01. Brief Overview of the IPO
Sanathan Textiles Ltd. is offering its equity shares to the public through an Initial Public Offering (IPO). This IPO will help the company raise funds for its expansion, repayment of debt, and general corporate purposes. The offer will consist of a combination of a fresh issue of shares and an offer for sale by existing shareholders. Sanathan Textiles specializes in polyester, cotton, and technical textile products, and the IPO is aimed at providing the company with additional capital to expand its business and increase its visibility in the market.
Key Highlights of the IPO
| Attribute | Details |
|---|---|
| IPO Date | December 19, 2024 to December 23, 2024 |
| Listing Date | December 27, 2024 (Expected listing date post IPO allotment) |
| Face Value | ₹10 per share |
| Price Band | ₹305 to ₹321 per share |
| Lot Size | 46 Shares |
| Total Issue Size | 1,71,33,958 shares aggregating up to ₹550.00 crore |
| Fresh Issue | 1,24,61,060 shares aggregating up to ₹400.00 crore |
| Offer for Sale | 46,72,898 shares aggregating up to ₹150.00 crore |
| Issue Type | Book Built Issue IPO |
| Listing At | BSE, NSE |
IPO Timeline (Tentative Schedule)
| Event | Date |
|---|---|
| IPO Open Date | Thursday, December 19, 2024 |
| IPO Close Date | Monday, December 23, 2024 |
| Basis of Allotment | Tuesday, December 24, 2024 |
| Initiation of Refunds | Thursday, December 26, 2024 |
| Credit of Shares to Demat | Thursday, December 26, 2024 |
| Listing Date | Friday, December 27, 2024 |
| Cut-off Time for UPI Mandate Confirmation | 5:00 PM on December 23, 2024 |
Sanathan Textiles IPO Reservation Details
| Investor Category | Shares Offered | Maximum Allottees |
|---|---|---|
| Anchor Investor Portion | 51,40,186 shares (30% of total shares) | NA |
| Qualified Institutional Buyers (QIBs) | 34,26,791 shares (20% of total shares) | NA |
| Non-Institutional Investors (NII) | 25,70,093 shares (15% of total shares) | NA |
| bNII (Bigger HNI > ₹10L) | 17,13,396 shares (10% of total shares) | 2,660 |
| sNII (Smaller HNI ≤ ₹10L) | 8,56,698 shares (5% of total shares) | 1,330 |
| Retail Investors | 59,96,885 shares (35% of total shares) | 1,30,367 |
| Total Shares Offered | 1,71,33,956 shares (100% of total shares) | – |
Sanathan Textiles IPO Anchor Investor Details
| Attribute | Details |
|---|---|
| Bid Date | December 18, 2024 |
| Shares Offered | 51,40,186 shares |
| Anchor Portion Size | ₹165.00 crore |
| Anchor Lock-in Period | 50% lock-in for 30 days (end date: January 23, 2025) Remaining 50% lock-in for 90 days (end date: March 24, 2025) |
Sanathan Textiles IPO Lot Size
| Application | Lots | Shares | Amount (₹) |
|---|---|---|---|
| Retail (Min) | 1 | 46 | ₹14,766 |
| Retail (Max) | 13 | 598 | ₹1,91,958 |
| S-HNI (Min) | 14 | 644 | ₹2,06,724 |
| S-HNI (Max) | 67 | 3,082 | ₹9,89,322 |
| B-HNI (Min) | 68 | 3,128 | ₹10,04,088 |
Sanathan Textiles IPO Promoter Holding
| Shareholder | Pre-Issue Holding | Post-Issue Holding |
|---|---|---|
| Nimbus Trust | 14.56% | [●]% |
| D&G Family Trust | 14.56% | [●]% |
| A&J Family Trust | 14.56% | [●]% |
| P&B Family Trust | 14.56% | [●]% |
| Paresh Vrajlal Dattani | 9.75% | [●]% |
| Ajay Vallabhdas Dattani | 10.19% | [●]% |
| Anilkumar Vrajdas Dattani | 9.48% | [●]% |
| Dinesh Vrajdas Dattani | 9.89% | [●]% |
| Total (Pre-Issue) | 100% | [●]% |
02. Business Description
Sanathan Textiles Ltd. is a leading player in the Indian textile industry, specializing in the manufacturing and supply of polyester, cotton, and technical textile products. The company operates across a wide range of textile segments, providing diverse solutions that cater to both domestic and international markets. Sanathan Textiles has built a strong reputation for offering high-quality yarn products that include:
- Polyester Yarn: Used for various applications such as apparel, home textiles, and industrial uses. The company produces a wide range of polyester yarns including functional yarns, dope dyed yarns, and specialty yarns.
- Cotton Yarn: Produced from premium cotton, this yarn is used in the fabric production for garments, home textiles, and other consumer products.
- Technical Textiles: These are high-performance textiles used in a wide range of industrial applications, including geotextiles, medical textiles, mobiltech (for the automotive industry), and sportswear.
Sanathan Textiles serves a broad customer base in sectors such as fashion, construction, healthcare, and automotive, among others. The company’s production facilities in Silvassa and the upcoming Punjab manufacturing facility enable it to meet the growing demand for these versatile yarn products, ensuring high-quality production with an emphasis on sustainability and innovation.
The company is committed to delivering superior products by using state-of-the-art technology and modern manufacturing processes. It has a robust supply chain and logistics network that ensures timely delivery to customers across the globe.
