IGI Logo

For Q4FY23, Vardhman reported 6% QoQ sales growth, owing to better utilization. EBITDAM came in at ~11%, leading to 66% QoQ growth in PAT (down 53% YoY). Sales during the quarter witnessed an uptick, while normalized margin still remains elusive as India cotton is at a 10-15% premium to international cotton. Management stated that demand from China is growing. Given low cotton-yarn spread, management presently has refrained from any near-term capacity addition (this year, 1lakh spindles have already been added), though the same will be relooked if margin improves. We maintain our BUY rating on the stock with an unchanged TP of Rs440. During the last two years, the company has registered extreme margins (high of 28% and low of 7%); though in a normalized scenario, 16-20% is realistic.

Improved sales on account of better utilization

Higher utilization (spinning is working almost at full capacity) led to sales of Rs24.3bn during the quarter, registering a sequential improvement. During the year, the company had added 1lakh spindles on a base of ~12lakh spindles.

Margin improvement remains key

EBITDA margin improved to ~11% in Q4FY23 in comparison to 7% in Q3FY23. While cotton-yarn spreads have remained almost flat in the last two quarters, lower cotton price has aided in these margins. Although domestic cotton prices have corrected to Rs60,000-65,000/bale, Indian spinners are not at the same level playing field in the international market compared to their international peers due to a 10-15% premium for domestic cotton. Cotton arrivals during the season have been slow. Over the long term, Vardhman has had an average margin of 16-20%.

Expansion

Management has maintained its position that no new capacity will be added in the near future until the price of cotton in India remains at a double-digit premium to international cotton, as this puts India’s spinners at a competitive disadvantage to players in other regions. The company might make an aggressive addition (2.5–3.0 lakh spindles) if this returns to normal levels and demand increases.

Valuation and Outlook

We roll forward our valuation to Mar-24 and maintain our TP of Rs440, based on 12x its FY25 EPS of Rs37. We have assumed a 15.8%/19% margin for FY24E/FY25E vs. 13.1% margin in FY23E. We believe strong spinning utilization (industry at 90%) and improvement in the home textile market demonstrate that demand is increasing, but not as per previous levels. Over the medium term, we expect better demand and a lower price differential between domestic and international cotton to ensure better margins.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer