Bombay Rayon IPO. Go for it or Not?

Here's an article from Business Line on the Bombay Rayon IPO issue:

INVESTORS with an appetite for risk can consider subscribing to the initial public offer of Bombay Rayon. Those who meet their targeted returns upon listing would be better off taking profit. The outlook is positive from a medium-term perspective. The higher end of the price band values the stock at about 18 times its annualised FY-06 earnings per share, on an expanded equity base. With new capacities to be commissioned by March 2006, the ramp up in revenues and earnings is likely to be significant in 2007. Though the stock looks attractive from a one/two-year perspective, the returns are likely to be moderate.

Bombay Rayon started operations as a fabric manufacturer and is a mid-sized player in the textile industry. It forayed into garments only in 2003 and is, therefore, relatively new to this business. But it has now charted out an ambitious plan to integrate its operations, from yarn-dyeing to processing and garment-making, to be set up under one roof at an apparel park near Bangalore. Its garment-making capacity, post-expansion, would be 60,000 pieces per day, which is a ten-fold jump from its current capacity.

This provides scope for a significant boost to revenues in the immediate term, on the back of strong demand in the export market. Bombay Rayon has grown at a healthy pace in the past. Between FY-01 and FY-04, revenues and profits grew at a compound annual rate of about 50 per cent.

It recently restructured its group, bringing three other companies into its fold. The FY-05 financials include the numbers for these companies and are, hence, not comparable with that of the previous year.

But, going by the first quarter performance, the company appears poised for another year of strong earnings growth.

With large capacities kicking in, the revenue growth is likely to be strong in FY-07 as well. Profits too, should register a good growth, though it may be tempered by depreciation and interest costs.

Margins have improved, post the corporate restructuring, and could head up a little more in the near term, as the benefits of integration flow on and higher realisations on the back of a growing contribution from value-added segments such as home textiles.

The move towards integration bodes well for the company. Over the long term, however, its rapid foray into new lines of businesses, such as manufacture of women's and children wear and home textiles, could throw up challenges.

Bombay Rayon runs the risk of spreading itself too thin, rather than developing expertise in any single segment. The company maintains flexibility in its operations, willing to switch from cotton fabrics to synthetics to blends, depending on demand.

Bombay Rayon would have to be able to sustain this on a larger scale. A wide product range, at the same time, help reduce the seasonality in earnings, which is characteristic of most textile companies that focus only on a particular segment.

Offer details: Of the 1.35 lakh shares on offer, 1.28 lakh is open to the public. The price band is Rs 60-70 and the post-offer equity base is Rs 48.97 crore.

The promoter's stake, post-listing, would be 55 per cent. The lead managers are UTI Bank and Anand Rathi Securities. The offer closes on November 17.

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