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About the stock: Nitin Spinners (NSL) has graduated from a small pure spinning company to a company with a sizeable presence in India’s yarn market (3 lakh+ spindles). Forward integration into knitted and finished woven fabrics (~ 25% of revenues) in its product portfolio, which yields more superior margins than spinning has fortified its presence across the textile value chain.

* NSL invested in capacity building over the last decade, more than quadrupled its spinning capacities and forward integrated with the addition of fabric capacities. The company has been able to sweat its assets effectively and has maintained average utilisation of 85%+

Q4FY23 Results: Nitin Spinners reported an improvement in operational performance on a sequential basis but macro headwinds continued to impact its performance on a YoY basis.

* Revenue grew 22% QoQ to | 654.8 crore (down 15% YoY). Gross margins declined 330 bps QoQ to 29.8% (vs. 41% in Q4FY22) probably owing to high cost cotton inventory and tough demand scenario

* However, positive operating leverage led to lower employee (down 102 bps QoQ) and other expenses (down 194 bps QoQ), which curtailed the decline in EBITDA margins to only 40 bps QoQ to 10.8%. Absolute EBITDA grew 18% QoQ to | 71 crore (down 58% YoY))

* Consequently, PAT grew 22% QoQ to | 38.5 crore (declined 55% YoY

What should investors do? Consistent improvement in financial performance of NSL in spite of cyclical nature of the textile industry signifies NSL’s ability of optimum asset utilisation leading to sustainable profit growth. In line with its superior performance, the stock price has grown at 19% CAGR over the last five years. We believe that NSL, with its presence across textile value chain (yarn to fabric) is well poised to capture the export opportunity in global textile trade.

• We maintain BUY rating on the stock

Target Price and Valuation: We value Nitin Spinners at | 290 i.e. ~7x FY25E earnings.

Key triggers for future price performance:

* Capacity expansion across segments to drive revenue growth. NSL’s planned capex of | 900+ crore can generate incremental revenue of ~| 1100 crore (peak revenue of | 3500 crore)

* We expect NSL to generate superior RoCE of ~15% in FY25E (vs. average RoCE: 10-12%). We model revenue, earnings CAGR of 15%, 21%, respectively, in FY23-25E

Alternate Stock Idea: Apart from NSL, we like Siyaram Silk Mills.

* Siyaram’s strong brand portfolio and presence in tier II/III towns would enable it to benefit from a shift from unorganised to organised players

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