Shekhawati Poly-Yarn. IPO NOTE 24 December, 2010 SECTOR: TEXTILES AVOID. Investment Rationale. Investment Concerns. Valuation

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1 IPO NOTE 24 December, 2010 Shekhawati Poly-Yarn SECTOR: TEXTILES AVOID Issue Snapshot Issue Open: 27-Dec-10 Issue Close: 29-Dec-10 Fixed Price (INR) 30 Issue Size (INR Mn) 360 Market Cap (INR Mn) 660 Issue Size (No. of Shares) 12,000,000 QIB: 6,000,000 Non-Institutional: 1,800,000 Retail: 4,200,000 Face Value (INR): 10 Book Value as of FY10 (INR): 20.7 Capital Structure: Pre Issue Equity (INR Mn) 100 Post Issue Equity (INR Mn) 220 Shareholding Pattern Pre Issue (%) Post issue (%) Promoter & Promoter Groups 100% 45% Public 0% 55% Total 100% 100% Total Shares 10,002,181 22,002,181 Shekhawati Poly-Yarn Limited (SPYL) is engaged in the business of manufacturing of Texturised and Twisted yarn. The company currently operates through its 3 manufacturing units located at Dadra & Nagar Haveli with a total capacity of 28,000 MTPA. Investment Rationale SPYL is expanding its installed capacity to 33,940 MTPA at an estimated cost of INR 172.5mn. These facilities are expected to come online in phases by Q1FY12. The company proposes to enter into Knitting segment by installing 30 imported machines at an estimated cost of INR 70mn. SPYL s plants are in close proximity with the raw material source, thus reducing freight costs and consumption centres. Investment Concerns Presence of large vertically integrated and diversified companies in the domestic market pose a tough competition to SPYL. Objects of the Issue Sr. No. Particulars INR Mn. 1 Factory Building Shed 70 2 Corporate Office 33 3 Plant & Machinery Electrical Installations & Misc. Fixed Assets 39 5 IPO Expenses 30 6 Margin for Working capital 55 Total 360 Website: Increase in Raw material prices in is likely to bring the profit margins of the company under pressure. Valuation At the offer price of INR 30, the stock is available at a P/E and P/BV multiple of 29.9x and 1.2x based on its FY10 EPS of INR 1.0 and post issue BVPS of INR The offer price is quite steep based on current peer group valuations. We recommend Avoid to the issue.

2 Investment Rationale Expanding Facility SPYL currently has a capacity of 600 MTPA in Twisted Yarn with MTPA capacity in Texturised yarn. The company intends to increase its total capacity to MTPA at a capital outlay of INR 172.5mn. The expansion is expected to come online by Q1FY12. Division Existing Proposed Addition Final Capacity (MTPA) (MTPA) (MTPA) Twisting 600 3,960 4,560 Knitting Nil 1,980 1,980 Texturising 27,400 Nil 27,400 Foray in Knitting Segment SPYL is proposing to foray in the knitting segment. For this purpose, the company is proposing to install 30 imported machines to the tune of INR 70mn. Setting up of knitted segment will result in additional capacity of 1,980 MTPA to the company. Location Advantages The company s plants are located at village Dadra, Dadra Nagar & Haveli. Silvassa is about 180 kms. from Mumbai and 17 kms. from Vapi, the nearest railway station. Existing & Proposed Capacity Company Background SPYL incorporated in 1990, started with an initial capacity of 600 TPA. Presently it is engaged in manufacturing of Texturised and Twisted Yarn having an installed capacity of 28,000 MTPA. Existing Products Class of Goods Unit H1FY11 FY10 FY09 Texturised Yarn Mt Twisted Yarn Mt Capacity Utilization Unit FY08 FY09 FY10 Texturising Twisting Exports Existing Installed MT % Utilised 32% 72% 76% New Installed MT % Utilised Existing Installed Meter % Utilised 91% 86% 91% SPYL has been exporting its products since FY09. As on H1FY11, SPYL had exported products worth INR 47mn. Most of the raw materials are purchased from depots at Silvassa, Daman and neighboring cities. Due to proximity of the new unit, the Company does not envisage any problem in transportation of Twisted Yarn and knitted fabric form marketing. Pan-India Dealer Network SPYL has an established client base and markets its products through various dealers and distributors in Mumbai, Bhiwandi, Surat, Ludhiana, Secunderabad, Meerut, Panipat, Delhi, Bhilwara, Erode, Salem, Coimbatore, Ichalkaranji, Malegaon and Calcutta. Financial Highlights Sales grew from INR 325mn in FY08 to INR 894mn in FY10. EBITDA saw a jump of 200% from INR 28mn in FY08 to INR 83mn in FY10. PAT increased to INR 22mn in FY10 from INR 6mn in FY08.

