Shekhawati Poly,Yarn Syndicate

Shekhawati Poly-Yarn is entering the capital market on 27^th December 2010 with a public issue of 1.2 crore equity shares of Rs.10 each, at a fixed price of Rs. 30 per share, aiming to raise Rs. 36 crore. The issue, comprising of 54.54% of the company's post issue paid-up capital, closes on 29^th December 2010.

A Silvassa-based yarn manufacturer, producing twisted and textured polyester yarn, Shekhawati Poly-Yarn is a tiny regional textile company embarking on a massive expansion, to be funded via IPO proceeds. The company, having texturising capacity of 13,200 MTPA, plans to increase its twisting capacity over seven-fold, from 600 MTPA, at present, to 4,560 MTPA by March 2011. It is also undertaking forward integration by adding knitting capacity of 1,980 MTPA.

Aggregate estimated cost for the above is Rs. 14 crore. However, project completion is likely to be delayed, given that orders for about 50% of the machinery is yet to be placed. Also, since it is undertaking significant capacity expansion in a very short period of time, capacity ramp-up will be gradual and its present capacity utilization levels of around 90% will drop substantially.

About 10% of funds raised via the IPO will go towards buying corporate office, a non-revenue generating asset, for Rs 3.25 crore, while another 8% will be issue expenses, leaving only 82% of IPO proceeds for capex and operating purposes. Besides, Rs. 14 crore investment as highlighted above, Rs. 5.5 crore will be used for meeting working capital requirements.

However, these funds will not be sufficient to support the growing business activity, post-expansion and going forward, company will borrow an additional Rs. 9 crore for working capital financing in the form of cash credit from banks. This will continue to exert pressure on its balance sheet, which is already quite burdened with Rs. 58 crore debt, as of 30-09-10, on equity of Rs. 10 crore and networth of just Rs. 22 crore. These borrowings also come at a very high cost (average interest rate of 13% and above), continuing to put pressure on earnings as well. This point is proved by the rise in interest and finance charges, from Rs. 2.6 crore in FY10 to Rs. 2.1 crore in H1FY11.  

For FY10, company reported revenues of Rs. 89 crore and net profit of Rs. 2.2 crore, earning a paltry 2.5% net margin. For H1FY11, sales increased to Rs. 58 crore, but margins were flat at 2.7%, on net profit of Rs. 1.6 crore. It is likely to report FY11 EPS of around Rs. 3, which is discounting the issue price of Rs. 30 by 10 times. This is a very steep asking price (and in-turn PE multiple), given that peers, much larger and more established, are presently ruling at PE multiples of around 5 times. 

There are also a number of corporate governance issues with this company, such as non-registration with authorities for statutory dues like professional tax and employees' state insurance as well as failure to comply with accounting standards in the past. Also, three group companies of promoters are engaged in the same business, creating a potential conflict of interest for the new incoming shareholders.

In addition to this, the company is undertaking heavy dilution, wherein promoter holding will reduce to 45.46% from the present 100%. Post-issue, equity will expand to Rs. 22 crore, which is very high, considering the size and nature of company's operations. At Rs. 30, post-issue, company is seeking an enterprise value of Rs. 123 crore, which is very aggressive by any valuation means.

Considering the concern on timely project completion, company's weak fundamentals, heavy dilution by promoters and steep valuations, the issue is an 'avoid'.