United Cotfab coming with IPO to raise Rs 36.29 crore

United Cotfab

• United Cotfab is coming out with an initial public offering (IPO) of 51,84,000 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 70 per equity share. 
• The issue will open for subscription on June 13, 2024 and will close on June 19, 2024.
• The shares will be listed on BSE SME Platform.
• The share is priced at 7.00 times higher to its face value of Rs 10.
• Book running lead manager to the issue is Beeline Capital Advisors.
• Compliance Officer for the issue is Muskan Kashyap.

Profile of the company

United Cotfab is engaged in the manufacturing of high quality open end yarn catering to the textile industry. Its manufacturing process adheres to stringent quality standards and is backed by advanced technology and machinery. It follows a systematic approach that includes raw material selection, blending (if required), spinning, winding, and quality control. Its Manufacturing facility is equipped with modern and automatic plant and machinery. The level of advancement determines the productivity of machines and labor, which in turn, determines the production and profitability of the Company. Its technical team in spinning is well equipped with modern spinning technology and processing techniques by virtue of which it is able to ensure quality yarn. Technology is a crucial aspect of the cotton yarn industry. Its experienced team of technicians and operators ensure that every batch of open end yarn produced meets the highest quality parameters. 

It has implemented a comprehensive quality management system that covers every stage of production. It conducts rigorous testing and inspection of raw materials, intermediate products and final yarns to ensure they meet the specified standards. It is committed to sustainable manufacturing practices and environmental responsibility. Its processes are designed to minimize waste, conserve energy and reduce the environmental impact. It has built strong relationship with a diverse range of clients, including textile manufacturers, garment exporters and distributors. Its emphasis on quality, reliability and timely delivery has helped it establish long term partnerships with its customers.

During FY 2022-23, the company was engaged in the business of trading of cotton yarn. In April 2023, the company commenced the manufacturing of open ended cotton yarn. Cotton yarn is a type of yarn that is made from cotton fibres. Cotton yarn comes in various thicknesses, known as yarn weights, which determine its suitability for different products. Common yarn weights include lace, fingering, sport, worsted, and bulky, each with its own characteristics and recommended uses. It is widely used in the textile industry for various applications, including knitting, weaving, and crocheting. Cotton yarn is known for its softness, breathability, and versatility, making it a popular choice for clothing, home textiles, and other fabric-based products.

Proceed is being used for:

• Meeting working capital requirements 
• General corporate purposes

Industry overview

India is the world’s second-largest producer of textiles and garments. It is also the sixth-largest exporter of textiles spanning apparel, home and technical products. India has a 4.6% share of the global trade in textiles and apparel. India is the world's 3rd largest exporter of Textiles and Apparel. The textiles and apparel industry contributes 2.3% to the country’s GDP, 13% to industrial production and 12% to exports. The textile industry has around 45 million workers employed in the textiles sector, including 3.5 million handloom workers. During (April-March) 2022-23, the total exports of textiles (including handicrafts) stood at $36.68 billion. India’s textile and apparel exports (including handicrafts) stood at $44.4 billion in FY22, a 41% increase YoY. The Indian textile industry has made a mark in the world with its innovative and attractive products. Total textile exports are expected to reach $65 billion by FY26.

In order to attract private equity (PE) and employee more people, the government introduced various schemes such as the Scheme for Integrated Textile Parks (SITP), Technology Upgradation Fund Scheme (TUFS) and Mega Integrated Textile Region and Apparel (MITRA) Park scheme. Total FDI inflows in the textiles sector between April 2000-June 2023 stood at $4.31 billion. The Government is taking initiatives to attract foreign investment in the textile sector through promotional visits to countries such as Japan, Germany, Italy and France. According to the new Draft of the National Textile Policy, the Government is planning to attract foreign investment and creating employment opportunities for 35 million people. In December 2019, online clothing brand Henry & Smith raised $1 million from WEH Ventures and Rukam Capital. 

Pros and strengths

Experienced promoters: Its promoters Nirmalkumar Mangalchand Mittal and Gagan Nirmalkumar Mittal have a combined experience of more than 55 years in the field of cotton textile industry. They have proven background and rich experience in the Cotton industry. They have sound knowledge of manufacturing process, marketing, finance and all kind of other commercial activities related to the cotton textile industry.

