Sanathan Textile IPO review (Apply)

•    The company is engaged in three verticals of yarn, i.e. polyester yarn, cotton yarn and yarns for technical textiles.
•    It marked inconsistency in its top and bottom lines for the reported periods. 
•    Degrowth for FY24 is attributed to general sluggish trends for the industry as a whole.
•    Based on FY25 annualized earnings, the issue appears fully priced. 
•    Investors may park funds for long term, considering rising fancy for textile segment.

PREFACE:
Despite humble urge from the regulator for non-clubbing/bunching of more than 2 IPOs a day for opening for subscription, we are set to mark bunching of five mainboard IPOs that are opening on December 19, 2024, and here again very short time was spared for analysts to understand the pros and cons for the IPOs. Well, this is the first IPO from the set of 5 IPOs that are scheduled to mark opening on December 19, 2024, others to follow are TransRail Lighting, DAM Capital, Sanathan Textiles, Concord Enviro. We have one more set of 3 mainboard IPOs lined up for opening on December 20, 2024, and they are Ventive Hospitality, Senores Pharma, and Carraro India. No doubt, this provided an ample choice of selection for investment, it also makes it difficult to manage funding. Let us hope that the regulator is definably turns strict on this matter and brings some amicable solution.

ABOUT COMPANY:
Sanathan Textiles Ltd. (STL) is one of the few companies (amongst peer group) in India with presence across the polyester, cotton and technical textile (which find application in multiple end-use segments including automotive, healthcare, construction, sports and outdoor, and protective clothing) sectors and based on its operating income, it had a market share of 1.7% in the overall Indian textile yarn industry as of Fiscal 2024. (Source: CRISIL Report).

Currently, all the three yarn verticals are housed under a single corporate entity. This has facilitated its diversification into new segments which in turn has helped in serving a large number of customers across various sectors. As of September 30, 2024, it has more than 3,200 active varieties of yarn products (i.e. yarn products manufactured by it during the period April 1, 2021 to September 30, 2024) and more than 45,000 stock keeping units (SKUs), and capability to manufacture a diversified product portfolio of more than 14,000 varieties of yarn products and more than 190,000 SKUs that are used in various forms and for varied end uses. STL also has a high share of value-added products such as dope dyed, superfine / micro, functional, industrial and technical yarn, cationic dyeable and specialty yarn which are produced after extensive in-house research. These value added products are tailor-made to customer requirements and have properties and characteristics which are distinctive from other products.

Its business is divided into three separate yarn business verticals, consisting of: (a) Polyester yarn products; (b) Cotton yarn products; and (c) Yarns for technical textiles and industrial uses. The company’s products are manufactured at its facility at Silvassa. Over the years, the Company has scaled up its production and as on June 30, 2024, its facility at Silvassa had a total installed capacity of 223,750 MTPA across the three yarn verticals. While it manufactures products across all verticals, polyester yarn products continue to be its largest item of production. The company manufactures polyester chips using purified terephthalic acid (PTA) and mono ethylene glycol (MEG) and convert the chips into polyester yarn through various intermediate processing to impart specific properties to the yarn. During June 30, 2024, Fiscal 2024 and Fiscal 2023, it catered to 983, 1,571 and 1,684 customers, respectively. As of September 30, 2024, it had 1394 employees on its payroll, and an additional 2964 contract workers in various departments.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route combo IPO of equity shares worth Rs. 550.00 cr. (approx. 17133956 shares at the upper cap). The company has announced a price band of Rs. 305 – Rs. 321 per equity shares of Rs. 10 each. The IPO consists of fresh equity issue worth Rs. 400 cr. (approx. 12461059 shares at the upper cap), and an Offer for Sale (OFS) of Rs. 150 cr. (approx. 4672897 shares at the upper cap). The issue opens for subscription on December 19, 2024, and will close on December 23, 2024. The minimum application to be made is for 46 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 20.30% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity issue, it will utilize Rs. 160.00 cr. for repayment/prepayment of certain borrowings, Rs. 140.00 cr. for investment in subsidiary i.e. Sanathan Polycot Pvt. Ltd., and the rest for general corporate purposes.

The joint Book Running Lead Managers (BRLMs) to this issue are DAM Capital Advisors Ltd., and ICICI Securities Ltd., while KFin Technologies Ltd., is the registrar to the issue. Sharekhan Ltd., is the syndicate members.

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 50 – Rs. 200 (based on Rs. 10 FV) between June 2006, and March 2012. It has also issued bonus shares in the ratio of 1 for 2 in July 2007, 5 for 1 in March 2019. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NIL, Rs. 3.04, Rs. 3.40, Rs. 3.51, and Rs. 4.05 per share. 

Post-IPO, its current paid-up equity capital of Rs. 71.94 cr. will stand enhanced to Rs. 84.40 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 2709.37 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 3201.46 cr. / Rs. 355.44 cr. (FY22), Rs. 3345.02 cr. / Rs. 152.74 cr. (FY23), and Rs. 2979.80 cr. / Rs. 133.85 cr. (FY24). For Q1 of FY25 ended on June 30 2024, it earned a net profit of Rs. 50.07 cr. on a total income of Rs. 787.76 cr. 

For the last three fiscals, the company has posted an average EPS of Rs. 24.61 and an average RoNW of 15.68 %. The issue is priced at a P/BV of 1.74 based on its NAV of Rs. 184.16 as of June 30, 2024, and at a P/BV of 1.57 based on its post-IPO NAV of Rs. 204.26 per share (at the upper cap).

If we attribute FY25 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 13.53, and based on FY24 earnings, the P/E stands at 20.24. The issue appears fully priced on the basis of its recent earnings. 

According to the management, considering GDP growth projections, government’s spending under PLI for textile segment, the Indian economy is poised for speedy growth and so is the case with the company. 
 
For the reported periods, the company has posted RoCE margins of 35.83% (FY22), 15.54% (FY23), 11.80% (FY24), 14.04% (Q1-FY25), and PAT Margins of 11.16%, 4.59%, 4.53%, 6.41%, respectively for the referred periods.  

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It has adopted a dividend policy in November 2021, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown KPR Mills, Vardhman Textiles, Indo Count Ind., Filatex India, and Garware Technical, as their listed peers. They are trading at a P/E of 47.7, 19.8, 25.1, 25.6, and 40.8 (as of December 18, 2024). However, they are not truly comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
The two BRLM associated with the offer have handled 64 pubic issues in the past three fiscals, out of which 20 issues closed below the offer price on the listing date.