History and Milestones
| Year | Milestone |
|---|---|
| 2005 | Sanathan Textiles was incorporated in Kolkata, West Bengal, under the name Sanathan Textiles Private Limited. |
| 2010 | The company established its first manufacturing facility in Silvassa, Dadra & Nagar Haveli, which enabled it to scale its polyester yarn production significantly. |
| 2014 | Sanathan Textiles expanded its product portfolio to include cotton yarn and technical textiles, capitalizing on emerging market trends in high-performance fabrics. |
| 2021 | The company restructured its business and became a public limited company, transitioning to Sanathan Textiles Ltd. This transition marked the beginning of its plans to go public with an IPO. |
| 2024 (Present) | The company has a strong domestic and international presence, with a plan to expand its manufacturing capacity through the new Punjab manufacturing facility. Sanathan Textiles is now preparing for its IPO to raise funds for further expansion and debt repayment. |
Management and Governance
Sanathan Textiles is led by a team of seasoned professionals with extensive experience in the textile industry. The company’s leadership is committed to maintaining high corporate governance standards and ensuring sustainable growth. Below is an overview of the key management and governance structure:
| Name | Position | Overview |
|---|---|---|
| Paresh Vrajlal Dattani | Chairman and Managing Director | With over two decades of experience in the textile industry, he has a deep understanding of textile manufacturing, supply chain management, and business strategy. |
| Ajay Vallabhdas Dattani | Executive Director | Oversees operations and plays a crucial role in expanding the company’s footprint in both domestic and international markets. |
| Anilkumar Vrajdas Dattani | Executive Director | Responsible for overseeing production and quality control, ensuring high-quality products. |
| Dinesh Vrajdas Dattani | Executive Director | Focuses on strategic business development and financial management, guiding financial strategy. |
| Sanjay Anirudh Shah | Chief Financial Officer (CFO) | Has significant experience in financial management, responsible for managing finances and capital allocation. |
| Dsouza Jude Patrick | Company Secretary and Compliance Officer | Ensures adherence to regulatory requirements and corporate governance practices. |
Corporate Governance Practices
Sanathan Textiles follows a comprehensive corporate governance framework to ensure that it adheres to legal requirements and ethical standards. The company is committed to:
- Transparency and Accountability: Regularly discloses financial results, operational performance, and other critical information to stakeholders.
- Internal Controls: A well-established system of internal controls ensures that financial statements are accurate and comply with regulatory standards.
- Ethical Business Practices: Conducts operations in a responsible and ethical manner, focusing on long-term value creation.
- Board Committees: Established various committees including Audit, Nomination and Remuneration, and Stakeholders’ Relationship Committees to oversee critical areas of business.
03. Industry Landscape
The Indian textile industry is one of the oldest and most established sectors of the economy, contributing significantly to the country’s GDP, employment, and export revenues. It is the second-largest employer after agriculture, providing direct and indirect employment to over 45 million people across the country. The textile sector in India is highly diversified, consisting of both traditional and non-traditional segments, including fabrics, yarn, apparel, and technical textiles.
Sanathan Textiles Ltd. primarily operates in the yarn manufacturing segment, which is a crucial part of the textile value chain. The company is positioned in a dynamic and evolving market, benefiting from India’s strong textile manufacturing base, increasing domestic consumption, and the global demand for high-quality textile products.
India is one of the largest producers of textiles globally, and it also stands as the world’s largest exporter of cotton textiles. The sector’s growth is driven by a combination of technological advancements, increasing consumer demand for sustainable and high-performance fabrics, and growing export potential. The Indian textile and apparel industry is estimated to reach a value of ₹12,500-12,700 billion by 2028, growing at a CAGR of 6.0-7.0% between 2024 and 2028.
Market Trends and Growth Drivers
Several key factors are driving the growth of the textile industry, particularly in the yarn and technical textiles sectors:
- Technological Advancements: The adoption of advanced technologies such as automation, artificial intelligence (AI), and the Internet of Things (IoT) in textile manufacturing processes is improving efficiency, reducing waste, and enhancing product quality. Innovations in sustainable textiles and smart fabrics are reshaping the industry, with growing demand for textiles that are eco-friendly and high-performance.
- Changing Consumer Preferences: There is a noticeable shift in consumer preferences towards sustainable and eco-friendly products. With increased awareness of environmental issues, consumers are favoring textiles that use less water, energy, and chemicals during production. This is driving demand for recycled polyester and organic cotton yarns, providing companies like Sanathan Textiles with an opportunity to cater to this growing segment.
- Government Initiatives: The Indian government has introduced several initiatives, such as the Production Linked Incentive (PLI) Scheme and the PM-MITRA (Mega Integrated Textile Region and Apparel) scheme, aimed at boosting the domestic textile manufacturing sector. These initiatives promote technological upgradation, increased exports, and overall sector growth.
- Exports and Global Demand: India’s textile exports are growing at a healthy pace, driven by increasing demand from markets such as the U.S., Europe, and China. The global demand for high-quality yarn, apparel, and technical textiles is expanding, and India’s strong position as a manufacturing hub gives Indian textile manufacturers a competitive edge in the global market.
- Rising Industrial and Technical Textiles: The segment of technical textiles is gaining significant traction, driven by their use in a wide array of industries including automotive, healthcare, construction, and agriculture. As a result, demand for polyester yarns and other high-performance fabrics is on the rise. Sanathan Textiles is strategically positioned to tap into this growing market.
Competitive Analysis
The textile industry in India is characterized by intense competition, with both large integrated players and small to medium-sized enterprises (SMEs) operating across various segments of the market. The competition is particularly strong in the yarn manufacturing segment, where the following key factors shape the competitive landscape:
- Large Players: Some of the biggest competitors in the yarn manufacturing segment include Vardhman Textiles, Arvind Ltd., Raymond Ltd., and Alok Industries. These companies have a significant market share, a wide product portfolio, and strong distribution networks, posing substantial competition to companies like Sanathan Textiles.
- Small and Medium Enterprises (SMEs): The SME segment is another important part of the industry, often focusing on niche markets and offering specialized products. While these companies may not have the scale or resources of large players, they benefit from agility, innovation, and flexibility in catering to niche demands like organic textiles and technical fabrics.
- Global Competitors: As India’s textile exports continue to grow, competition from international textile manufacturers, particularly from countries such as China, Bangladesh, and Vietnam, is increasing. These countries have a cost advantage due to lower labor costs, which gives them a competitive edge in the global market.
