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Textile margin to remain under pressure in the near term

In line operating performance

* TRID reported a strong revenue growth, led by the Home Textiles and Paper segment. EBIDTA margin was marginally higher (30bp), led by better operating performance in the Home Textiles segment, while Paper margin was a laggard. We expect the demand trend in the US market for Home Textiles to remain under pressure in the near term.

* We cut our FY23/FY24 EBIDTA estimate by 10%/9% to factor in input cost pressures in the Textile business. We reduce our TP to INR58/share and maintain our Buy rating.

Textile driving operating performance

* Revenue grew 37% YoY to INR18.5b (est. INR18.2b). EBITDA margin expanded by 30bp to 17.1%, despite a 840bp contraction in gross margin (to 45.7%), offset by a 440bp/420bp YoY decline in employee/other expenses as a percentage of sales. EBITDA, adjusted for a forex gain, stood at INR3.2b, up 39% YoY. Adjusted PAT grew 66% YoY to INR1.6b.

* Revenue from Textiles rose 39% YoY (down 8% QoQ) to INR15.7b, with EBIT margin expanding by 500bp YoY (down 200bp QoQ) to 14.8%. Textile EBIT surged 2.1x YoY (down 19% QoQ) to INR2.3b. Capacity utilization in the Sheeting/Towel business stood at 80%/46% in 4QFY22.

* The Home Textile segment registered a revenue growth of 10% YoY, driven by higher realization, while volume fell 25%/13% YoY in the Bath/Bed Linen segment to 10,322MT/8.68m meters. Yarn revenue grew 2.1x YoY to INR6.7b, with a volume growth of 9% YoY to 29,953MT.

* Revenue from Paper and Chemicals grew 27% YoY and 10% QoQ to INR2.8b. EBIT margin contracted by 640bp YoY and 160bp QoQ to 21.4%. Paper EBIT declined marginally by 2% YoY (+2% QoQ) to INR594m. Capacity utilization in the Paper segment stood at 89% v/s 92% in 4QFY21.

* Revenue/EBIDTA/PAT grew by 55%/82%/2.5x YoY to INR70b/INR14.9b/ INR8.1b in FY22. CFO came in at INR9.1b v/s INR5b in FY21.

Key takeaways from the management interaction

* Market share: As per OTEXA data, India’s market share in US cotton sheets has fallen to 50% in Jan-Mar’22 (from 57% in CY21), whereas Pakistan/China gained ~5pp/4pp over the same period. In the Terry Towel segment, India’s share has fallen by 400bp to 40% in Jan-Mar’22 (v/s 44% in CY21), while Pakistan/China’s share increased by 200bp/100bp.

* Vision 2025: The company has set three BHAGS (Big, Hairy, Audacious Goals): 1) grow to INR250b by CY25, with a profit of 12% as a business group; 2) make TRID a national brand; and 3) Digital TRID to maneuver through the Industry 4.0 journey.

* Capex: In the Yarn segment, the management has proposed a capacity addition of 98,496 spindles and 3,600 rotors. In the Sheeting division, it is adding an additional capacity of 70,000 meters/day. The management has guided at a total capex of INR13.8b for the above-mentioned capacity expansion, which is expected to be completed by Sep’23. The company will fund this expansion via a combination of debt and equity

Valuation and view

* We expect gross margin pressures to sustain till the next cotton season. Outlook for the Home Textile business remains positive for the long term, even as the short-term risk to margin persists.

* We cut our FY23/FY24 EBIDTA estimate by 10%/9%, factoring in input cost pressure.

* We value the stock at 23x FY24E EPS to arrive at our TP of INR58. We maintain our Buy rating.

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