Sambandam Spinning - Rs.126.00

Established in early seventies, Sambandam Spinning Mills Ltd (SSML) is engaged in the manufacture and sale of cotton yarn. It produces finer and high-count cotton yarns, which are used in making garments and madeups meant for export. Normally, such yarn trades at a premium with higher profit margin compared to the normal coarse cotton yarn. Although the company has been exporting directly/indirectly to Italy, Japan, Spain etc but is currently concentrating on the domestic market due to the higher demand and better price realization. With the removal of quota and cotton prices remaining stable, the future prospects of SSML appear very promising.

SSML has two spinning mills in Salem and one mill in Coimbatore with a total installed spinning capacity of around 55,000 spindles. Since it is an old mill, there is constant technological upgradation by replacing the older spindles. Also, it plans expand its capacity to 1,00,000 spindles by increasing capacity by 20% each year over the next 5 years. In addition, it has finalized outsourcing contracts with 3rd party spinning units to produce yarn on an exclusive basis. To ensure quality and cater to the increasing demand, SSML has set up an in-house R&D centre with state-of-the-art machines for all sorts of testing to produce a better product. Besides a windmill, it has also set up 10 wind energy converters at Tirunelveli district, which has led to a substantial reduction in its power cost. For future growth, the company has planned forward integration and intends to get into the production of knitted garment.

Ironically since the last 10 years, the company has not diluted its equity but preferred to avail of loans under the governments TUF scheme at subsidised interest rate for modernisation and expansion. Though the interest rate is low at 5 ~ 6%, SSML’s debt today stands at a huge Rs.61 cr. against its equity of Rs.4.30 cr. and sales of Rs.90 cr. Still, the company is fundamentally strong and has good dividend payout track record. For FY05 its sales increased by 7% to Rs.90 cr. whereas its NP jumped 65% to Rs.5.50 cr. inspite of higher tax provision of Rs.4.90 cr. and declared Rs.5 dividend (50%). Since the real effect of the quota-free regime will be visible in the current year, SSML can report a topline of Rs.110 cr. and NP of Rs.10 cr. leading to an EPS of Rs.23~24. Investors are advised to accumulate this scrip at declines with a price target of Rs.200 i.e.60% appreciation in 15 months time.