AB Cotspin India coming with an IPO to raise upto Rs 10.10 crore

AB Cotspin India

• AB Cotspin India is coming out with a 100% book building; initial public offering (IPO) of 28,84,000 shares in a price band Rs 33-35 per equity share.
• The issue will open on December 30, 2021 and will close on January 3, 2022.
• The shares will be listed on NSE Emerge Platform.
• The face value of the share is Rs 10 and is priced 3.30 times of its face value on the lower side and 3.50 times on the higher side.
• Book running lead manager to the issue is Pantomath Capital Advisors.
• Compliance Officer for the issue is Kannu Sharma.

Profile of the company

The company is primarily engaged in manufacturing of cotton yarn, knitted fabric, cottonseed oil and oilcakes. The company commenced its business in 1997 with a cotton ginning plant with cotton bales and cotton seeds being its initial products. Thereafter in the year 2000, the company installed a crushing unit to extract oil from cotton and mustard seeds and expanded its product basket with the addition of cotton seed oil, mustard oil and oil cake. In the year 2011, it ventured in manufacturing cotton yarn by setting up a spinning plant. In the year 2014, the company installed a knitting machine and thus forayed into manufacturing of knitted fabric.

The company has one manufacturing facility which is located at, Jaitu (Dist Faridkot), Punjab. So far, the company has an installed 18,000 spindles for manufacturing cotton yarn, 441 mt p.a. for knitted fabric and 6,750 mt p.a. for seed oil/oilcake. Over the years, it has made investments in its manufacturing infrastructure to support its product portfolio requirements and reach. The company is supplying its products domestically. The company’s domestic revenue from operations for the Three months period ended June 30, 2021 and for the financial years ended March 31, 2021, 2020 and 2019 were 100%, 100%, 100% and 97.81% respectively of its total revenue from operations.

Proceed is being used for:

• Funding the working capital requirements of the company.
  
• General corporate purposes.

Industry Overview

The Indian textile industry is among the oldest industries in the country dating back several centuries. The industry contributes 7% to the total industry output and 2% to the GDP. It also contributes 12% to export earnings and holds 5% of the global trade in textiles and apparel. The Indian textiles industry is also the second largest contributor towards employment generation, after agriculture, contributing 10% to the country’s manufacturing, owing to its labor-intensive nature. India also enjoys a comparative advantage in terms of skilled manpower and cost of production relative to major textile producers. The Indian textile and apparel industry can be broadly divided into two segments - yarn and fiber, and processed fabrics and apparel. The industry is extremely varied, with the hand-spun and hand-woven textiles sectors at one end of the spectrum and the capital intensive sophisticated mills sector at the other end of the spectrum.

Meanwhile, cotton plays an important role in the Indian economy as the country's textiles industry is predominantly cotton based. India is one of the largest producers as well as exporters of cotton yarn. The Indian textiles industry contributes around 5% to country’s gross domestic product (GDP), 14% to industrial production and 11% to total export earnings. The industry is also the second-largest employer in the country after agriculture, providing employment to over 51 million people directly and 68 million people indirectly, including unskilled women. The textiles industry is also expected to reach $223 billion by 2021. Gujarat, Maharashtra, Telangana, Andhra Pradesh, Karnataka, Madhya Pradesh, Haryana, Rajasthan, and Punjab are the major cotton producers in India.

The future for the Indian textiles industry looks promising, buoyed by strong domestic consumption as well as export demand. With consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade. High economic growth has resulted in higher disposable income which has led to a rise in demand for products creating a huge domestic market. Rising industrial activity is expected to support the growth in per capita income. Increased penetration of organized retail is likely to drive demand for home textiles whereas growth in building and construction is expected to drive demand for non-clothing textiles.

Pros and strengths

Diversified product portfolio: The company has gradually diversified, expanded and evolved its operations from selling cotton bales and seeds to yarn, knitted fabric, seed oil and oil cakes. The company engages in manufacturing of products based on the orders of its customers to meet its customer requirements. Maintaining a variety in range of products in its business provides the company with an opportunity to cater to diverse needs of different customer segment. The company’s products undergo quality check at various levels of production to ensure that any quality defects or product errors are rectified on real time basis. It has an in-house laboratory for quality control purpose which have 5 employees as on June 30, 2021.

