Vardhman Textiles Ltd

Textile

Vardhman Textiles Ltd

Textile

Large Cap Focus

CMP
Rs. 2689.95
Rating:
Buy
Target
Rs. 3400
January 14, 2022

Stock Info

BSE
502986
NSE
VTL
Bloomberg
VTEX:IN
Reuters
VART.NS
Sector
Textile
Face Value (Rs)
10
Equity Capital (Rs cr)
57
Mkt Cap (Rs cr)
15561.11
52w H/L (Rs)
2655.00 - 1011.35
Avg Daily Vol (BSE+NSE)
140,752

Shareholding Pattern

(as on 31-Dec)
%
Promoter
63.15
FIIs
6.30
DIIs
18.84
Public & Others
11.71
Source: Ace equity, StockAxis Research

Price performance

Return (%)
1m
3m
12m
Absolute
25.10
32.31
153.29
Sensex
5.34
-0.14
23.47
Source: Ace equity, StockAxis Research

Indexed Stock Performance

Vardhman Textiles Ltd Sensex
Vardhman Textiles Ltd
Source: Ace equity, StockAxis Research

Supply side constraints in yarn due to structural change in the yarn industry to benefit VTL

Incorporated in 1973, Vardhman Textiles Ltd (VTL) was founded by S.P. Oswal. It is one of India's most prominent textile firms, specializing in cotton yarn and fabric. It has 17 manufacturing facilities spread across Punjab, Madhya Pradesh, and Himachal Pradesh, with a total installed capacity of 1.2 million spindles, 1,544 fabric looms, and 175.6 million meters per annum of fabric processing capacity. It is also a significant producer of piece-dyed fabric and a cotton yarn exporter.

Consolidated Financial Statements

Rs in Cr Net Sales EBITDA EBITDAM PAT EPS ROE P/E EV/EBITDA
FY18 6242.40 903.00 14.50% 581.20 102.80 11.50% 11.90 9.10
FY19 6877.90 1193.50 17.40% 730.70 129.00 12.80% 8.40 6.50
FY20 6735.00 937.30 13.90% 577.50 101.90 9.40% 6.10 5.20
FY21 6139.90 813.80 13.30% 409.90 72.30 6.20% 17.90 10.80
FY22E 9518.00 2484.20 26.10% 1672.30 294.80 20.50% 9.10 6.60
FY23E 10660.20 2579.80 24.20% 1737.90 306.40 17.80% 8.80 6.40
FY24E 11513.00 2613.40 22.70% 1786.80 309.40 16.60% 8.50 5.80

Investment Rationale

Strong Market Position:
VTL is one of India's largest integrated textile producers, with significant production capacities, high-capacity utilization, and great operating efficiencies. It is a prominent player in the cotton yarn, piece dyed fabric, and sewing threads segments, as well as a leading yarn maker. VTL has a diverse customer base, with only 9.7% of total revenue coming from its top five customers in FY21. Its cotton yarn has a strong market presence in quality-conscious areas such as the EU, the United States, and the Far East. Almost half of its total yarn production goes to exports directly or indirectly. The balance 30% and 20% are for captive consumption by its Fabric units and for the domestic apparel manufacturing customers respectively. The company has established itself as a global leader in premium quality yarn production on the back of unwavering dedication to excellence, continual customer-driven innovation, and innovative technology partnership tactics. Over the medium term, we expect VTL to steadily develop its business across all market categories.

Global Cotton Yarn supply deficit to benefit VTL:
The USA has put a ban on Xinjiang (Chinese region) cotton made-ups leading to supply crunch of Cotton Yarn in the global market. Major Yarn producing countries like Pakistan, Vietnam, Bangladesh, Indonesia, Turkey have put large downstream capacities to grab the global apparel market share, lost by the Chinese exporters. This has resulted in majority yarn capacities in these countries being used captively to manufacture downstream products. Countries like Bangladesh and Vietnam have now become net importer of yarn, leading to shortage of Yarn in the global market. Vardhman Textiles, being the largest Yarn producer in India is a beneficiary of the structural improvement in the global demand for Indian Yarn and higher Cotton-Yarn spread. 

Vardhman Textiles

Margins to sustain despite increase in cotton prices:
Cotton prices have been increasing steadily since a year. We expect the EBITDA margin to normalize as the domestic spinning companies start replenishing their cotton inventory at relatively higher prices, though it is still likely to remain significantly higher than the average margin over the past decade due to structural improvement in the demand for the Indian Yarns. We expect the EBITDA margin of VTL to stay in the range of 22-24% over the next two years, though lower than ~28% in 2QFY22 but significantly higher than the FY11-21 average of ~17%.

