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Bottomline beat on higher gross margin

In-line revenue; Higher gross margins lead outperformance

Vardhman Textiles (VTEX IN) reported revenue in line with our estimates while PAT outperformed on account of higher gross margin. Gross margin expanded by 590bp YoY, led by reduced raw materials cost and superior product mix (value-added yarn & fabric). Yarn and fabric volume, excluding in-house consumption, rose 17.6% YoY and 11.98% YoY, respectively. Capacity utilization was at 93% for yarn and 92.9% for fabric. India cotton prices are more favorable than international ones; inventory normalization of brands may bolster growth with volume & margin improvement. Margin has started to improve; however, it is likely to revert to normalized levels once global retailers begin full-fledged sourcing and domestic demand recovers. 

Small capex hints at the beginning of a capex cycle

VTEX announced an expansion and modernization plan by adding 15,600 spindles and setting up 384 vortex drums (equivalent to ~7,000 spindles) by replacing 7,700 existing ring-frame spindles. Currently, spinning capacity has 1.23mn spindles, and this plan would expand it to 1.25mn. Total capex to be incurred is INR 2.0bn, and capacity is planned to be commissioned by March 2025.

Valuation: retain Accumulate with a higher TP of INR 420

Our long-term outlook is intact for India’s textile companies, given the China Plus One theme and ban on Xinjiang cotton. We raise our earnings estimates by 11.6% for FY24, 9.0% for FY25 and 9.8% for FY26 after considering an improvement in demand and higher Other income. We expect a revenue CAGR of 2.3%, an EBITDA CAGR of 12.9% and an adjusted PAT CAGR of 13.4% during FY23-26E. We are positive on VTEX, given its yarn and fabric leadership, increased integration and strong balance sheet. We retain Accumulate with a higher TP of INR 420 from INR 385 based on 7.0x FY26E (from 6.7x) EV/EBITDA. Key triggers are capacity expansion for growth as it operates at full utilization and margin reversion to the normal levels.

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