Location advantage: The company is located in Punjab which is considered as one of the hub for cotton textiles in India and enjoys domestic market for knitted fabric and cotton yarn. For the three months period ended June 30,2021 and for fiscal 2021, 2020 and 2019 its revenue from customers situated in Punjab was 64.72%, 70.88%, 70.68% and 7.23% of its total revenue from operations. Hence, such location boosts its marketing activities and adds value to its revenues due to established markets. Further its manufacturing unit is also strategically located in terms of access to key raw materials. Its existing manufacturing facility is located at Jaitu, Punjab which is surrounded by the narma/cotton producing belt and facilitates ease of procurement of its key raw material i.e. raw cotton and cotton.

Repeat orders: Meeting customer specific requirements and delivery of orders is one of the factor for growth. The company has made efforts to ensure customer satisfaction by taking steps for meeting customer specific requirements, timely delivery of orders to its customers as well as maintaining consistency in quality and this has yielded results in the form of repeat orders from its customers. The repeat orders reflect the confidence reposed in the company by its customers.

Risks and concerns

Maximum revenue comes from limited customers: The company’s top ten customers contributed 77.70% and 68.15% of its total revenue from operations for the three months period ended June 30, 2021 and for the year ended March 31, 2021. However, the composition and revenue generated from these clients might change as it continues to add new customers in normal course of business. Any decline in its quality standards, growing competition and any change in the demand for its products by these customers may adversely affect its ability to retain them. The company has maintained good and long term relationships with its customers, however, there can be no assurance that it will continue to have such long term relationship with them. Also any delay or default in payment by these customers may adversely affect its business, financial condition and results of operations. The company cannot assure that it shall generate the same quantum of business, or any business at all, from these customers, and loss of business from one or more of them may adversely affect its revenues and profitability.

Geographical constrain: For the three months period ended June 30,2021 and for the year ended March 31, 2021, the company’s revenue from its customers situated in Punjab and Haryana contributed to 97.96% and 94.08% of its total revenue from operations as per its Restated Financial Statements. Such geographical concentration of its business in these regions heightens its exposure to adverse developments related to competition, as well as economic and demographic changes in these regions which may adversely affect its business prospects, financial conditions and results of operations. The company may not be able to leverage its experience in such regions to expand its operations in other parts of India and overseas markets, should it decide to further expand its operations.

Huge working capital requirement: The company requires a significant amount of working capital for its operations. A significant amount of its working capital is required to finance the purchase of materials before payment is received from its customers. Further, the company also maintains inventory levels as per industry standards. Its trade receivables are generally non-interest bearing and are generally on credit terms up to 20-40 days. Its working capital requirements may increase if the payment terms in its agreements with its customers or purchase orders include reduced advance payments or longer payment schedules, or if there is delayed realisation from its customers. These factors may result in increase in the amount of its receivables and short-term borrowings. Continued increase in its working capital requirements may have a material adverse effect on its financial condition, results of operations and cash flows.

Outlook

AB Cotspin is engaged in the manufacturing of cotton yarn, knitted fabric, cottonseed oil, and oilcake products. The company manufactures products based on the orders from its clients. The company has made significant investments in its manufacturing infrastructure to support its product portfolio requirements and reach. Majority of the company's customers are from Punjab and Haryana. On the concern side, the company generates its major portion of sales from its operations in certain geographical regions especially Punjab and Haryana. Any adverse developments affecting its operations in these regions could have an adverse impact on its revenue and results of operations. Moreover, the company’s top ten customers contributed 77.70% and 68.15% of its total revenue from operations for the three months period ended June 30, 2021 and for the year ended March 31, 2021. Any loss of business from one or more of them may adversely affect its revenues and profitability.

The company is coming out with a maiden IPO of 28,84,000 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 33-35 per equity share. The aggregate size of the offer is around Rs 9.52 crore to Rs 10.10 crore based on lower and upper price band respectively. On performance front, in fiscal 2021, the company’s revenue from operations increased by 22.58% to Rs 11,536.49 lakhs for the financial year 2020-21 from Rs 9411.44 lakhs for the financial year 2019-20. The company’s profit after tax increased by 411.84% to Rs 387.82 lakh for the financial year 2020-21 from Rs 75.77 lakh for the financial year 2019-20. The company propose to set up a new manufacturing facility which shall expand its existing installed capacities for cotton yarn. It has already procured a land adjacent to its existing manufacturing facility for the proposed expansion. This shall help it cater to expand its customer base and increase its revenue from operations. Moreover, the company intends to capitalise on huge demand for Indian yarn and increase its export presence. In this direction, it shall participate in international trade exhibitions, appoint dealers at strategic locations, create local presence and explore geographies where it can begin its international operations.