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Buy Vardhman Textiles Ltd For Target Rs.1510

Strong margin performance to sustain…

Vardhman Textiles’ (VTL) reported an improved performance both in terms of revenue growth and profitability. Revenues for Q4FY21 grew 22% YoY to | 1947 crore. Gross margin expansion of 459 bps YoY to 53.1% and lower power cost (down 146 bps YoY to 9.6%) enabled EBITDA margin expansion of 610 bps to 20.2%. EBITDA was up 75% YoY to | 394 crore. Consequently, PAT grew 72% to | 250 crore.

Both yarn, fabric segment register positive volume growth

The yarn business (including internal transfer) volumes for Q4FY21 grew 6% YoY while fabric business volumes returned to the positive growth trajectory with a pick-up in demand and posted growth of 12% YoY. For FY21, volumes in the yarn segment were at 97% of pre-Covid levels while fabric volumes, which were severely impacted in H1FY21, exited the year with a recovery rate of 75% of pre-Covid level.

Global brands expect strong rebound in demand in FY22

The management indicated that most global brands were expecting double digit growth in FY22E (on 2019 as a base year) in textile user industries. Vardhman being a major supplier to most renowned global brands can be a beneficiary of the same and can expect strong revenue growth in FY22. On the domestic front, demand in March 2021 had seen a strong uptick while the management expects the domestic business also to pick up from Q2FY22 providing further support to overall revenues.

Operating margin to sustain; capex to drive growth

The management indicated that yarn demand continued to remain strong as global retailers were looking at de-risking their supply chains and India is expected to be a beneficiary in the yarn and fabric segment. Also, Chinese exporters to the US were keen on raw material sourcing from India and other destinations. The enhanced demand coupled with supply constraint owing to closure of ~ 5-6% of capacities due to impact of pandemic is expected to result in stronger spreads in yarn business, thereby leading to improvement in operating margins for players like Vardhman. VTL has announced plans to expand its yarn capacity by ~1 lakh spindles with capex of ~| 700 crore. The company expects to complete the project by June-July 2022.

Valuation & Outlook

Sustained improvement in yarn spreads and consequent improvement in margins would enable VTL to improve its financial performance, going ahead. We expect Vardhman to report revenue, earnings CAGR of 13%, 61%, respectively, in FY21-23E. The improved financial performance is expected to result in augmentation of RoCE profile (570 bps improvement in FY21-23E to 13.4%) We expect VTL to capitalise on the emerging demand scenario owing to its strong balance sheet and long standing relationship with marquee clients. We upgrade our rating from HOLD to BUY with a revised target price of | 1510 (8x FY23E earnings) (earlier TP: | 1100).

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