Textile cos fail to weave a success story

Cos Have Been Unable To Sustain Valuations Claimed During IPO, And Investors Turn Cautious

THE textile sector has dominated the primary market in terms of the number of IPOs so far in CY07. But this trend may not sustain as almost all of these are trading at a substantial discount to their offer prices. These companies have been unable to sustain valuations claimed during IPOs as investors are increasingly turning cautious on the sector’s prospects. Several reasons can be cited for investor apathy towards these scrips. First, many of these players are betting on India’s outsourcing story. Thus, growth prospects of these companies are linked to India’s performance in export market. This, at least as of now, doesn’t look as bright as it was thought to be earlier. In 2006, India’s textile exports to USA, the largest export destination, grew by just 9% compared to the 21% jump seen by China, the closest competitor. Moreover, India’s realisations per unit skidded by 4%, while those of China improved by almost 9%. With growing competition from other Asian countries including Vietnam, Indonesia and Bangladesh, realisations for the Indian exporters are expected to remain subdued in future. Adding to its woes is the fact that India lacks the size and scale of operations at the present moment. This limits the economies of scales enjoyed by the domestic exporters compared to their Chinese counterparts. Further, higher raw material prices have put a lid on profit margins. All these concerns make textile scrips less attractive. In fact, in the past one year, the ET textile index has underperformed vis-à-vis BSE Sensex. During the first three months of CY07, as many as eight textile companies made public offers. Barring Tubeknit Fashions, the remaining seven could sail through successfully. Investors showed moderate interest in these IPOs, with overall 2-3 times oversubscription but response could not be sustained. For instance, the stock of House of Pearl Fashions was listed at Rs 500, nearly 10% lower than its offer price. The readymade garments company with global presence in manufacturing, sourcing and distribution, was valued at a P/E of 20.3 times the FY07 annualised earnings, at the offer price of Rs 550. It is currently quoted at Rs 370. Thus, its P/E now stands at 13.7x. Page Industries, the exclusive licence holder of Jockey brand of innerwear, commanded a P/E of 22.6x at the offer price of Rs 360 per share. At the current level of Rs 292, its valuation has declined to 18.3x. The fate was more or less same for the other recently-listed textile companies. With inputs from Haresh Soneji

Courtesy: EconomicTimes

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