Sanathan Textiles’ Position: Sanathan Textiles holds a competitive position due to its diversified product offering, strong emphasis on quality, and expansion plans. The company differentiates itself through its focus on technical textiles and specialty yarns, which are in high demand globally. The company’s operational efficiency, focus on sustainable production, and ability to scale its operations with the new Punjab manufacturing facility give it a strong competitive edge in the evolving textile market.
Market Opportunities and Risks
Opportunities:
- Growing Demand for Sustainable Textiles: The growing demand for eco-friendly and sustainable textile products presents a significant opportunity for Sanathan Textiles. The company’s commitment to sustainable production methods positions it to cater to this emerging trend, particularly in the recycled polyester and organic cotton segments.
- Expansion into Technical Textiles: The increasing demand for industrial textiles in sectors like automotive, healthcare, and infrastructure provides an exciting growth opportunity. With its expertise in polyester yarns and plans to expand its technical textile offerings, Sanathan Textiles is well-positioned to capitalize on this trend.
- Government Initiatives: The Indian government’s support through the PLI scheme and PM-MITRA is expected to benefit textile manufacturers, offering opportunities for growth through incentivized technology upgrades, improved infrastructure, and enhanced export capacity.
- Global Market Expansion: As global textile demand continues to grow, Sanathan Textiles has the opportunity to expand its market presence, particularly in key export destinations such as the U.S., Europe, and Middle East. By enhancing its production capabilities and scaling operations, the company can capture a larger share of the growing global market.
Risks:
- Raw Material Price Fluctuations: The textile industry is highly dependent on raw materials such as cotton and polyester. Any fluctuations in raw material prices, caused by factors such as weather conditions, global commodity prices, or supply chain disruptions, could impact the company’s profitability.
- Competition from International Markets: While India is a leading textile producer, competition from low-cost manufacturing countries such as China and Vietnam remains a significant challenge. These countries often benefit from lower labor and production costs, which may affect the price competitiveness of Indian textile products in the global market.
- Regulatory Risks: Changes in government policies, such as import-export regulations, tax policies, or environmental laws, could impact the operations and profitability of textile manufacturers. The textile sector is subject to stringent regulations regarding environmental sustainability and labor practices, and non-compliance with these could result in financial and reputational risks.
- Economic Downturns: Economic slowdowns, both domestic and global, could lead to reduced demand for textile products. Any reduction in consumer spending or lower demand from key sectors like automotive and construction could impact the company’s sales and growth prospects.
04. Financial Performance
Revenue and Profit Analysis
Sanathan Textiles Ltd. has shown steady growth in revenue over the past few years, driven by increasing demand for its polyester, cotton, and technical textile products. Below is a detailed analysis of the company’s revenue and profit trends over the last few fiscal years:
| Particulars | Fiscal 2024 | Fiscal 2023 | Fiscal 2022 |
|---|---|---|---|
| Revenue from Operations (₹ million) | 29,575.04 | 33,292.13 | 31,853.20 |
| Gross Profit (₹ million) | 6,578.10 | 7,184.76 | 6,276.51 |
| Gross Profit Margin | 22.24% | 21.56% | 19.71% |
| Operating Profit (₹ million) | 2,956.24 | 3,263.82 | 2,681.09 |
| Operating Profit Margin | 10.00% | 9.79% | 8.41% |
| Net Profit (₹ million) | 1,338.48 | 1,527.41 | 3,554.42 |
| Net Profit Margin | 4.53% | 4.58% | 11.15% |
| Earnings Per Share (₹) | 18.60 | 21.24 | 49.40 |
Revenue: The company’s revenue from operations witnessed a slight decline in Fiscal 2024 to ₹29,575 million from ₹33,292 million in Fiscal 2023. This was primarily due to a reduction in cotton yarn sales and a temporary slowdown in the demand for polyester products.
Gross Profit: The gross profit margin improved marginally in Fiscal 2024 due to cost-saving measures in production and better raw material management.
Operating Profit: Operating profit has seen a decrease in Fiscal 2024 compared to the previous fiscal year, primarily due to higher operational expenses. However, the operating profit margin remains healthy at 10% in Fiscal 2024.
Net Profit: The net profit showed a significant decline in Fiscal 2024 compared to Fiscal 2023, primarily due to lower revenue and higher interest costs related to outstanding borrowings. The net profit margin for Fiscal 2024 is relatively lower at 4.53% compared to 4.58% in Fiscal 2023.
Earnings Per Share: The Earnings Per Share (EPS) dropped from ₹21.24 in Fiscal 2023 to ₹18.60 in Fiscal 2024, reflecting a dip in profitability.
Balance Sheet Strength
Sanathan Textiles Ltd. has a solid balance sheet with a reasonable mix of equity and debt. The following table outlines the key components of the company’s balance sheet:
| Particulars | Fiscal 2024 | Fiscal 2023 | Fiscal 2022 |
|---|---|---|---|
| Total Assets (₹ million) | 15,687.60 | 14,989.72 | 14,515.83 |
| Non-Current Assets (₹ million) | 8,514.30 | 7,658.22 | 6,785.11 |
| Current Assets (₹ million) | 7,173.30 | 7,331.50 | 7,730.72 |
| Total Liabilities (₹ million) | 8,947.90 | 8,588.54 | 8,406.15 |
| Non-Current Liabilities (₹ million) | 2,738.80 | 2,413.55 | 2,246.02 |
| Current Liabilities (₹ million) | 6,209.10 | 6,174.99 | 6,160.13 |
| Shareholder Equity (₹ million) | 6,739.70 | 6,401.18 | 6,109.68 |
Assets: The company’s total assets grew to ₹15,687.60 million in Fiscal 2024, driven by an increase in non-current assets primarily due to the acquisition of machinery for its Punjab manufacturing facility.
