BUSINESS
Steady growth over past few quarters, utilisation levels as high as 90% will see them raising funds for capacity expansion, says Crisil report.
Better times are here in the textile industry, according to a Crisil report. Steady growth in the past few quarters coupled with high utilisation levels will have players in the cotton yarn spinning segment looking to expand capacity in 2011-12.
What is different this time is that companies are looking to raise funds via equity, rather than debt, as done in the past.
Gurpreet Chhatwal, director, bank loan ratings, Crisil, pointed out that during 2005-2009, the industry saw major capacity expansion, which was largely debt funded, thanks to the government’s Technology Upgradation Fund scheme, which offered spinning companies an interest subsidy of up to 4%.
“The gearing ratio was as high as 3.1 times in 2008,” said Chhatwal. He added that this ratio has been gradually improving — at present, it is 2.7 times, and by March 2011, it is expected to reach about 2.5 times.
Chhatwal said that with utilisation levels as high as 90%, it is expected the mills will go for capacity expansions. In such a scenario, a prudent debt-to-equity ratio for funding is expected to be the key, according to Crisil.
Major players in the spinning space agree the coming times would see equity-dominant funding, with minimal debt.
Harish Cherukiri, managing director, Priyadarshini Spinning Mills Ltd, said most the companies are well leveraged and equity would be the most sought-out mode to fund expansions.
“As an industry, I think the bigger players are sufficiently cash-rich to fund their expansion plans through internal accruals. Those looking at larger expansions might tap the market and then fund the remaining part through equity. Market sentiment is good for textile companies, but is not yet the right time to tap the market in terms of fund raising. We might see players tapping the market in the next financial year,” he told DNA.
Priyadarshini Spinning plans to invest Rs25-40 crore in the next three months for modernisation of the existing plant and as working capital and for its power project.
Going forward, it plans to set up a new spinning mill project with a capacity of 30,000-35,000 spindles. This facility would entail an investment of Rs90 crore in the next two years.
Suryalakshmi Cotton Mills too has readied expansion plans.
The company plans expansion in around three phases. Funds for the first phase would entail an investment of around Rs120 crore, which has already been tied-up.
The second and third phases would see investments of around Rs70 crore each. Funding for the second phase would be completed in the next financial year.
“We are looking at raising equity and funding the project through internal accruals and minimum debt funding. We would target a debt-equity ratio of around 1:1 for the new project,” said Paritosh Agarwal, managing director, Suryalakshmi Cotton Mills.
Meanwhile expectations are high on the re-introduction of the TUF scheme, leading to cheaper debt. Shishir Jaipuria, managing director, Ginni Filaments and chairman of Confederation of Indian Textile Industry (Citi) is positive the TUF scheme would be reintroduced soon and hence, debt-based funding would make more sense for players.
“What would be crucial for one’s financial risk profile is at what cost the equity or debt is being raised. With the TUF scheme, your cost of debt is really low, as a 5% interest subsidy becomes an advantage which makes 10% interest rate available at 5% interest net, against a required 14-15% as return on equity,” said Jaipuria. “Debt would be a problem only if the TUF scheme is not reintroduced, which seems unlikely.”
Crisil’s Chhatwal says a lot of the expected capacity expansion will depend on the TUF scheme.
“It is not clear on how the dispensation will be affected in future. If it is not favourable, then capacity expansion in this space might remain muted,” he told DNA. “My take is that some players would fund it through equity, but a majority of them will go for debt if the TUF scheme dispensation is favourable.”
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