* Trident’s Q2FY18 net revenues stood at Rs11.9bn (+1% yoy), primarily led by sales decline of 6.7% yoy in the Paper segment.
* EBITDA margin declined 325bps yoy to 17.6% (our expectation of 20.8%). EBITDA stood at Rs2.09bn (-14.8% yoy). Textile EBIT margin stood at 3.7% (-711bps yoy) while Paper EBIT margin came in at 37.3% (+1752bps yoy) on better realisations and efficiency.
* For FY18, management has reiterated guidance for capacity utilization of 40-50% in Bed Linen and 55-60% in Terry Towel. Textile EBITDA margin will be in the range of 18-22% for FY18 while Paper segment EBITDA margin will be in the range of 35-40%.
* We expect TRID IN to deliver earnings CAGR of 23% over FY17-19E on account of margin expansion and lower finance cost (due to debt repayment). We maintain BUY rating with TP of Rs110 based on 6.5x FY19E EV/EBITDA.
Muted sales in paper and lower margin in yarn impact earnings
Trident’s Q2FY18 net revenues grew by 1% yoy to Rs11.9bn; Textile registered 1% yoy growth while paper de-grew by 6.7%. Home Textile contributed 49% to sales while Yarn contributed 33% and Paper 18%. In H1FY18, bed linen capacity utilization improved to 39% (29% in FY17) aided by addition of new customers, Terry Towels was lower at 47% ( 50% in FY17) as a result of uneven vendor procurement cycle and Yarn utilization at 94% (93% in FY17). Captive consumption of Yarn was 40% in H1FY18 as against 34% in FY17. Paper capacity utilization was lower at 85% (89% in FY17). EBITDA margin contracted by 325bps YoY to 17.6% and EBITDA fell by 14.8% YoY to Rs 2.09bn against our expectation of Rs 2.51bn. Gross margin contracted by 490bps YoY to 48.3%. Textile EBIT margin came in at 3.7% (-710bps yoy) as a result of higher cotton prices. Profitability was adversely impacted as spreads widened between spot and forward prices of cotton and yarn prices adjusted itself to the lower forward price. Paper EBIT margin was 37.3% (+1752bps yoy) due to better realisations and efficiency. Finance cost declined by 11% yoy to Rs319mn. Net profit declined by 36.4% yoy to Rs509mn due to lower gross margins and higher effective tax rate.
Maintain earnings on better performance likely in H2FY18; Retain BUY
TRID IN retired Rs3.59bn long-term debt in H1FY18, including high cost debt of Rs1.63bn. Net debt reduced by Rs3.88bn to Rs23.3bn and Net Debt/Equity stood at 0.8x, with over 75% of long-term debt under TUFS. Management reiterated debt repayment of over Rs4.5bn in FY18. It is likely to generate free cash flow of ~Rs13bn over FY18-19E, led by high operating cash flows of ~Rs15bn, translating into deleveraging of Rs7.7bn over FY17-19E. We maintain BUY rating with TP of Rs110 based on 6.5x FY19E EV/EBITDA.
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