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Niche technical textile player with innovative products

About the stock: Garware Technical Fibres (GTFL) is one of India’s leading players in the technical textiles sector and a major supplier of aquaculture cage nets to the global salmon farming industry (40% market share). GTFL also has a dominant market position in providing solutions to the domestic marine fisheries and a growing presence in sports nets and geosynthetics.

* The company has transitioned from being a provider of nets and ropes to Indian fisheries and shipping sector, respectively, to a value added solution provider to its clients across the globe with a presence in 75 countries with exports contributing ~ 63% of revenues

* GTFL develops new and innovative products to enable customers to maximise revenues and reduce costs that leads to customer stickiness and steady flow of repeat orders. GTFL has filed 75 patents over the years (granted 23 patents) for various products and continues to provide innovative solutions to its customers

Financial performance over last decade:

* Over the last decade, GTFL’s financials have witnessed significant improvement in operating metrics. Conscious strategy of focusing on value added products rather than commoditised products has led to moderate revenue CAGR of ~7%. However, profitability has improved materially with EBITDA and PAT CAGR of 14% and 21%, respectively

* B/s has also strengthened with D:E ratio improving from 0.6x in FY12 to 0.1x in FY22. Consistent OCF generation (average: ~70% OCF/EBITDA) has led to robust cash & investments worth | 520 crore. RoCE, RoE have almost doubled from 12%, 9% in FY12 to 22%, 17%, respectively, in FY22

What should investors do? Over the past three years, the impact of GTFL’s improved financial performance has been visible in upward momentum in stock price, which has grown at ~2.5x over the last three years.

* We initiate coverage under Stock Tales format with a BUY rating

Target Price and Valuation: We value GTFL at | 3695 i.e. 32x FY24E EPS

Key triggers for future price performance:

* GTFL has a unique business model as it derives ~ 60% of revenues from products developed for food related sectors that are relatively immune to demand fluctuations compared to textile fashion and clothing categories

* High share of value added products (75% of revenues) enhances customer stickiness and enables GTFL to pass on majority of the input cost increase to consumers and maintain its margin profile trajectory

* Expansion of aquaculture cages business by foraying into non-salmon fish farming cages coupled with strong growth in sports and geosynthetics segment would aid in maintaining pace of revenue growth. Increased traction in new high margin innovative products (40% of value added products) to drive 240 bps margin expansion to 21.1% in FY22-FY24E. We expect revenue, PAT CAGR of 12%, 20%, respectively, in FY22-24E with healthy RoCE in range of 22%-24% (RoIC: 40%+)

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