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Decent performance in tough operating scenario…

About the stock: Filatex India (FIL) is among the top cost efficient manufacturers of manmade yarns in India with a diversified product portfolio. FIL, over the last decade, has transformed its product mix with enhanced focus on value added products with its share increasing from 10% in FY13 to 78% in FY21.

* Despite being capital intensive in nature, FIL has maintained a capital efficient business model with stringent working capital policy (NWC days: 17) and high asset turn (2.0x), generating healthy RoCE of 22%

* Healthy cash flows have enabled it to reduce debt by ~ | 140 crore (D/E: 0.8x in FY21 vs. 1.2x in FY20). We expect further deleveraging to result in D/E of ~0.2x in FY23E

Q1FY22 Results: The company managed to operate at above 80% utilisation levels and reported reasonable revenue and profitability in a tough operating scenario.

* Revenue de-grew 18% QoQ (3.8x growth YoY) to | 698.9 crore

* Gross spreads, which were significantly higher in Q4FY21, fell 22% QoQ to | 29.3/kg with gross margins down ~560 bps QoQ (up 1380 bps YoY) to 28.4%

* Subsequently, EBITDA margins were down 760 bps QoQ to 14.5% (Q1FY21 -4.3%), with absolute EBITDA down 46% YoY to | 101.1 crore (EBITDA/kg: | 14.9 vs. | 24.3 in Q4FY21)

* Ensuing PAT came in at | 52.1 crore vs. | 118 crore in Q4FY21.

What should investors do?

The stock price of FIL has appreciated at 50% CAGR in the last five years.

* We continue to remain structurally positive and maintain BUY rating

Target Price and Valuation: We value FIL at | 125 i.e. 7x FY23E EPS

Key triggers for future price performance:

* Commissioning of 130 TPD capacity of POY and DTY by Q1FY23 to provide thrust to revenue growth

* Commencement of captive power plant in Q2FY22 to reduce power cost

* We expect share of value added products to increase from 64% in FY20 to 81% in FY23E

* Improved operational performance to lead to RoCE improvement to 32%

Alternate Stock Idea:

Apart from FIL, in our textile coverage we also like KPR Mill

* KPR Mill is among select vertically integrated textile players in India that has displayed consistent operating margins with strong return ratios

* BUY with target price of | 2310

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