3 Industry Overview The Indian Textiles Industry currently contributes about 14% to industrial production, 4% to the GDP, and 17% to the country's export earnings. The major sub-sectors that comprise the textiles sector include the organized Cotton/Man-Made Fibre Textiles Mill Industry, the Man-made Fibre/Filament Yarn Industry, the Wool and Woollen Textiles Industry, the Sericulture and Silk Textiles Industry, Handlooms, Handicrafts, the Jute and Jute Textiles Industry, and Textiles Exports. Man-made fibers industry in The revival in demand for apparels led to a pick-up of the entire value chain of the textiles industry in Healthy demand for fabric from the apparel manufactures led to a recovery in demand for man-made fibres and yarn. During April 2009-February 2010, production of most of the man-made fibres grew briskly. Apart from the apparels industry, demand for man-made fibres from the home textiles industry is also expected to be strong. Promoter Background Mr. Ramniranjan Ruia, aged 62 years, is the Non- Executive Chairman of the Company. He is one of the founders of Shekhawati Poly- Yarn Limited. He has around 40 years of vast experience in manufacturing and trading business. Mr. Mukesh Ruia, aged 38 years, is the Managing Director of the Company. Valuation & Recommendation At the offer price of INR 30, the stock is available at a P/E and P/BV multiple of 29.9x and 1.2x based on its FY10 EPS of INR 1.0 and post issue BVPS of INR On peer comparison, over different valuation parameters, the issue is very expensive. We recommend Avoid to the issue. Early results of the man-made fibres industry for the March 2010 quarter show a robust sales growth of 32.6%, mainly driven by higher realisations. Prices of most man-made fibres peaked during the quarter and some tested new highs due to high raw material prices viz. Partially Oriented Yarn (POY). High Raw material Prices to Squeeze Margins As per the CMIE report, in , sales of the industry is expected to grow by a brisk 14.9%, driven by higher volumes and realisations. The healthy demand will boost volumes. Raw material prices are expected to surge in Although, good demand will enable manufacturers to hike prices, they may not be able to pass-on the entire rise in input costs to consumers. Hence profit margins are likely to come under pressure.

4 Financials Income Statement (INR Mn) FY08 FY09 FY10 H1FY11 Income from Operations Less: Excise Duty Operating Expenditure Other Income Increase/(decrease) in stock EBIDTA EBIDTA Margin 8% 8% 9% 10% Depreciation Profit before Interest & Tax Financial Charges Profit Before Tax Tax Expenses PAT PAT Margin 2% 2% 2% 3% Balance Sheet (INR Mn) FY08 FY09 FY10 H1FY11 Share Capital Reserves & Surplus Share Application Net Worth Borrowed Funds Deferred Tax Liability Current Liabilities Total Liabilities Net Block Capital WIP Total Fixed Assets Investment Current Assets Total Assets Cash Flow Statement (INR Mn) FY08 FY09 FY10 H1FY11 From Operating Activities From Investing Activities From Financing Activities Net Cash Flow Opening Cash Closing cash Ratios FY08 FY09 FY10 Debt to Equity (x) ROCE (%) 5.7% 10.6% 9.2% Cash EPS (INR) BV/Share (INR) P/BV at 30 (x) RoNW (%) 6.0% 9.4% 10.7% EPS (INR) P/E at 30 (x) EBIDTA Margin (%) 8% 8% 9% PAT Margin (%) 2% 2% 2% *Pre Issue Figures Peer Comparison Company CMP (INR) M-Cap (INR Mn) M-Cap/Sales (x) Sales (INR Mn) EPS (INR) P/E (x) BVPS (INR) P/BV (x) SPYL Filatex India Century Enka Bombay Rayon Fashions Alok Industries Sangam (India) Sumeet Industries *EPS and BVPS are calculated using post issue shares

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