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.
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 |
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.
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%.
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.
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.
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.
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% |
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 |
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 |
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 |