Liabilities: Total liabilities stood at ₹8,947.90 million in Fiscal 2024, reflecting an increase in both non-current liabilities (due to long-term borrowings) and current liabilities (mainly trade payables and short-term borrowings).
Equity: The company’s shareholder equity stands strong at ₹6,739.70 million in Fiscal 2024, reflecting a stable capital base. The increase in equity is mainly due to retained earnings from previous years and the fresh issue planned for the IPO.
Cash Flow Statement
The cash flow statement provides an insight into the company’s liquidity, showing how cash is generated and used across different activities:
| Particulars | Fiscal 2024 | Fiscal 2023 | Fiscal 2022 |
|---|---|---|---|
| Net Cash from Operating Activities (₹ million) | 2,455.30 | 3,200.50 | 2,876.00 |
| Net Cash from Investing Activities (₹ million) | (1,252.70) | (1,097.60) | (1,041.90) |
| Net Cash from Financing Activities (₹ million) | (980.10) | (1,123.80) | (1,189.50) |
| Net Increase in Cash and Cash Equivalents (₹ million) | 222.50 | (21.90) | (355.40) |
Operating Activities: The company generated ₹2,455.30 million in net cash from operating activities in Fiscal 2024, which is a positive sign indicating healthy cash flows from core operations.
Investing Activities: The negative cash flow from investing activities in Fiscal 2024 is primarily due to capital expenditures related to the expansion of its manufacturing capacity.
Financing Activities: The company’s financing activities resulted in a net outflow of ₹980.10 million in Fiscal 2024, mainly due to debt repayments and interest payments.
Margins
| Margin Type | Fiscal 2024 | Fiscal 2023 | Fiscal 2022 |
|---|---|---|---|
| Gross Margin | 22.24% | 21.56% | 19.71% |
| Operating Margin | 10.00% | 9.79% | 8.41% |
| Net Profit Margin | 4.53% | 4.58% | 11.15% |
Gross Margin: The gross margin in Fiscal 2024 improved slightly to 22.24%, reflecting better cost management in the production process.
Operating Margin: The operating margin in Fiscal 2024 remained healthy at 10.00%, indicating that the company is effectively managing its operational costs.
Net Profit Margin: The net profit margin dropped to 4.53% in Fiscal 2024, mainly due to a reduction in revenue and higher financial expenses. However, it remains within a reasonable range for the industry.
Key Financial Ratios
| Financial Ratio | Fiscal 2024 | Fiscal 2023 | Fiscal 2022 |
|---|---|---|---|
| Debt-to-Equity Ratio | 1.33 | 1.35 | 1.38 |
| Return on Equity (ROE) | 19.85% | 23.88% | 58.16% |
| Current Ratio | 1.16 | 1.19 | 1.26 |
| Quick Ratio | 0.86 | 0.90 | 0.92 |
Debt-to-Equity Ratio: The debt-to-equity ratio in Fiscal 2024 stands at 1.33, indicating a balanced mix of debt and equity financing. The ratio has improved slightly compared to Fiscal 2023, which indicates a reduction in debt relative to equity.
Return on Equity (ROE): The ROE for Fiscal 2024 is 19.85%, reflecting a reasonable return on shareholders’ equity despite the decline in profits. The lower ROE compared to Fiscal 2023 is mainly due to lower net profits.
Current Ratio: The current ratio of 1.16 in Fiscal 2024 suggests that the company has sufficient current assets to cover its current liabilities, indicating a stable liquidity position.
Quick Ratio: The quick ratio of 0.86 in Fiscal 2024 indicates a slight decrease in the company’s ability to cover its immediate liabilities without relying on inventory sales.
05. IPO Details
Issue Size and Price Band
The Sanathan Textiles Ltd. IPO offers a total issue size of 1,71,33,958 shares, aggregating up to ₹550.00 crore. The price band for the IPO is set between ₹305 and ₹321 per equity share. The price band provides potential investors with a range of investment options, depending on their risk appetite and financial goals.
Total Issue Size: ₹550.00 crore
Price Band: ₹305 to ₹321 per share
This issue includes both a fresh issue of shares and an offer for sale by existing shareholders.
Offer Structure
The IPO will consist of two components:
- Fresh Issue: 1,24,61,060 shares (aggregating up to ₹400.00 crore) will be issued by Sanathan Textiles to raise funds primarily for expansion and debt repayment.
- Offer for Sale (OFS): 46,72,898 shares (aggregating up to ₹150.00 crore) will be offered by the existing promoters and shareholders.
The Fresh Issue portion will contribute to increasing the company’s equity base, while the OFS portion will provide liquidity to the existing shareholders.
Use of Proceeds
The funds raised from the IPO will be utilized for various purposes, which include:
| Purpose | Amount (₹ crore) |
|---|---|
| Repayment of Debt | ₹180.00 crore |
| Expansion of Manufacturing Facilities | ₹150.00 crore |
| Working Capital | ₹60.00 crore |
| General Corporate Purposes | ₹10.00 crore |
Repayment of Debt: A significant portion of the proceeds, ₹180 crore, will be used to reduce the company’s existing debt. This will help improve the company’s financial leverage, lowering interest costs and improving profitability.
Expansion of Manufacturing Facilities: ₹150 crore will be allocated towards the expansion of manufacturing facilities, particularly the Punjab manufacturing facility, which will allow Sanathan Textiles to scale production and meet growing demand.
Working Capital: ₹60 crore will be used to enhance working capital, ensuring the company has sufficient liquidity for day-to-day operations.
General Corporate Purposes: A smaller portion, ₹10 crore, will be allocated for general corporate needs, including operational flexibility and investment in other areas of the business.
Listing Exchange
The shares issued in the Sanathan Textiles IPO will be listed on two major Indian stock exchanges:
- Bombay Stock Exchange (BSE)
- National Stock Exchange (NSE)
This dual listing will provide greater visibility and liquidity for the company’s shares, allowing investors to trade and track the stock on both exchanges.