Vardhman Textiles
Vardhman Textiles

Source: IndexMundi

CAPEX to Aid Growth:
In order to meet growing demand, the company incurs capex on a continuous basis. In past 5 years, it has incurred capex of Rs. 2,400 crores and further, it has planned additional capex of Rs. 1,800-1,900 crores over FY22E-24E, of which, Rs. 1,400 crores will be used to increase capacity of spindles by 1.65 lakhs. On the fabric capacity front, no capacity expansion is planned, but the existing capacity may be debottlenecked in the coming quarters, as per the management. The enhanced capacity is likely to come on stream in phases by FY24 and is likely to boost volumes over the medium term. The earlier announced expansion of 1 lakh spindles is likely to commission by September 2022 and full benefit will come in FY23. Currently, revenue growth is price driven (yarn and fabrics) as the company is not operating at full utilization (spindle). The company can surprise with improved top-line and bottom-line if utilization improves and cotton prices stabilize. We believe that utilizations should improve or else the company would not have announced two new capex plans within a short period of time. This clearly indicates that management is trying to under-promise and over-deliver in terms of operational performance going forward. Vardhman has a very strong balance sheet which can support capex and thus growth.

Improving Operating Matrices:
On the back of low base, high demand, and improved volume & realization, the company’s sales in H1FY22 increased 76.5% YoY. Furthermore, rising discretionary demand, particularly for textiles, resulted in greater revenue share of value-added fabrics compared to low-value yarns with lower realizations. In terms of sales volumes, the operational performance that was impacted by the second wave of COVID-19 during Q1FY22 rebounded in Q2FY22 to better-than-pre-COVID-19 levels for yarns and textiles.

Risks & Concerns

Cotton Price Risk:
VTL purchases cotton during the cotton season and creates a six-to-eight-month inventory. Cotton production is seasonal, and the risks associated with agricultural yields and output exposes the company's operations to price volatility.

Industry Related Risks:
Due to low entry hurdles, India's textile industry is extremely fragmented, and it has also been troubled by overcapacity, particularly in the spinning sector. Furthermore, the pricing dynamics of the domestic industry are heavily influenced by events in China. In the textile business, substitution risk is very considerable. The synthetic yarn industry benefits from a decrease in demand for and production of cotton yarn.

Duty structure of various markets
VTL exports Yarn and Fabrics to over 60 countries. Adverse regulations and unfavourable change in the duty structure in its key export markets will directly impact the earnings of VTL.

Currency Risk:
VTL's exports accounted for roughly 46% of total revenue in FY21; it also imports raw materials and some assets, putting its margins at risk from currency fluctuations.

Outlook & valuation

China+1 policy and ban on Xinjiang Cotton Products by the US Government has created robust demand for yarn in both the global and domestic market. Xinjiang Cotton Made-ups and Garments accounted for ~20% of the global Cotton supplies, which is up for grab by various countries, including India. As with many other textile companies, VTL is also expected to benefit as global retailers are looking to de-risk their supply chains and moving away from China. We take confidence in VTL’s strong market position and expect it to leverage on the strong demand and elevated realizations in near term. We expect higher volume along with higher realization to aid earnings in the current fiscal. We also expect the planned capacity expansion to boost volume growth in medium term. Based on our estimates, the stock is currently trading at ~9x of FY24E earnings. At this valuation, the probability of downside risk is very low and any positive surprise on top-line & bottom-line growth can act as a re-rating trigger and hence, we initiate coverage on VTL with a ‘BUY’ rating.

Financial Statement

Profit & Loss statement

Yr End March (Rs Cr) 2019 2020 2021 2022E 2023E 2024E
Net Sales 6878.00 6735.00 6140.00 9518.00 10660.00 11513.00
Growth % 10.00% -2.00% -9.00% 55.00% 12.00% 8.00%
Expenditure
Material Cost 3669.00 3638.00 3339.00 4949.00 5650.00 6102.00
Employee Cost 550.00 596.00 590.00 666.00 746.00 979.00
Other Expenses 1465.00 1564.00 1397.00 1418.00 1684.00 1819.00
EBITDA 1193.00 937.00 814.00 2484.00 2580.00 2613.00
Growth % 32.00% -21.00% -13.00% 205.00% 4.00% 1.00%
EBITDA Margin 17.00% 14.00% 13.00% 26.00% 24.00% 23.00%
Depreciation & Amortization 254.00 333.00 364.00 401.00 453.00 509.00
EBIT 939.00 604.00 450.00 2084.00 2127.00 2104.00
EBIT Margin % 14.00% 9.00% 7.00% 22.00% 20.00% 18.00%
Other Income 223.00 174.00 202.00 212.00 245.00 272.00
Interest & Finance Charges 120.00 135.00 113.00 99.00 89.00 87.00
Profit Before Tax - Before Exceptional 1043.00 643.00 538.00 2196.00 2282.00 2331.00
Profit Before Tax 1043.00 643.00 538.00 2196.00 2282.00 2331.00
Tax Expense 318.00 65.00 136.00 553.00 574.00 576.00
Effective Tax rate 31.00% 10.00% 25.00% 25.00% 25.00% 25.00%
Exceptional Items - - - - - -
Net Profit 725.00 579.00 402.00 1643.00 1708.00 1755.00
Growth % 26.00% -20.00% -31.00% 309.00% 4.00% 3.00%
Net Profit Margin 11.00% 9.00% 7.00% 17.00% 16.00% 15.00%
Consolidated Net Profit 731.00 578.00 410.00 1672.00 1738.00 1787.00
Growth % 26.00% -21.00% -29.00% 308.00% 4.00% 3.00%
Net Profit Margin after MI 11.00% 9.00% 7.00% 18.00% 16.00% 16.00%

