• Pradip Overseas Ltd. (POL) was originally formed as a partnership firm in the name of M/s. Vishal Textile in April 2005. Subsequently, the name of the company changed to M/s. Chetan Textiles and it was converted into a private company in June 2005. In August 2006, it converted into a public Ltd. company. In October 2007, Chetan Textiles Ltd., merged the textile division of Pradip Overseas Ltd. and its name was changed to Pradip Overseas Ltd.
• POL is into textile manufacturing with niche focus on home linen products of both, Narrow Width (up to 65” width) and Wider Width (up to 120” width). POL processes grey fabric and manufactures home textile made ups like beds-sheets, curtains, comforters, quilts (poly/cotton filled), duvet covers, pillow covers and mattress covers. In addition to its range of home linen products, POL also sells fabric for consumption in local as well as international markets.
• POL’s key markets are India, Europe, USA and Africa. Export turnover for 2008-09 accounted for approximately 47.5% of the overall turnover. Majority of POL’s exports were indirect exports (almost 93% of total exports) i.e. through agents of international retailers.
• Company’s has a manufacturing facility at Changodar near Ahmedabad in Gujarat with annual capacity of 136.50 million metres.
• The company is also setting up a Textile SEZ near Ahmedabad.
• Post issue the shareholding of the promoter & promoter’s group will reduce from existing 61.8% to 45.6%.

The Issue has been graded by ICRA and has been assigned the “IPO Grade 2/5”, indicating below average fundamentals.  The IPO grading is assigned on a five point scale from 1 to 5 with an “IPO Grade 5” indicating strong fundamentals and “IPO Grade 1” indicating poor fundamentals.

• To part finance the setting up of the proposed manufacturing facility within the proposed Textile SEZ
• To part finance the incremental margin money requirement for working capital

• Strong order book: Company’s order book as at February 15, 2010 was Rs. 3,337.8 million, comprising of export orders worth Rs. 1,015.1 million and domestic orders worth Rs. 2,322.7 million.
• Experienced management: POL’s promoters, Mr. Pradipkumar Karia and Mr. Chetan Karia, have around two decades of business experience in textiles with specific focus on the home linen business in the last fifteen years.

• Dependence on intermediaries: POL is dependent on intermediaries for sales in domestic as well as international market. Over 95% of its exports are done through intermediaries. Presence of intermediaries has led to lower operating profitability for the company.
• Exposed to Raw Material price and supply fluctuations: POL is wholly dependent on external suppliers for its raw materials requirements. Grey cloth comprises of approximately 80% of company’s total sales value, and it does not have any long-term supply agreements or commitments in relation to the same or for any other raw materials used in our manufacturing process. Consequently, the company is exposed to price and supply fluctuations in grey cloth and other raw materials.
• Absence of long term contracts with customers: POL does not have any long term sales contracts with its customers and its sales take place on the basis of purchase orders.
• Dependence on a few major customers: POL’s top ten customers contributed around 48% of turnover in FY 2008 and approximately 42% in FY 2009. Loss of one or more of its major customers would have a material adverse effect on our business, results of operations and financial condition.
• Lack of prior experience in setting up an SEZ: POL is exposed to project execution risks associated with the development of textile SEZ as it has no prior experience in any similar project.
• High Gearing: Company’s debt/equity ratio rose to 2.6 times in FY 09 from 2.2 in FY08. As of December 31, 2009, debt/equity ratio of the company was 2.5 times.

• POL’s operating income at Rs. 11,705.8 million in 2008-09 marked a growth of 78% over the previous year, on the back of capacity enhancement and higher capacity utilization. Further, company’s topline in 2008-09 includes a trading income of Rs. 2,250.9 million. For nine months period ending December 31, 2009, net sales stood at Rs. 12,168.3 million.
• During FY 09, company’s operating profit rose 38.14% (yoy) to Rs. 1,134.02 million. Due to trading revenue on which margins are low and discounts to achieve higher sales volumes, overall operating profit margin of the company fell by almost 300 bps to 9.69%. For nine months period ending December 31, 2009, operating profit stood at Rs. 1,236.9 million.
• During FY 09, NPM of the company fell by 227 bps to 3.5%. Company’s net profit rose 8.40% (yoy) to Rs. 414.6 million. For nine months period ending December 31, 2009, net profit stood at Rs. 511 million.
• During FY 09, POL’s RONW and ROCE fell to 32.7% and 23.8% respectively from 44.9% and 28.7% year earlier. For nine months period ending December 31, 2009, RONW and ROCE were 28.8% and 19.3% respectively.
• During FY 09, POL’s Interest coverage ratio fell to 2.4 times from 3.5 times a year earlier.
• During FY 09, POL’s debtor turnover ratio improved to 5.5 times from 4.5 times a year earlier. For nine months period ending December 31, 2009, debtor turnover ratio was 3.3 times.
• During FY 09, POL’s inventory turnover ratio improved to 4 times from 3.8 times a year earlier. For nine months period ending December 31, 2009, debtor turnover ratio was 2.7 times.

Post issue, the company is priced at 5.9 times on the lower price band and 6.5 times on the upper price band of its post issue annualized FY10 EPS of Rs. 16.9. Company’s peers are trading between 5.3 times and 13.3 times, their respective annualized FY10 EPS. Considering POL’s lower margins vis-à-vis its peers and its dependence on intermediaries for sales, the issue seems to be expensive.