Pre-IPO Shareholding
| Shareholder | Shareholding Pre-Issue (%) |
|---|---|
| Nimbus Trust | 15.00% |
| D&G Family Trust | 14.50% |
| A&J Family Trust | 14.00% |
| P&B Family Trust | 14.00% |
| Paresh Vrajlal Dattani | 10.50% |
| Ajay Vallabhdas Dattani | 10.00% |
| Anilkumar Vrajdas Dattani | 9.00% |
| Dinesh Vrajdas Dattani | 8.00% |
| Public (Others) | 5.00% |
| Total Pre-Issue Shareholding | 100% |
The major shareholders of Sanathan Textiles Ltd. include various family trusts and promoters, with a dominant shareholding by the founding group. The Public will hold a relatively smaller portion of the company’s shares before the IPO.
Underwriters and Legal Advisors
Lead Manager (Underwriters):
- ICICI Securities
- Axis Capital
- HDFC Bank Ltd.
These underwriters are responsible for managing the IPO, assisting in pricing, and ensuring that the offer is marketed to the right investor base. They will also be involved in the book-building process and ensuring regulatory compliance.
Legal Advisors:
- Khaitan & Co.: One of the leading law firms advising on legal matters related to the IPO, including regulatory filings, compliance with SEBI regulations, and drafting the Red Herring Prospectus (RHP).
- Cyril Amarchand Mangaldas: A top-tier law firm providing advice on corporate governance, contracts, and ensuring that all necessary legal documents are in order.
Registrar:
KFin Technologies Pvt. Ltd.: The registrar to the issue, responsible for managing applications, allotments, and refunds to investors.
These key participants ensure that the IPO process is carried out smoothly, in compliance with all regulatory requirements, and in a way that maximizes value for both the company and its investors.
06. Risk Factors
Investing in Sanathan Textiles Ltd. IPO involves certain risks that potential investors must carefully consider. Below is a breakdown of various risk factors that may impact the company’s operations, financial performance, and stock performance:
Business Risks
- Dependence on Key Raw Materials: The company relies heavily on raw materials such as cotton, polyester, and synthetic fibers for its production. Fluctuations in the prices of these raw materials, due to global supply chain disruptions, weather conditions, or changes in government policies, could impact the company’s profitability. Price hikes in raw materials can lead to increased production costs, which may not always be passed on to customers, thereby affecting profit margins.
- Concentration of Customers: A significant portion of the company’s revenue is derived from a few large customers. Any changes in their procurement strategies, financial instability, or reduction in demand could adversely affect Sanathan Textiles’ revenue streams. The company is working towards diversifying its customer base, but high reliance on key customers remains a risk.
- Operational Risks: Sanathan Textiles operates in a capital and labor-intensive industry. Risks associated with operational inefficiencies, technological failures, or disruptions in production due to equipment breakdowns or labor issues could result in production delays, increased costs, or reputational damage. Expansion plans, such as the new Punjab manufacturing facility, also bring operational risks during the setup and ramp-up phases.
- Foreign Exchange Risks: Sanathan Textiles has a significant export business, and a large portion of its revenue comes from international markets. Currency fluctuations could have an adverse impact on profitability if the rupee strengthens against key foreign currencies like the US Dollar or the Euro. Additionally, exposure to foreign trade policies and tariffs in international markets could affect revenue generation.
Industry Risks
- Intense Competition: The textile industry, particularly the yarn manufacturing sector, is highly competitive, with both large integrated players and small to medium-sized enterprises (SMEs) vying for market share. Competitors often have advantages such as lower labor costs, established brands, or better access to raw materials. The presence of global textile producers, such as China, Vietnam, and Bangladesh, adds further pressure to Indian textile companies, including Sanathan Textiles.
- Dependence on Government Policies: The Indian textile industry is significantly affected by government policies, including regulations on exports, labor laws, and environmental compliance. Any changes in the government’s export incentives, subsidies, or tax policies could have a substantial impact on the company’s cost structure and competitiveness in the global market. Additionally, stringent environmental regulations could require investments in compliance technologies.
- Shifts in Consumer Preferences: Consumer preferences are evolving, with increasing demand for eco-friendly and sustainable textiles. While Sanathan Textiles is positioning itself to capitalize on this trend, there remains the risk that consumer preferences could shift away from the company’s offerings. The company must continue to innovate and adapt to changing market demands, especially in the technical textiles segment, to stay relevant.
- Raw Material Sourcing Risks: Fluctuations in the availability of key raw materials, particularly cotton and polyester, can disrupt production. Price volatility due to factors like weather patterns, crop failures, or international supply disruptions (e.g., changes in global cotton output) can have a significant impact on the cost of goods sold.
Financial Risks
- Debt Exposure: While Sanathan Textiles has managed its debt prudently, it remains exposed to financial risk due to its debt obligations. The company is using part of the proceeds from the IPO to reduce its debt, but it will still have some level of borrowing on its balance sheet after the IPO. Any adverse changes in interest rates or a delay in debt repayment could increase the cost of debt and reduce profitability.
- Profitability Fluctuations: The company’s profit margins are susceptible to fluctuations in input costs, foreign exchange rates, and overall demand for its products. Lower-than-expected revenues or unforeseen increases in raw material prices could result in reduced profitability. While Sanathan Textiles has maintained a healthy operating margin, a dip in demand or increased competition could lead to margin compression.
- Capital Structure Risks: The company’s capital structure, which includes both equity and debt, exposes it to the risk of rising interest costs and the need for additional capital. If the company cannot meet its financial obligations or if profitability declines, it may face challenges in managing its capital structure, which could affect its ability to expand or invest in future projects.
- Earnings Volatility: As with any manufacturing business, earnings volatility is inherent, particularly in the textile industry, where changes in production volumes, demand, and raw material prices can lead to earnings fluctuations. Sanathan Textiles’ earnings per share (EPS) and net profit margins could be affected by unforeseen circumstances like global economic slowdowns or disruptions in supply chains.
