Buy Sanathan Textiles Ltd for the Target Rs 625 by Emkay Global Financial Services Ltd
Sanathan Textiles (STL) reported consolidated EBITDA of ~Rs1.1bn (up 55%/14% yoy/qoq and ~10% above our estimate), led by strong showing from the Silvassa plant. Consolidated volumes stood at 99kt, up ~62% yoy but down ~2% qoq, as downstream customers deferred purchases in anticipation of a price correction. Blended realization shot up 10%/16% yoy/qoq, owing to the cost pass-through of expensive input materials (PTA and MEG) during the quarter. Gross margin at the Silvassa unit increased by ~200bps qoq, as we believe STL received inventory-gain benefits on account of low-cost PTA and MEG. However, similar benefits were not realized at the Punjab plant. Hence, consolidated gross margin stood at ~30%, flat qoq, but down by 100bps yoy. Consequently, total EBITDA came in at ~Rs1.1bn (up 55%/15% yoy/qoq) or ~Rs11/kg, while Silvassa plant’s margin stood at ~Rs18/kg. Our view: We see the inventory-led standalone margin gain as transient rather than structural. Further, we expect restocking-led demand in upcoming quarters, resulting in better operating rates at both plants. We broadly maintain our FY28E PAT, and roll forward to 1QFY29E EPS, valuing STL at 13x PER. Our TP rises by ~14% to Rs625 (Rs550 earlier); maintain BUY.
Silvassa leads the show; Punjab ramp-up looks imminent
STL (consolidated) delivered revenue growth of ~79% yoy (~14% qoq) to Rs13.3bn, in line with our estimate, on volumes of 99kt (up 62% yoy; albeit down 2% qoq). Consolidated gross margin stood at ~30% (flat qoq but down 100bps yoy), underpinned by the standalone performance. Gross margin (standalone) expanded by ~260bps yoy (~200bps qoq) to 33.6%, as STL consumed low-cost PTA/MEG inventory. Fixed costs increased by 81%/14% yoy/qoq as STL is ramping up the Punjab plant and incurring overhead charges. Consequently, EBITDA stood at Rs1.08bn (Emkay: Rs978mn; ~11% beat), up ~55%/15% yoy/qoq, with margin at 8.1% vs 9.3% in 1QFY26 and 8.1% in 4QFY26; standalone EBITDA margin came in at 11.7% (vs 9.3% yoy) against ~2.5% for the subsidiary. Consolidated PAT stood at Rs240mn (in-line), down ~41% yoy.
Growth pipeline intact, with improving leverage profile
STL plans cumulative capex of ~Rs6.5bn over FY27-28E. We maintain a positive stance, led by 1) doubling of technical textile capacity to 18ktpa at Silvassa, where commercial production commences shortly; 2) the ~91ktpa brownfield expansion at the Punjab unit by Mar-27, taking the site’s capacity to 900tpd; and 3) a 73k-spindle cotton yarn plant at Dhar, MP, by 2HFY28, aided by PM MITRA incentives. Collectively, we estimate incremental revenue of ~Rs13bn at optimal utilization. Unlike the Punjab Phase-1 capex, the abovementioned expansion plans are far lighter, owing to brownfield programs. Net debt should peak at ~Rs15bn in FY27E, with net debt/EBITDA easing to 1.1x by FY29E (vs 4.7x in FY26) as FCF turns positive at ~Rs2bn in FY28E.
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