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SPL Industries (SPLIL) exports almost 95% of its production of knitted apparels to the US, Europe, Canada and Japan. The major customers of the company are GAP, J.C. Penny, Haggers, Sears, Arrow, and PVH. The company also manufactures home furnishings, which include bed sheets, curtains, and pillows. These products are exported to the Middle East and the US.
Progressively, SPLIL has increased its garment capacity from 50000 pieces in 1994 to 7500000 pieces per month at present. Currently it employees around 4000 employees. The company has factories in Faridabad, Haryana.
SPLIL plans to invest Rs 70 crore to expand its fabric and garment capacity by 40% each, and add a yarn dyeing, home textile and a woven garment division. The proposed expansion will be funded through a public issue of Rs 60 crore and a term loan of Rs 10 crore. Of this, Rs 41.83 crore will be towards capital expenditure and the balance for meeting the working capital requirement.
Strengths:
- The abolition of the quota regime has opened new growth avenues for export-oriented garment companies like SPLIL.
- The customers of SPLIL have a long-term relation with the company. For instance, GAP is a customer since 1994. Moreover, the CEOs of GAP and J.C.Penny have visited the company on their tour to India.
Weakness:
- The revenues of SPLIL are highly dependent on a limited number of buyers. For example, GAP contributes nearly 35% of its revenues. The loss of business from any one of its major buyers may adversely affect the top line and bottom line of SPLIL.
- In the past, the company has not grown its sales much and the profit margin has been widely fluctuating. This is attributed to problems related to quotas.
- The cash flows from operating activities for FY 2005 are a negative Rs 14.40 crore as against a positive Rs 3.09 crore in the previous year. The company claims that the cash flows are negative due to build-up of inventory on the basis of orders on hand.
- The post-quota regime has lead to an increase in competition, and this will affect the profit margin going forward.
Valuation:
SPLIL made a net profit of Rs 11.90 crore on sales of Rs 169.54 crore in FY 2005. EPS on post- IPO equity works out to Rs 4.1.The shares are being offered in a band of Rs 60 to Rs 70 at a P/E of 14.7 to 17.1 times. Gokaldas Exports (over four times the size of SPLIL), which is also in similar business, is trading at P/E of 22 times. In spite of competition from China, strong Indian players will have enough room to grow and SPLIL does have that potential.
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