Regulatory Risks
- Compliance with Environmental Regulations: The textile industry faces stringent environmental regulations, especially with regard to water consumption, waste management, and chemical discharges. Sanathan Textiles’ manufacturing facilities may be subject to fines or compliance costs if the company fails to adhere to these standards. Environmental concerns and compliance issues could also affect the company’s reputation and ability to operate in certain regions.
- Changes in Taxation Policies: The company’s operations are subject to indirect taxes like the Goods and Services Tax (GST), as well as customs duties on imports of raw materials. Any significant changes in taxation laws, such as increased duties or stricter compliance requirements, could adversely affect profitability and cash flow.
- Labor Laws and Regulations: The textile sector is labor-intensive, and Sanathan Textiles relies on a large workforce for its manufacturing operations. Changes in labor laws, such as minimum wage regulations, social security benefits, or union activities, could increase operational costs and potentially lead to labor disputes or unrest.
Market Risks
- Stock Price Volatility: The stock price of Sanathan Textiles Ltd. post-IPO may be subject to significant market volatility due to broader economic conditions, investor sentiment, and stock market trends. Factors such as global economic downturns, political instability, or unexpected events (like pandemics) could lead to sudden fluctuations in the stock price.
- Interest Rate Fluctuations: As the company has existing debt obligations and may continue to take loans for expansion, changes in interest rates could impact its financing costs. An increase in interest rates by the central bank could raise the company’s borrowing costs, affecting profitability and financial stability.
- Economic Slowdown and Demand Decline: The textile industry is cyclical, and demand for textiles and yarn may decline during periods of economic slowdown or recession. If global or domestic demand for Sanathan Textiles’ products slows down, it could negatively impact revenue, particularly in the retail and export segments.
- Geopolitical Factors and Trade Barriers: Sanathan Textiles is involved in global exports, and any geopolitical tensions or trade barriers (such as tariffs or import/export restrictions) could have an adverse effect on its international sales. Changes in international trade agreements or the imposition of trade sanctions could disrupt the company’s supply chain and affect its bottom line.
07. Valuation Analysis
Comparable Company Analysis
To assess Sanathan Textiles Ltd.’s valuation, we compare it with other publicly traded companies in the Indian textile sector, particularly those in the yarn manufacturing and technical textiles segments. The key players in this space include:
| Company | Market Cap (₹ Cr) | Revenue (₹ Cr) | EBITDA (₹ Cr) | P/E Ratio | EV/EBITDA |
|---|---|---|---|---|---|
| Vardhman Textiles | 12,000 | 9,000 | 1,500 | 20.5 | 11.0 |
| Arvind Ltd. | 7,500 | 8,500 | 1,200 | 18.0 | 9.8 |
| Raymond Ltd. | 10,200 | 6,500 | 900 | 24.0 | 13.5 |
| Alok Industries | 6,300 | 5,000 | 750 | 13.5 | 8.5 |
| Sanathan Textiles | 2,709.37 | 2,957 | 400 | 17.25 | [●] |
Key Observations:
- Sanathan Textiles is smaller compared to major industry players such as Vardhman Textiles and Raymond Ltd., but its position in the specialty yarns and technical textiles market provides potential for higher growth.
- P/E ratios in the textile industry range from 13.5 to 24.0, with Sanathan Textiles expected to fall within this range once the IPO is completed.
- The EV/EBITDA multiples suggest that Sanathan Textiles is relatively more undervalued compared to larger peers, which is typical for a smaller company in a growth phase.
Discounted Cash Flow (DCF) Analysis
The Discounted Cash Flow (DCF) analysis is one of the most widely used methods to estimate a company’s intrinsic value. This method projects the company’s future cash flows and discounts them to their present value using a discount rate that reflects the company’s risk profile.
Key Assumptions for DCF Calculation:
- Revenue Growth Rate: 12% per annum over the next 5 years (based on the company’s expansion plans and growing demand in the technical textiles sector).
- EBITDA Margin: 13% (reflecting improved operational efficiency and margin growth through capacity expansion).
- Discount Rate (WACC): 12% (reflecting the company’s cost of capital and risk profile).
- Terminal Growth Rate: 3% (long-term growth assumption after the forecast period).
Projected Free Cash Flow (FCF):
| Year | Projected FCF (₹ Cr) |
|---|---|
| Year 1 | 230.00 |
| Year 2 | 280.00 |
| Year 3 | 320.00 |
| Year 4 | 350.00 |
| Year 5 | 400.00 |
Terminal Value Calculation (using the Gordon Growth Model):
The terminal value is calculated using the formula:
TV = FCF in Year 5 * (1 + Terminal Growth Rate) / (WACC - Terminal Growth Rate)
Thus, Terminal Value (TV) = ₹4,577.78 Cr.
DCF Valuation:
| Year | FCF | Discount Factor | Discounted FCF (₹ Cr) |
|---|---|---|---|
| Year 1 | 230.00 | 0.892 | 205.20 |
| Year 2 | 280.00 | 0.797 | 222.16 |
| Year 3 | 320.00 | 0.711 | 227.52 |
| Year 4 | 350.00 | 0.636 | 222.60 |
| Year 5 | 400.00 | 0.567 | 226.80 |
| Terminal Value | 4,577.78 | 0.567 | 2,594.12 |
Total Present Value = ₹3,798.40 Cr
Thus, the intrinsic value of Sanathan Textiles Ltd. based on the DCF method is approximately ₹3,798.40 crore.
Valuation Multiples
Valuation multiples are commonly used to estimate a company’s market value based on its financial performance. Here are the key multiples for Sanathan Textiles:
| Multiple | Sanathan Textiles | Industry Average |
|---|---|---|
| P/E Ratio | 17.25 | 18.0 – 24.0 |
| EV/EBITDA | [●] | 9.0 – 13.5 |
| P/S Ratio | [●] | 1.0 – 1.5 |
P/E Ratio: The P/E ratio for Sanathan Textiles is expected to be 17.25 based on its Pre-IPO shareholding, which is in line with the industry’s average. After the IPO, this ratio is expected to adjust to 13.53.
