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Vardhman Textile Ltd. (VTL) is one of the largest vertically integrated Textile companies in India. The Company enjoys leadership in Yarn manufacturing with ~1.13mn spindles/664MT per day capacity. The company also manufactures Acrylic Yarn, Grey Fabric (220mn meters p.a. capacity) and Processed Fabrics (175mn meters p.a. capacity). Its wholly owned subsidiary, Vardhman Nisshinbo Garments Co Ltd has garmenting capacity of ~5000 shirts per day. We believe the recent ban on Xinjiang Cotton made up and supply crunch of Cotton Yarn in the global market has put the domestic spinning business in a sweet spot. VTL with India’s largest spindle capacity is well placed to capitalize on the emerging opportunity in the global Yarn space and is poised for a robust growth in both revenue and profit in the medium term. We initiate coverage on VTL with BUY rating and Target Price of Rs2771.

* Largest domestic spinner, with best in class Yarn margin: Vardhman Textiles is the largest domestic spinning company, manufacturing varieties of Grey, Blended, Spun Dyed, Mercerized, Melange, Compact Yarns etc. for both the domestic and as well as exports markets. Almost half of its total yarn production goes to exports directly or indirectly. The balance 30% and 20% are for captive consumption by its Fabric units and for the domestic apparel manufacturing customers respectively. Higher proportion of value added products like Blended, Mercerized, Mélange and Spun Dyed Yarns yields best in class EBITDA margin, one of the highest in the Industry (~28.4% in 2QFY22).

* Well placed to capitalize on Global Yarn supply deficit: Recent addition of large downstream capacities in the major Yarn exporting countries and ban on Xinjiang Cotton made-ups by the US led to supply crunch of Cotton Yarn in the global market. Major Yarn producing countries like Pakistan, Vietnam, Bangladesh, Indonesia, Turkey has off late put large downstream capacities to grab the global apparel market share, lost by the Chinese exporters. This has resulted in almost entire internal yarn capacities in these countries being used captively by the downstream capacities. Countries like Bangladesh and Vietnam have now become net importer of yarn, leading to shortage of Yarn in the global market. China+1 policy and ban on Xinjiang Cotton Products by the US Govt. have created demand for the Indian Yarn, Garmenting and Home Textile companies, resulting in robust demand for the Yarn in the both the global and domestic market. Xinjiang Cotton Made-ups and Garments accounted for ~20% of the global Cotton supplies, which is up for grab by various countries, including India. Vardhman Textiles, being the largest Yarn producer in India is a likely beneficiary of the structural improvement in the global demand for Indian Yarn and higher Cotton-Yarn spread.

Outlook & Valuation:

VTL is the largest vertically integrated textile company, producing large variety of Cotton Yarns, well accepted by marquee clients spread across 61 countries. On account of superior operation metrics and varieties of value added Yarns, VTL enjoys best in class profitability. Supply crunch of Cotton Yarns in the global market has pushed the Cotton Yarn Spread to a decadal high. We believe that VTL with its economies of scale is well placed to capitalize on the emerging opportunities for the domestic textile business. We initiate coverage on VTL with BUY rating and DCF based target price (TP) of Rs2771; implying a PE multiple of 10.6x based on FY24E earnings.

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