Location advantage of manufacturing facility: The manufacturing facility of the Company is situated at Survey No. 191, Village Timba, Taluka -Dascroi, Ahmedabad in the close vicinity of the cotton rich belt of Gujarat and Maharashtra. The small staple cotton is also available in the month of February to April. All infrastructure facilities like availability of skilled labour, raw material, technology; Communication, transportation etc. are easily available due to extensive industrialization in the area.

Scalable business model: It focuses on maximum capacity utilization, developing linkages with quality raw material suppliers and achieving consequent economies of scale. This business model has proved successful for it in the first financial year itself i.e. F.Y. 2023-24. It can scales upward as per the requirement generated by the Company. The business scale generation is basically due to the increasing demand of the products, development of new markets and by maintaining the consistent quality of the product.

Risks and concerns

Dependent on few numbers of customer: In Financial Years 2020-21 and 2021-22, there were nil revenue. There was only one customer in Financial Year 2022-23. Its top ten customers contributes 79.57% and 100% of its total revenue from operations for the financial year ended March 31, 2024 and for the year ended March 31, 2023 respectively. The revenue from its group companies are constituting 53.65% for the financial year ended March 31, 2024. The company is engaged in the business of manufacturing of open ended cotton yarn. Its business operations are highly dependent on its customers and the loss of any of its customers may adversely affect its sales and consequently on its business and results of operations. The loss of one or more of these significant or key customers or a reduction in the amount of business it obtains from them could have an adverse effect on its business, results of operations, financial condition and cash flows.

High working capital requirements: Its business requires significant amount of working capital and major portion of its working capital is utilized towards debtors and inventories. Its working capital requirement for the financial year ended March 31, 2024 is Rs 1,972.64 lakh. The Net Working capital requirement for the FY 2024-25 is estimated to be Rs 4,097.46 lakh and Rs 4,777.18 lakh for FY 2025-26. Its growing scale and expansion, if any, may result in increase in the quantum of current assets. Its inability to maintain sufficient cash flow, credit facility and other sourcing of funding, in a timely manner, or at all, to meet the requirement of working capital or pay out debts, could adversely affect its financial condition and result of its operations.

Highly dependent on operations in geographical region of state of Gujarat & Maharashtra: It derives its revenue from domestic regions only. It derives a large portion of its domestic revenue from state of Gujarat & Maharashtra. State of Gujarat & Maharashtra contributes 92.90% and 1.33% of its total domestic revenue for the financial year ended on March 31, 2024. The financial situation of the company will be severely impacted if the Gujarat & Maharashtra government changes their policy regarding the textile industry. If the state's economies becomes unstable or uncertain, if the financial market conditions worsen, if there are changes made to the laws that apply to its industry, or if it are subject to any restrictive measures. Furthermore, its operations and financial situation might be negatively impacted if the final customers in these regions decide to significantly cut back on or delay their spending.

Outlook

United Cotfab is engaged in the manufacturing of high quality open end yarn catering to the textile industry. Its manufacturing process adheres to stringent quality standards and is backed by advanced technology and machinery. It follows a systematic approach that includes raw material selection, blending (if required), spinning, winding, and quality control. On the concern side, its business is dependent upon its ability to manage its operations which involves manufacturing, storage and transportation, which are subject to various operating risks, including planned shutdowns of its manufacturing facility for maintenance, statutory inspections and testing and those beyond its control, such as the breakdown or failure of equipment, industrial accidents, severe weather conditions, and natural disasters. Any significant malfunction or breakdown or occurrence of any accident involving any of its machinery, its equipment, its laboratories, its automation systems, and maintenance costs, cause delays, suspension or full or partial shutdown of its operations. If it is unable to repair or rectify it’s Manufacturing Assets in a timely manner or at all which could have an adverse effect on its business, financial condition and results of operations.

The company is coming out with an IPO of 51,84,000 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 70 per equity share to mobilize Rs 36.29 crore. On performance front, revenue from operation increased to Rs 11,529.41 lakh for the FY 23-24 from Rs 44.20 lakh for the FY 22-23. Profit for the year from Rs 13.93 lakh in the FY 2022-23 to Rs 866.65 lakh in the FY 2023-24. Meanwhile, it intends to cater to the increasing demand of its existing customers and also to increase its existing customer base by enhancing the distribution reach of its products in different parts of the country and also around the world. It proposes to increase its marketing and sales team which can focus in different regions and also maintain and establish relationship with customers. Enhancing its presence in additional regions will enable it to reach out to a larger population.