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Capacity enhancement to support long-term growth story!

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 (~ 27% 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%+

Key Investment Thesis:

• Geared up well to capture robust opportunities: In a bid to capture long term growth opportunities and to further strengthen the product range, NSL had embarked on a brownfield expansion and outlined capex worth | 900 crore to enhance capacities across segments. It is enhancing yarn capacity by 47% (from 75000 to 110000 tonnes), knitted fabric by 22% (from 9000 to 11000 tonnes) and woven fabric by 33% (from 30 to 40 million meters). At optimum utilisations (at an average yarn realisation of ~| 280/kg), company could generate incremental revenue of ~ | 1100 crore (peak revenue: | 3500 crore). Commissiong of weaving and knitting fabric capacities are completed and is expected to be ramped up soon. Yarn capacity is expected to be commissioned by Q2FY24E.

• Higher RoCE to create value for longer term: For FY23-25E, we build in volume CAGR of 26% for yarn segment (76000 tonnes in FY25E, CU: 87%), 14% for woven segment (37 mn meters in FY25E, CU: 93%) and 46% CAGR for knitted segment on a lower base (7800 tonnes in FY25E, CU: 70%). Efficient asset utilisation (1.3x AT/O) coupled with positive improvement in yarn spreads would enhance profitability. We build in EBITDA margins of 14-15% in FY24-25E (vs. 12% in FY23) on account of superior product mix and improvement in yarn spreads. We expect NSL to generate RoCE of ~15% in FY25E (vs. average RoCE: 10-12%) and in-turn lead to higher value creation.

Rating and Target Price

• Government initiatives like signing of FTAs with multiple countries, stability in export incentive policy to provide opportunity for Indian exporters across textile value chain to gain market share in global textile trade. • With steady recovery from FY24E onwards, we build in revenue and EBITDA CAGR of 15% and 27%, respectively in FY23-25E.

• We ascribe BUY rating on the stock.

• We value NSL at | 360 per share (based on 9x FY25E EPS)

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