Avoid Minar International IPO: Angel Broking

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Minar International, a leading exporter of made-ups to the US markets, is open for subscription with an initial public offer, IPO of 69,23,077 equity shares of Rs 10 each through 100% book building process in the price band of Rs 108 to Rs 115 per equity share.

The issue closes on September 29, 2006. The issue will constitute 28.49% of the post issue paid-up capital of the company.

Keynote Corporate Services is the BRLM for the issue and Intime Spectrum Registry is the registrar. The equity shares are proposed to be listed on BSE and NSE.

The Angel Broking report on Minar International IPO:

Details of the project

"Minar International proposes to set up a wider width fabric processing unit in the SIPCOT Industrial Growth Center of Erode District, Tamil Nadu. The company has acquired 22.13 acres of land under 99 years lease. Initially, the unit is expected to process and finish 60,000 mtrs per day of bleaching or dyeing of light/medium/dark shades. The unit will have a state-of-the-art processing machinery to be imported from leading European manufacturers."

"The unit will have a zero discharge effluent treatment plant, ETP and around 70% of the water requirement will be recycled thereby saving water and cost. The company will have a caustic recovery plant to recover and re-use the caustic lye solution in mercerizing. The unit will be set up with energy and process efficient machinery to reduce processing costs."

"Implementation of the processing unit will enable Minar to have its own full fledged facilities encompassing the entire chain from weaving to fabrics and packing, better control over quality, reduced lead-time and reduction in production cost thereby saving on Processing Margin. The project is to be funded through the issue proceeds. Commercial production of the new unit is expected to commence by May 2007."

Company background

Minar is engaged in the business of manufacturing and export of Home Textiles, primarily in the USA. The company's core exports include bed linens, napkins and terry towels. For five years of the quota period, the company had been the largest Merchant Exporter in Made-ups and held the largest quota in Made-ups in the US till the quota regime came to an end in December 2004."

"Currently, the company has been catering to the export market through outsourcing of processed fabrics which is converted into finished sheets at its cutting, machining and trimming unit, CMT. Presently, the company has 2 facilities for made-ups."

"In May 2006, Minar issued 15.19 lakh equity shares for consideration of cash (average price Rs 148 per share) to its major US customers viz., Sunham Home Fashions LLC, and Bristol Associates Ltd and has raised approximately Rs 22.9 crore."

Concerns

Negative operating cash flows

"Minar had a negative operating cash flow of Rs 24 crore in FY2006 accompanied with drawings of Rs 2.1 crore by erstwhile partners."

Low margins

"Minar's operating margins were close to 7% in FY2006 whereas peers like Welspun and Alok Industries enjoy margins closer to 20%. Also, the company's raw materials account for more than 85% of Sales with the industry norm being closer to 60%."

Lack of growth in topline

"Although Minar is focusing on becoming an integrated player and the upcoming processing capacities may improve its margins, no significant growth is visible in its topline in the coming year."

Exports debarred to quota-regulated destinations

"Minar has to overcome the setback of a temporary ban until 22 November, 2007 on its exports to major markets such as the US, European Union and Canada."

Poor grading by Crisil

"Crisil has graded the IPO 2 on 5 (5 indicating strong fundamentals). The grading is constrained on account of lack of adequate experience in setting up or running large textile manufacturing facilities, inexperienced second line management and a challenging business environment post removal of quotas."

Valuation

"At the price band of Rs 108 - 115, the issue is valued at 17.6x - 18.7x at the higher and lower band respectively, on FY2006 earnings of Rs 6.1 and post issue diluted equity base of 24.3 crore. This is quite expensive compared to its peers. We recommend Ignore the issue."