Jindal Cotex Limited

Background
Jindal Cotex Limited (JCL) offers 12,453,894 (about 12 million) Shares Face Value Rs. 10/- each, representing 49.81% of post issue equity. The present issue is being made to raise the funds for setting up a new facility for manufacturing of Cotton Yarn, Yarn Dyeing and Garments and to invest in Subsidiaries Jindal Medicot Limited and Jindal Specialty Textiles Limited. The company has not contemplated to use the proceeds to repay the bank loans.

Issue Details
Face Value INR. 10
Price INR 70-INR75 per share
Issue Size 12.5 mn Equity Shares
Issue Amount INR 871.8 mn-INR934 mn
Minimum Lot 90 shares
Minimum Amount INR.6300 – INR. 6750
Issue Opens August 27, 2009
Issue Closes September 01, 2009

Objects of the issue

1. Setting up a new facility for manufacturing of Cotton Yarn, Yarn Dyeing and Garments
2. Meeting public issue expenses
3. Investment in subsidiaries:

a) Jindal Medicot Limited;
b) Jindal Specialty Textiles Limited


Company Profile
Jindal Cotex manufactures acrylic, polyester and polyester-viscose, and polyester cotton combed and carded yarns which are used in apparels, hosiery and garments. Jindal Cotex, a flagship company of the Jindal group of Ludhiana, was incorporated in 1998 in Ludhiana, Punjab. The Jindal Group was promoted by Jagdish Rai Jindal in 1977 with trading business of iron and steel. The company is promoted by Mr. Sandeep Jindal, Mr. Yash Paul Jindal, Mr. Rajinder Jindal and Mr. Ramesh Jindal. Jindal Cotex initially set up 6,912 spindles and started manufacturing acrylic yarns in May 1999. Subsequently, it ventured into polyester yarns in 2001. In 2006, the company expanded its product range to polyester cotton blended yarns and also marked its presence in exports

The company has an installed capacity of 23,472 spindles for acrylic, cotton blended and polyester yarns with a manufacturing capacity of 7,000 TPA. Jindal Cotex successfully installed and commissioned a 1.25 MW w/m at Pithla-Satta-Gorera in Jaisalmer, Rajasthan, in FY08. The entire power generated through this wind mill will be sold to Ajmer Vidyut Vitran Nigam Limited (AVVNL), under a PPA.

Subsidiaries
Jindal Cotex has two wholly owned subsidiaries namely,

1. Jindal Medicot Limited
2. Jindal SpecialtyTextiles Limited.

Jindal Medicot Limited was incorporated in May 2008 to manufacture medical textile products like absorbent bleached cotton wool and its products and cotton crepe bandage such as stretch bandage and crepe bandage cloth.

Jindal Specialty Textiles Limited was also incorporated in May 2008 to manufacture laminated technical textile products and Banner fabrics textile products.
Jindal cotex has an installed capacity of 7,000 MT and it is currently operating at capacity utilization of 88 %, and plans to increase its capacity to 90% by FY10. Jindal cotex’s revenue breakup has undergone a change with acrylic’s share declining from 70% to 40% in the last four years. Correspondingly the balance has been taken up by knitted cloth, acrylic top and blended yarn.
Exports contributed 13% to total sales in FY09. The company’s sales increased ~36% due to better sales realization of yarn, increase in sales of acrylic yarn, and trading sales of knitted cloth and acrylic top. However the net profit of the company has remained flat due to increase in cost of goods sold and administrative expenses


Key Concerns:

1. Jindal Cotex has a high client concentration with top three customers accounting for ~60% and the top ten customers contributed ~76.3% of FY09 sales.
2. The company depends on few suppliers for its raw material requirements. About 52.1% of the company’s purchases rely on top three suppliers and top 10 suppliers contributed about 85% of FY09 sales.
3. Prices of cotton and polyester fiber have started increasing again. If this continues, we believe the company will not be able to pass on the increase in the raw material prices to its customers, given that three customers contribute ~60% to the company’s sales.
4. Foreign exchange rate fluctuations could have an impact on Jindal Cotex’s input costs, especially the cost of sodium that is imported from China.
5. Jindal Cotex has not made firm arrangements for funding of balance working capital requirement by banks.
6. There have been delays in the implementation of the company’s and its subsidiaries’ projects.
7. Any prolonged decrease in cotton prices may have a material adverse effect on the performance of the company.

Peer comparison

Valuation & Verdict
In FY09 company had an adjusted EPS of INR 3.5 but on a post issue basis EPS is INR 1.7 which translates into a P/E of 40.3 at the lower band(INR 70) and 43.2 at the higher band(INR75). Majority of the issue proceeds will be used for its subsidiaries which are foraying into “functional textiles”, a very nascent industry. Compared to its peers, like Ambika Cotton and Himachal Fibres the issue appears expensive.
Hence we recommend “Avoid” to the issue

Investment Advisor, SP Tulsian said one should remain away from the issue. "One must admire the courage of the promoters to come out with an IPO in the band of Rs 70 to Rs 75, against the book value per share of Rs 23.10, as on 30-06-09 and at a PE multiple of 21.68 times, at the upper end of the price band. There are over 10 similar companies available at PBV of 0.50 times and at a PE of close to 5 times", he said.

"Such companies come out with IPO mainly to play in stock market, as it is obvious that no sane investor would be willing to subscribe to it, when so many lucrative ideas are available in the secondary market. A clear advice to the public – remain away from the issue and don’t be part of this weak and unviable project", Tulsian added.