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United Cotfab: A Look at its Financial Journey and IPO Details

Published 14-06-2024, 09:27 am

United Cotfab Ltd. (UCL) is a prominent player in the textile industry, specializing in the production of high-quality open-end yarn. With a manufacturing process grounded in stringent quality standards and supported by advanced technology, UCL's operations encompass raw material selection, blending, spinning, winding, and quality control.

From 2020 to 2023, UCL undertook a significant expansion by acquiring 7,264 square meters of land in Timba, Ahmedabad. This site, strategically located near the rich cotton-growing regions of Gujarat and Maharashtra, became operational in April 2023 with an annual capacity of approximately 9,125 metric tons of cotton yarn. The facility is outfitted with modern, automated machinery that enhances productivity and profitability, underlining the critical role of technology in the cotton yarn industry.

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UCL is dedicated to sustainable manufacturing practices, aiming to minimize waste, conserve energy, and reduce environmental impact. This commitment extends to fostering strong relationships with diverse clients, including textile manufacturers, garment exporters, and distributors.

UCL's financial trajectory reveals a sharp rise in income and profits. From modest figures of INR 0.02 crore in FY22 to an impressive INR 115.53 crore in FY24, with corresponding net profits increasing from INR 0.02 crore to INR 8.67 crore, the company's financials have surged, particularly in the pre-IPO year. This growth prompts questions about the sustainability of these margins in a highly competitive market.

On June 13, 2024, UCL will launch its maiden IPO, offering 5,184,000 equity shares at INR 70 per share, aiming to raise INR 36.29 crore. The issue, which closes on June 19, 2024, constitutes 30.16% of the post-IPO paid-up capital, with shares set to list on the BSE SME. The funds will primarily bolster working capital and cover general corporate expenses. Beeline Capital Advisors Pvt. Ltd. is leading the IPO process, supported by Purva Sharegistry (India) Pvt. Ltd. as the registrar, and Spread X Securities Pvt. Ltd. as the market maker.

Post-IPO, UCL's equity capital will increase from INR 12.01 crore to INR 17.19 crore, with an anticipated market capitalization of INR 120.33 crore based on the upper IPO price band. Despite the significant financial performance in FY24, concerns linger regarding the company's ability to maintain these results given the volatile raw material prices and reliance on government policies.

UCL's average EPS over the past three fiscals stands at INR 2.71, with an average RoNW of 32.45%. The IPO is priced at a P/BV of 6.20 based on the NAV of INR 11.30 as of March 31, 2024, dropping to 2.41 post-IPO NAV of INR 29.00 per share. The P/E ratio based on annualized FY24 earnings is 13.89, suggesting that the issue is fully priced, factoring in all near-term positives.

The company has not declared dividends since its inception, planning to adopt a prudent dividend policy based on future performance. Compared to its listed peers, Lagnam Spintex, PBM Poly, and Vippy Spinpro, UCL's P/E ratios suggest a competitive positioning within the market.

Beeline Capital Advisors Pvt. Ltd., handling its 41st mandate in three fiscal years, boasts a strong track record of IPO listings, often opening at significant premiums.

Transitioning from fabric trading to manufacturing cotton yarn in April 2023, UCL has shown notable financial growth. However, the sustainability of these gains in a fragmented and competitive market remains uncertain. Well-informed and cash-surplus investors might consider a moderate long-term investment in this IPO, acknowledging the potential risks and rewards.

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