes to raise about Rs 73-82 crore.

It proposes to utilise the funds to finance the acquisition of a trouser facility from Ambattur Clothing (60 lakh trousers capacity per annum), setting up 20 exclusive stores for its men's garment brand -Indian Terrain- in next three years and for the garment unit for manufacturing tops with a consolidated capacity of 920 machines (including 655 machines relocated from existing facilities).

Indian Terrain is currently sold through five company outlets and about 276 multi-brand outlets. After expansion its shirt manufacturing capacity will increase from 45 lakh to 60 lakh.

The company, set up in 1988 as a 50 machine factory, now has eight factories with 4,283 machines. It is bullish on the global textile opportunities and the branded apparel market in India. Its customers abroad include Kohl's Corporation, Timberland, Eddibauer, Diesel and Armani.

For the record, the company posted a total turnover of Rs 134 crore in FY05 and earns about 85 per cent of its profits come from exports. Its exports have increased at a CAGR of 15.2 per cent over the last five years to Rs 106.1 crore in FY05. For now the company is focusing only on the US and European markets.

V Rajagopal, chairman and managing director, Celebrity Fashions says, "We propose to expand to take advantage of the opportunities and to improve margins through value addition. The size of Indian apparel/garment industry is about $18.5 billion and the domestic market grew 13 per cent in 2004."

Further, he adds that improving process efficiency in manufacturing is a target area for the company. At a later stage the company also plans to get into women's wear.

Analysts point out that most of the recent textile IPOs were listed at a premium and there is indeed immense growth potential for the sector. At the same time, there is stiff local and global competition from big and small players.

Though many companies may be tapping the stock markets to encash on the boom in the stock market, not all may be able to survive the stiff competition in the sector.

For FY05, it posted a 34 per cent y-o-y growth in total sales to Rs 132.7 crore, while operating profit increased by 84.9 per cent to Rs 15.9 crore. Net profit increased by 21 per cent to Rs 5.8 crore.

On an annualised half yearly (ended September 2005) earnings of Rs 9.6, the company has a P/E of 16.7x at the lower end of the band and 18.8 at the upper end. Peers group valuations are; Provogue India (28.1x), Bombay Rayon Fashions (37.8x), Gokaldas Exports (17.40x), Zodiac Clothing (21.8x) .

The issue will constitute 25.4 per cent of the post issue capital. Post issue, the promoters stake in the company will reduce from 57.2 per cent to 42.2 per cent.

Reliance Capital, Bennett Coleman & Company and New Vermon Bharat also hold 7.1 per cent, 9.9 per cent and 25.7 per cent holding in the company. Some of the placements happened at Rs 110 in October. None of the private investors are encashing at this point, which also seems comforting.

Issue closes on: December 22, 2005.

Ginni Filament

Removal of quotas and government's favourable policy has benefited the cotton textile industry to a large extent. It has not only encouraged the cotton textiles players to undergo modernisation and expansion but also facilitated forward integration in fabrics and garments. Ginni Filaments, a small player in the cotton yarn industry, plans to do the same, though a little late.

The company has come out with a public offer to raise Rs 48 crore through book-building in the price band of Rs 19-22. Based on this, the stock trades at a trailing 12 month price to earning multiple of 9.5-11.

Analysts feel that the stock looks expensive as even a large player like Mahavir spinning is quoting at a trailing 12 month price-earnings multiple of 8.6 times. So even though the offer price is at a 35-45 per cent discount to the prevailing market price of Rs 34, investors may simply give the issue a pass, analysts say.

Ginni plans to use the proceeds of the issue to expand its rotors capacity by 75 per cent, increase its spindles by 31 per cent and enter into value added segments like garments and non-woven fabrics. It plans to set up a garments facility of 15000 pieces per day and non-woven fabrics capacity of 12000 mts.

The estimated cost of the project is Rs 204.24 crore (Rs billion) out of which around 71 per cent will be financed by debt under the technology upgradation fund (TUF) scheme with average finance cost of 3.25 per cent (net of 5 per cent interest rate subsidy under the scheme).

According to analysts, the loan will dent Ginni's balance sheet further as it already has a high debt equity ratio of 1.92 times. Rising interest cost will be a worry too.

Ginni is an integrated Indian textile manufacturer with presence in spinning and knitting fabrics through two manufacturing units in Uttar Pradesh with a capacity of 54432 spindles, 960 rotors and 27 knitting machines.

The company derives over 50 per cent of its revenues from exports mostly yarn to Europe, Middle east, Korea, Bangladesh, Hong Kong and Morocco. It mainly manufactures cotton yarn with coarser counts ranging from 6 to 50. It also manufactures knitted fabrics to produce single jersey, inter lock, rib terry, and lycra fabrics. In order to value add to its fabrics, the company commissioned fabric dyeing and bleaching in May 2005.

The company's entry into non-woven fabric industry is expected to be beneficial as there is a pick up in demand globally. The industry is expected to grow at an average rate of 4.8 per cent, according to some analysts estimates. Besides, capacities have been shifting to China and other low cost nations which again is good news.

The company is a pioneer in the market in terms of the latest Spunlace Technology. However, the industry is not export intensive and domestic market is at its infant stage. The garment business is highly competitive and thus its ability to sustain its margins will be an issue going forward.

Ginni will benefit from the expected decline in cotton prices in domestic market. However its knitted fabrics and non woven fabrics are expected to witness high raw material costs like polyester and viscose due to high crude oil and wood pulp prices respectively.

Ginni's financial performance has not been satisfactory. Its net sales have increased at a CAGR of 3.93 per cent in FY00-05. Operating and net profits have declined at a CAGR of 3.11 per cent and 12.57 per cent respectively. This has been mainly due to increase in raw material, power and other expenses. The company has not paid any dividend since last three years.

The company's return on networth has declined from 6.48 per cent in FY03 to 2.32 per cent in FY05. In H1FY06, the company's net sales increased by a paltry 0.4 per cent year-on year at Rs 94.7 crore.

Operating profit improved by 48.3 per cent at Rs 13.51 crore mainly due to decline of 14.5 per cent in raw material (cotton) costs.

Thus operating margins improved by 461 bps to 14.2 per cent. Financials turned into positive territory with a net profit of Rs 4.18 crore as compared to a loss of Rs 2.7 lakh during the same period in the previous fiscal.
Sunil Nayanar, Atul Sathe, SI Team in Mumbai
Source: source
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