EV/EBITDA: With Sanathan Textiles’ projected growth in EBITDA due to the expansion plans, the company could achieve an EV/EBITDA multiple between 9.0 to 11.0, indicating a favorable valuation compared to larger peers.
P/S Ratio: Sanathan Textiles’ P/S ratio should be approximately 1.2 to 1.5, which is in line with other textile companies in the market.
IPO Pricing Comparison
At the price band of ₹305 to ₹321 per share, the company’s valuation compares as follows:
| Particulars | Low Price (₹305) | High Price (₹321) |
|---|---|---|
| Market Cap (₹ Cr) | ₹2,709.37 | ₹2,709.37 |
| P/E Ratio (Post-IPO) | 13.53 | 13.53 |
| EV/EBITDA | [●] | [●] |
| P/S Ratio | [●] | [●] |
Based on the projected market cap post-IPO, the company will be valued at ₹2,709.37 crore, which appears reasonable considering its growth potential, especially in the technical textiles and specialty yarn markets.
The IPO pricing is aligned with industry standards, with the company offering shares at an attractive valuation range compared to its peers. Sanathan Textiles’ relatively smaller size and growth prospects make the IPO an attractive investment option at these price levels.
Key Performance Indicators (KPI)
| KPI | Values |
|---|---|
| ROE (Return on Equity) | 11.09% |
| ROCE (Return on Capital Employed) | 11.80% |
| Debt/Equity | 0.17 |
| RoNW (Return on Net Worth) | 10.42% |
| Price to Book Value | 1.81 |
Pre and Post-IPO Performance Indicators
| Metric | Pre-IPO | Post-IPO |
|---|---|---|
| EPS (₹) | 18.60 | 23.73 |
| P/E (x) | 17.25 | 13.53 |
Note: The Pre-IPO EPS is calculated based on pre-issue shareholding as of the date of the RHP and the latest fiscal year earnings available as of March 31, 2024. The Post-IPO EPS is calculated based on the post-issue shareholding and the annualized FY earnings of June 30, 2024, available in the RHP.
08. Investment Thesis
Why Invest?
Sanathan Textiles Ltd. offers a compelling investment opportunity for long-term investors looking to gain exposure to the growing Indian textile industry. The company operates in a high-growth segment, focusing on polyester, cotton, and technical textiles, with a strong emphasis on innovation and sustainability. Here are the key reasons why investors should consider investing in Sanathan Textiles:
Diversified Product Portfolio:
Sanathan Textiles produces a wide range of products, including polyester yarn, cotton yarn, and technical textiles. This diversification provides the company with multiple revenue streams, making it less susceptible to fluctuations in any single market segment.
Expanding into High-Value Technical Textiles:
One of the key growth drivers for Sanathan Textiles is its focus on technical textiles, which are increasingly in demand across industries such as automotive, healthcare, and infrastructure. The global technical textiles market is expected to grow rapidly, and Sanathan Textiles is well-positioned to capture a significant share of this market.
Government Support:
The Indian textile industry benefits from various government initiatives, such as the PLI (Production Linked Incentive) scheme and PM-MITRA (Mega Integrated Textile Region and Apparel) scheme. These initiatives aim to promote manufacturing, technology adoption, and exports, creating a favorable environment for companies like Sanathan Textiles to expand.
Strong Financial Performance:
The company has demonstrated consistent revenue growth, with a healthy gross margin of 22.24% in Fiscal 2024. Despite a dip in net profit margin, the company is on track to recover and improve its profitability with new product offerings and capacity expansion.
IPO Use of Proceeds:
The funds raised from the IPO will be strategically used for debt reduction, expansion of manufacturing capacity, and working capital enhancement. This will not only improve the company’s financial flexibility but also position it for accelerated growth in the coming years.
Attractive Valuation:
At the price band of ₹305 to ₹321 per share, Sanathan Textiles offers a P/E ratio of 17.25 (Pre-IPO) and 13.53 (Post-IPO), which is competitive compared to industry peers. The EV/EBITDA multiple is also attractive, suggesting that the IPO is priced reasonably relative to the company’s growth potential.
Key Catalysts
Several key catalysts could significantly drive Sanathan Textiles’ growth in the coming years:
- Expansion of Manufacturing Facilities: One of the key catalysts for growth is the expansion of its manufacturing capacity. The funds raised from the IPO will be used to set up a new manufacturing facility in Punjab, which will increase the company’s production capabilities and help meet rising demand, particularly in the technical textiles market.
- Increasing Global Demand for Technical Textiles: The demand for technical textiles is set to grow at a rapid pace due to increasing use in industries such as automotive, medical, construction, and sportswear. Sanathan Textiles, with its focus on high-performance fabrics, is well-positioned to tap into this growing market.
- Government Initiatives: The government’s PLI scheme and other industry-supportive measures will provide a significant boost to the textile sector. Sanathan Textiles stands to benefit from these schemes, which will help it improve its operational efficiencies and expand its market share both domestically and internationally.
- Sustainability Trends: As sustainability becomes a key consideration for consumers, investors, and governments alike, companies that focus on eco-friendly fabrics and sustainable production processes will be at a competitive advantage. Sanathan Textiles’ ongoing efforts to incorporate sustainability into its production processes will help it capitalize on this long-term trend.
- Improved Financial Position Post-IPO: By using the IPO proceeds for debt reduction and working capital improvement, Sanathan Textiles will strengthen its balance sheet, improving its financial stability and reducing interest expenses. This will allow the company to reinvest savings into growth initiatives.
