Spentex Industries
Acquisition in Uzbekistan catapults Spentex as the India’s largest spinning enterprise
In conversation with Mr. Mukund Choudhary ,MD Spentex Industries

Mr. Mukund Choudhary

Spentex Industries recently took over Indo Rama Textiles (IRTL) and Amit Spinning Industries (ASIL) and Tashkent Toytepa Tekstil. It made the first Qualified Institutional Placement (QIP) by any Indian company after Sebi notified the fresh guidelines. To know more about the company Capital Market’s Darshan Singh Bagga spoke to Mr. Mukund Choudhary ,MD Spentex Industries Excerpts:

What is the present product mix of the company and what will it be post these acquisitions?

  • Cotton Yarn : The Company manufactures various counts i.e. in the 20-50 range of cotton at its plants and manufactures four types of cotton i.e. CH, CW, KW, KH in addition to this company has also set up 36000 spindles for value added cotton yarn as below :
  • Slub Yarn – These types of yarns are used in premium quality denim and bottom wear fabric manufacturing. There is 20% more value addition in slub yarn over normal yarn.
  • Core Spun Yarn – There are two types of core spun yarn. There is 25-30% more value addition in core spun yarn in comparison to normal yarn.
  • Soft Core Spun: This type of yarn imparts high stretch ability to fabric. These types of fabrics are used for comfort & ladies wear.
  • Hard Core Spun: This type of yarn imparts strength to fabric. Normally these fabrics are used for industrial and technical purpose.
  • Compact Yarn – This type of yarn is latest in high-end premium yarns. Fabric made out of Compact Yarn is very smooth, more durable and has no tendency for pilling on washing repeatedly. Value addition in Compact yarn is 25-30% more in comparison to normal yarn.
  • Man Made Yarn – IRTL manufactures products like Polyester Staple Fibre (PSF) & Partly Oriented Yarn (POY). Manufactures in blends, polyester / cotton, polyester / viscose, 100% polyester & 100% viscose.

Kindly give deal values of the acquisitions and means of finance?
The company has acquired 50.91% in Amit Spinning for Rs 17.66, 84.02% in Indo Ram textiles for Rs 220.44 crore, and Invested USD 12 MN equalent to Rs 58 crore in its Dutch subsidiary to acquire business of Tashkent Tekstill ltd in Uzbekistan. .The total acquisitions value of Rs 296.10 are financed by Equity raised through preferential allottment , QIB , Internal accruals and Debts etc.

Considering all acquisitions the debt equity ratio of the Company is 1.75. The major cost of debt is between 8.5% to 9.5%.

Pursuant to Hon’ble High Court, Bombay order paid up share capital of the Company reduced by an extent of 50% and paid up capital reduced from Rs. 22,22,00,090/- to 11,11,01,350/-. The Company has issued 82,74,465 equity share of Rs. 10/- each to partners of CLC Corporation and Share Capital of Company increased from Rs. 11,11,01,350/- to 19,38,46,000/-.

The company has issued 2,02,50,000 equity shares of Rs. 10/- each at premium of Rs 26.54 of each shares to Citigroup Venture Capital Venture Capital International Growth Partnership Mauritius Ltd (CVCI) and promoters of the company. The Share Capital increased from Rs. 19,38,46,001/-to 39,63,46,000/-

Pursuant to Ho’ble High Court, Delhi order, Company has issued one equity share of Rs. 10/- each in proportion to one equity share to the members of CLC Global Ltd., the Share Capital of Company increased from Rs. 39,63,46001/- to Rs. 57,45,91,910/-

Company has issued and allotted 17,50,000 equity shares to CVCI , therefore share capital of Company increased from Rs 57,45,91,910/- to Rs 59,20,91,910/-

Company has also issued 75,00,000 equity shares to Qualified Institutional Buyer (QIB) at a price of Rs. 62.13 per shares. Therefore the share capital of the company increased from Rs 59,20,91,910/- to Rs.66,70,91,910/-.

