Sanathan Textiles IPO analysis

Sanathan Textiles Limited IPO (initial public offering) will open for subscription on December 19, 2024, and close on December 23, 2024. Here, we provide a breakdown of the textile manufacturer's strengths, weaknesses and growth prospects to help investors make an informed decision.

Sanathan Textiles IPO in a nutshell

• Quality: Between FY22 and FY24, Sanathan Textiles reported an average three-year ROE and ROCE of around 23.1 and 21 per cent, respectively.
  
• Growth: During FY22-24, its revenue and net profit declined annually by 3.6 and 38.6 per cent, respectively.
  
• Valuation: At the upper price band of Rs 321, the stock is valued at a P/E and P/B ratio of 20.2 and 1.6 times, respectively.
  
• Overview: The company can benefit from the ongoing geopolitical tensions in Bangladesh (one of the major exporting nations to the US and EU) and the decline in China's export of apparel to the US, providing Indian exporters with an alternate choice of exporter to the US, which had 22 per cent share in global apparel imports as of CY23. However, the competitive nature of the textile industry poses a threat.

About Sanathan Textiles

Sanathan Textiles manufactures and supplies polyester (77 per cent of revenue) and cotton (18 per cent of revenue) yarn. It also produces technical textiles that find applications in multiple sectors, including automotive, healthcare, construction, sports and protective clothing. As of September 30, 2024, it has more than 3,200 active varieties of yarn products and the capability to manufacture a diversified product portfolio of more than 14,000 varieties of yarn products. The company supplied yarns to over 1,500 customers in FY24. Some of its prominent clientele include Welspun, Premco Global, Page, etc.

Strengths of Sanathan Textiles

• Long-standing clientele: The company has long-standing relationships with reputed consumer brands such as Welspun India, Techno Sportswear, Page Industries, D'Décor Home Fabrics, Siyaram Silk Mills, etc. It has also been associated with its top 10 customers for over a decade.

Weaknesses of Sanathan Textiles

• Geographical concentration: As of FY24, the company derived 65 per cent of its revenue from just three states - Gujarat, Maharashtra and Punjab. Any uncertainty (social, political, economic) can affect Sanathan Textile's profitability.
  
• Dependence on distributors: Sanathan Textiles relies heavily on its distributors to sell its products. In FY24, almost 94 per cent of the revenue was generated by the company's distributors. Thus, the loss of key distributors can adversely affect the company's profitability.

Risk report

Company and business

• Did Sanathan Textiles report earnings before tax of Rs 50 crore or more in the last 12 months?
  Yes. The company reported earnings before tax of Rs 181 crore in FY24.
  
• Will the company be able to scale up its business?
  Yes. The growing popularity of the China-plus-one policy and the development of textile infrastructure in India is expected to help Sanathan Textile scale up its business.
  
• Does the company have recognisable brands with client stickiness?
  Yes. The company has established a strong brand presence in the yarn industry through brands such as 'Sanathan' and 'BornDyed'. Further, Sanathan Textiles has maintained long-standing relationships with leading consumer brands and has been associated with its top 10 customers for an average of over 10 years.
  
• Does the company have a credible moat?
  No. The yarn industry is highly fragmented, with many small and large players, which can make it difficult for Sanathan Textiles to consolidate a sizable market share.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold over a 25 per cent stake in the company?
  Yes. After the IPO, the promoters will retain a 79.7 per cent stake in the company.
  
• Do the top three managers have over 15 years of combined leadership at Sanathan Textiles?
  Yes. The company's Chairman and Managing Director, Paresh Dattani, and Joint Managing Director, Ajay Dattani, have been with Sanathan Textiles since its incorporation in 2005.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Sanathan Textiles free of promoter pledging of its shares?
  Yes. The promoters have not pledged their shares.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No. It has a three-year average ROE and ROCE of around 23.1 and 21 per cent, respectively. In FY24, it reported an ROE and ROCE of nearly 11 per cent each.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. It reported a positive cash flow from operations in the last three years.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. As of Q1 FY25, the company's net debt-to-equity ratio was 0.4 times.
  
• Is the company free from reliance on huge working capital for day-to-day affairs?
  No. Though Sanathan Textile's working capital days are not too long, it relies on short-term funding for its day-to-day needs.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. The company is operating cash flow positive with a low level of debt. Further, the fresh issue is expected to cover Sanathan Textile's funding needs for the next three years.
  
• Is the company free from meaningful contingent liabilities?
  Yes. The company's contingent liabilities stood at just 5 per cent of its net worth as of June 2024.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 6 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock has a P/E ratio of 20.2 times compared to its peers' median level of 26.5 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock has a P/B ratio of 1.6 times compared to its peers' average level of 4.8 times.

Assessing an IPO requires a careful evaluation of the company's strengths, weaknesses, and growth potential, just like we've outlined for Sanathan Textiles. However, sustainable wealth creation can only be achieved by building a well-researched, balanced stock portfolio. This requires expert insights and actionable recommendations. Our Value Research Stock Advisor can help you with that. The service provides meticulously researched stock recommendations and ready-to-invest portfolios, updated every month to help you build a long-term stock portfolio.

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Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.

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