Risks and Concerns
While Sanathan Textiles presents an attractive investment opportunity, investors should be aware of several risks that could impact the company’s performance and stock price:
- Raw Material Price Volatility: The company is dependent on cotton, polyester, and synthetic fibers for its production. Fluctuations in raw material prices, driven by factors such as global supply chain disruptions, weather conditions, or commodity price volatility, could negatively impact the company’s profitability. Rising raw material prices could also erode margins if the company is unable to pass on costs to customers.
- Competitive Pressure: The textile industry, particularly the yarn manufacturing segment, is highly competitive. Sanathan Textiles faces stiff competition from both large integrated players like Vardhman Textiles and Raymond Ltd., as well as smaller domestic manufacturers. Additionally, international competition from countries like China, Vietnam, and Bangladesh, which have cost advantages, could put pressure on the company’s market share and pricing power.
- Operational Risks During Expansion: Sanathan Textiles’ expansion plans, particularly the setup of its new Punjab manufacturing facility, could face operational challenges. Delays in construction, cost overruns, or issues with scaling up production could impact the company’s ability to realize its growth targets. Moreover, expansion efforts often involve significant capital expenditures and may result in short-term cash flow issues.
- Regulatory Risks: The textile industry is subject to stringent environmental regulations regarding water usage, waste management, and emissions. Sanathan Textiles must comply with these regulations to avoid fines and reputational damage. Changes in labor laws or taxation policies could also increase operational costs and affect profitability.
- Economic Sensitivity: The textile sector is sensitive to changes in economic conditions, both in India and internationally. Economic slowdowns or recessions could lead to reduced demand for textiles, particularly in export markets. In addition, fluctuating interest rates and inflationary pressures could affect consumer spending and the company’s overall performance.
- Exposure to Foreign Exchange Risk: Since Sanathan Textiles has a significant portion of its revenue from exports, it is exposed to foreign exchange risk. Currency fluctuations, particularly changes in the value of the Indian Rupee, could impact the company’s earnings and profitability. An unfavorable exchange rate could reduce the revenue generated from overseas sales.
09. Recommendations
Investment Rating: Buy
Based on Sanathan Textiles Ltd.’s strong growth prospects, attractive valuation, and robust position in the expanding technical textiles market, we recommend a Buy rating for the stock. The company is well-positioned to capitalize on both domestic and international demand for specialty yarns and technical textiles, making it a promising candidate for long-term investment.
The company’s strategic initiatives, such as the expansion of manufacturing capacity, debt reduction, and focus on sustainability, are expected to drive further growth. Additionally, the IPO pricing is attractive compared to industry peers, providing investors with an entry point at reasonable valuations.
Target Price: ₹375 – ₹400 per share
Based on Sanathan Textiles’ P/E ratio, EV/EBITDA multiples, and DCF valuation, we estimate a target price range of ₹375 to ₹400 per share within a 12-month horizon. This target price reflects the company’s growth potential, particularly in the high-value technical textiles sector, and is supported by the expected improvements in margins and profitability post-IPO.
The stock is expected to trade in the target range as the company’s growth initiatives begin to materialize and revenue from the new manufacturing facility starts to contribute.
Time Frame: Long-term
The investment horizon for Sanathan Textiles should be long-term (1-2 years). This time frame is appropriate given the company’s growth plans, which include scaling up production capacity, increasing its share in the technical textiles market, and benefiting from government initiatives in the textile sector. The long-term outlook is further supported by the company’s plan to strengthen its financial position through IPO proceeds and enhance operational efficiency.
Given the anticipated growth trajectory, Sanathan Textiles should be evaluated over the medium-to-long term, as the company’s expansion efforts are expected to take time to materialize into significant revenue and profit growth.
10. Conclusion
Summary of Key Takeaways
Sanathan Textiles Ltd. offers an exciting investment opportunity, particularly for investors looking for exposure to the growing Indian textile industry, especially the specialty yarn and technical textiles segments. The company is well-positioned to benefit from several key growth drivers:
- Expansion into Technical Textiles: As demand for high-performance fabrics grows across sectors such as automotive, healthcare, and infrastructure, Sanathan Textiles is poised to capture a larger share of this high-value market.
- IPO Proceeds Utilized Effectively: The company plans to use the funds raised through the IPO for debt repayment, capacity expansion, and working capital enhancements. This financial flexibility will improve the company’s overall financial stability and allow it to scale its operations more effectively.
- Attractive Valuation: With a P/E ratio of 17.25 (Pre-IPO) and a target price range of ₹375 to ₹400, the company is priced attractively relative to industry peers, suggesting strong upside potential for long-term investors.
- Financial Strength: Sanathan Textiles has shown solid financial performance, including strong margins and a manageable debt load, which positions it well for future growth.
Despite the strong prospects, investors should be aware of the inherent risks, such as raw material price fluctuations, intense competition, and economic volatility, which could impact the company’s short-term performance. However, given the long-term growth prospects and the company’s solid strategic positioning, we believe that the IPO represents a Buy opportunity for long-term investors.
Next Steps for Investors
Investors should consider the following steps to make informed investment decisions:
- Consider Long-term Investment: Investors should consider Sanathan Textiles as a long-term investment (1-2 years), with a focus on the company’s expansion into technical textiles and its ability to leverage government initiatives. The expected growth in these segments, alongside improvements in operational efficiency, makes the stock a promising option for those willing to invest for the long run.
- Review the Company’s Progress: Post-IPO, investors should keep track of the company’s progress on manufacturing capacity expansion, particularly the new Punjab facility, and its execution of planned projects. Monitoring quarterly results and management updates will provide insights into whether the company is meeting its targets.
- Assess Financial Reports Regularly: Regularly review the company’s financial statements to gauge its profitability, cash flow, and debt position. Since a portion of the IPO proceeds will be used for debt repayment, tracking improvements in debt-to-equity ratio and interest expenses will be essential for evaluating the company’s financial health.
- Understand the Risks: Investors should continue to assess the risks outlined in the report, particularly in areas such as raw material price volatility, competition, and regulatory challenges. Staying informed on these factors will help manage expectations and adjust investment strategies accordingly.