After merger of IRTL with Spentex Industries Limited, the Company has to issue 90 shares for every 100 shares of IRTL to the shares holders of IRTL i.e. 44,83,957 shares amounting of Rs.4,48,39,570/- and therefore, after merger of IRTL with SIL the share capital of SIL will increase from Rs. 66,70,91,910/- to Rs.71,19,31,480/-

The Company is under expansion mode / acquisition mode and the cost of expansions and acquisitions is being financed by Equity & Debt. As soon as the repayment of debts would be completed the EPS of the Company will go up.

Throw some light on your acquisition of Tashkent-To’yetpa Tekstil
In July 2006, Spentex Industries has acquired the business of Tashkent-To’yetpa Tekstil Limited (TTTL), a stateowned spinning company in Uzbekistan, under the privatisation programme of Government of Uzbekistan at a consideration of USD 81 million. The Government of Uzbekistan has given Spentex a number of incentives including 15% discount on raw cotton, exemption on corporate taxes, customs duty and VAT. TTTL with a combined capacity of 220,000 spindles and 236 air jet looms catapults Spentex as the India’s largest spinning enterprise with an installed capacity of over 570,000 spindles.

There is substantial rise in interest cost, while depreciation costs are also rising. But the company appears to have not been able to scale up revenues (which have actually come down), margins etc, and going by its unaudited results for the quarter ended June 2006.

Increase in interest cost is mainly attributable to investments and creating new capacities. Depreciation expenses has increased due to the fact that the Company has revised the estimated useful life of spindles acquired during the last quarter of previous year and certain other plants and machinery located at its manufacturing facilities. The EBIDTA of the Company is almost same compare to corresponding quarter of previous year. The revenue came down due to low focus on low margin trading activities. Further, on consolidated basis the EBIDTA is improving.

Kindly share with us the details of Contract manufacturing carried out for Bombay Dying and Manufacturing Company (BDMC). Do you expect scaling up of revenues on this account? Are there plans for such contract manufacturing for other reputed players?
The Solapur unit – II (BDMC) was established for the purpose of contract manufacturing for BDMC. BDMC had provided the main plant and machinery for manufacturing at the facility. Company had also procure additional machinery for supporting the main machinery supplied by BDMC. BDMC shall at its own cost make raw cotton available to the Company at its factory site for manufacturing of the finished product. As consideration for the contract manufacture, BDMC shall pay to the company, the entire conversion cost on monthly basis, which also includes the interest payable on the term loan and working capital availed by the company for the proposed project. BDMC will also pay management fee, which will inter alia, cover the loan repayment installment and profit element. It has also been agreed to share equally the productivity benefits arising out of increased productivity resulting in reduction in per unit operational cost or reduction in the operation cost keeping the same productivity.

No, the Company do not expect scaling up of revenues on this account. No other comments.

What is your outlook on cotton prices for the current year? What quality of cotton do you use for your production, what is the average price of cotton procured for the current year? How many months inventory do you hold at present?
Cotton prices have reduced in year 2005-06 compared to the year 2004-05 and we are expecting the same trend for the current year due to bumper crop in the current year. Presently we are using local cotton procured from the state where our units are located. We have also imported Supima cotton from United State to produce value added yarn. In last year we have procured cotton @ Rs.45/- per Kg on an average and we are expecting it will be same for the current year. From the month of December onwards we start procurement of cotton till the month of May for the production upto December. It means our holding period of inventory in the month of May is approximately for 7 Months and it reduced to one month in the month of November.

What are your company’s vision in terms of growth in revenues and profits (a) in FY 2006-07 and (b) over the next five years?
Our consolidated revenues and EBIDTA are expected to touch Rs 1565 crore and Rs 252 crore by FY 2007-08 from the present operation and company,s vision to reach revenue up to USD 1000 million.