Balance Sheet

Yr End March (Rs Cr) 2019 2020 2021 2022E 2023E 2024E
Share Capital 56.00 57.00 57.00 57.00 57.00 57.00
Total Reserves 5519.00 5977.00 6399.00 7941.00 9535.00 11165.00
Shareholders' Funds 5705.00 6169.00 6607.00 8155.00 9756.00 11394.00
Minority Interest 113.00 121.00 133.00 140.00 147.00 154.00
Non Current Liabilities
Long Term Burrowing 1089.00 1266.00 1297.00 1281.00 1181.00 881.00
Deferred Tax Assets / Liabilities 323.00 243.00 257.00 257.00 257.00 257.00
Long Term Provisions 12.00 16.00 17.00 17.00 17.00 17.00
Current Liabilities
Short Term Borrowings 886.00 737.00 552.00 552.00 552.00 552.00
Trade Payables 316.00 357.00 299.00 429.00 553.00 607.00
Other Current Liabilities 624.00 538.00 538.00 254.00 254.00 254.00
Short Term Provisions 36.00 3.00 40.00 40.00 40.00 40.00
Total Equity & Liabilities 9016.00 9354.00 9627.00 11005.00 12630.00 14022.00
Assets
Net Block 3201.00 3628.00 3539.00 3838.00 4185.00 4476.00
Non Current Investments 753.00 573.00 567.00 567.00 567.00 567.00
Long Term Loans & Advances 78.00 64.00 65.00 65.00 65.00 65.00
Current Assets
Currents Investments 592.00 572.00 508.00 583.00 583.00 583.00
Inventories 2610.00 2681.00 2796.00 3496.00 4506.00 4951.00
Sundry Debtors 803.00 821.00 1039.00 1180.00 1520.00 1671.00
Cash and Bank 44.00 280.00 212.00 323.00 245.00 750.00
Short Term Loans and Advances 487.00 380.00 387.00 412.00 412.00 412.00
Total Assets 9016.00 9354.00 9627.00 11005.00 12630.00 14022.00

Cash Flow Statement

Yr End March (Rs Cr) 2019 2020 2021 2022E 2023E 2024E
Profit After Tax 725.00 579.00 402.00 1643.00 1708.00 1755.00
Depreciation 254.00 333.00 364.00 401.00 453.00 509.00
Changes in Working Capital -499.00 -2.00 -658.00 -712.00 -1226.00 -541.00
Cash From Operating Activities 499.00 849.00 168.00 1332.00 935.00 1723.00
Purchase of Fixed Assets -908.00 -657.00 -243.00 -700.00 -800.00 -800.00
Free Cash Flows -409.00 192.00 -75.00 632.00 135.00 923.00
Cash Flow from Investing Activities -278.00 -379.00 -116.00 -700.00 -800.00 -800.00
Increase / (Decrease) in Loan Funds -44.00 -57.00 -89.00 -300.00 -100.00 -300.00
Equity Dividend Paid -84.00 -99.00 0.00 -102.00 -113.00 -125.00
Cash from Financing Activities -252.00 -296.00 -175.00 -402.00 -213.00 -425.00
Net Cash Inflow / Outflow -30.00 175.00 -122.00 230.00 -78.00 498.00
Opening Cash & Cash Equivalents 70.00 40.00 215.00 93.00 323.00 245.00
Closing Cash & Cash Equivalent 40.00 215.00 93.00 323.00 245.00 743.00

Key Ratios

Yr End March 2019 2020 2021 2022E 2023E 2024E
Basic EPS 129.00 101.90 72.30 294.80 306.40 309.40
Diluted EPS 129.00 101.90 72.30 294.80 306.40 309.40
Cash EPS (Rs) 173.80 160.70 136.40 365.50 386.30 397.40
DPS 17.50 - 17.50 18.00 20.00 22.00
Book value (Rs/share) 1007.10 1088.70 1164.90 1437.80 1720.20 2008.90
ROCE (%) Post Tax 11.00% 9.00% 6.00% 19.00% 17.00% 15.00%
ROE (%) 13.00% 9.00% 6.00% 21.00% 18.00% 17.00%
Inventory Days 129.00 143.00 163.00 163.00 163.00 163.00
Receivable Days 41.00 44.00 55.00 55.00 55.00 55.00
Payable Days 16.00 18.00 20.00 20.00 20.00 20.00
PE 8.40 6.10 17.90 9.10 8.80 8.50
P/BV 1.10 0.60 1.10 1.80 1.50 1.30
EV/EBITDA 6.50 5.20 10.80 6.60 6.40 5.80
Dividend Yield (%) 2.00% 0.00% 1.00% 1.00% 1.00% 1.00%
P/Sales 0.90 0.50 1.20 1.60 1.40 1.30
Net debt/Equity 0.30 0.20 0.20 0.20 0.20 0.00
Net Debt/ EBITDA 1.40 1.50 1.70 0.60 0.60 0.00
Sales/Net FA (x) 2.40 2.00 1.70 2.60 2.70 2.70