Vardhaman Spinning and General Mills Ltd (VSGML) belongs to the Ludhiana-based S P Oswal Group and is into cotton yarn, worsted fabrics, steel ingots and rolled products. The other prominent companies in S P Oswal stable include Mahavir Spinning Mills Ltd (MSML) and Vardhaman Polytex Ltd.For VSGML, cotton and synthetic yarn accounted for about 86 per cent of the turnover in 1995-96. The company's 1995-96 performance was badly hit due to high raw material costs which could not be passed because the sudden capacity creation in yarn industry created oversupply in the market.

The fall in cotton prices during 1996 cotton season has once again brought about improvement in VSGML's 1996-97 performance. The company's sales which decreased to Rs 310.39 crore (1995-96) from Rs 320.45 crore (1994-95), increased to Rs 356.37 crore (1996-97).

Similarly PAT which decreased to Rs 11.43 crore from Rs 18.73 crore increased to Rs 21.26 crore during this period. The fall in raw material prices resulted in operating profit margins improving from 14.81 per cent in 1994-95 to 17.47 per cent in 1996-97.

The group has in the past few years undertaken massive expansion and modernisation plans covering VSGML, MSML, Vardhaman Polytex and Vardhaman Acrylic. Besides in-house expansions these companies are also setting up joint ventures with leading international trading houses like Marubeni of Japan and KyungBang of Korea.

The company's exports increased to Rs 99.48 crore (1996-97) from Rs 78.15 crore (1995-96). VSML has established itself as a reliable supplier of quality market and this explains the reason for Marubeni of Japan and KyungBang of Korea setting up joint venture (VKM Colorspin) with the company.

In September 1996, VSGML added 24,000 worsted spindles. It is now expanding its dyeing facility by 5 tpd, adding 36 looms besides setting up a greenfield 25,000 spindles capacity (100 per cent EOU). As per the company, the weaving expansion project is expected to be commissioned by November '97 while the EOU is to be commissioned by March '98.

All these involve massive investments. Oswal had ruled out the possibility of immediate dilution of equity to fund these projects a few months back. As on March 31, 1996, VSGML had debt to equity ratio of 1.2 times and the company may not find it difficult to raise further debt. Cotton yarn has become more of commodity product now too much players and yarn companies like VSGML can stay ahead only through value addition.

VSGML is setting up 100 per cent EOUs and diversifying into weaving to ward off competition. These investments need to generate results fast considering that VSGML's return of networth for 1996-97 is just 11.90 per cent. The VSGML scrip has witnessed price spurt in the anticipation of better results and is quoting at Rs 74.50 on the BSE.

The Vardhaman group is better placed than other spinning mills owing to better procurement skill and inventory holding capacity besides being located close to cotton growing areas. However, the cotton yarn prices have remained soft for most of the first half and it would be better to pick up the scrip when there are indications of improvement in cotton yarn prices.

(Specially prepared for The Financial Express by Kensource Financial)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.