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Stable growth led by the yarn & value-added segments

* Vardhman Textiles (VTEX) is one of India’s largest and most established yarn manufacturers, with a dominant position in premium yarns and a global export footprint across the world. It has 1.25m spindles, with Yarn contributing ~63% of the revenue, followed by Fabric (~34% of revenue) and Garment (1%). Additionally, VTEX operates in acrylic fiber through its subsidiary, Vardhman Acrylics (70.74% stake), further strengthening its presence across the textile value chain.

* The yarn segment remains closely linked to downstream demand from garments and home textiles, both domestically and globally. Over FY22-26, this segment observed flat growth, while we expect ~5% CAGR over FY26-28 led by higher realization.

* VTEX currently operates ~2.2m pieces of garment capacity with clients such as Zara, Lands' End, and Ben Sherman, leveraging strong backward integration. We expect ~47% CAGR, on a low base, over FY26-28, led by capacity expansion to ~4.5m pieces. ? We model a revenue, EBITDA, and PAT CAGR of 9%, 24%, and 32%, respectively, over FY26-28, led by higher garment growth followed by stable yarn business.

* We initiate coverage on VTEX with a NEUTRAL rating and an EV/EBITDA-based TP of INR700, valuing the stock at 11x FY28E EV/EBITDA (20% premium to the 10Y mean).

Integrated value chain: Largest spinning player in India

VTEX has established itself as India’s largest spinning player with ~1.25m spindles, supported by a completely integrated textile value chain. VTEX operates at industry-leading utilization levels of ~100% and has built a strong global export presence across Bangladesh, Vietnam, Sri Lanka, China, the EU, and the US, while steadily increasing its share of value-added and branded yarns to improve realizations and margins. Alongside its dominant yarn business, VTEX is expanding its fabric and garment segments to reduce cyclicality and strengthen profitability through higher value-added offerings. The company’s strong positioning comes at a time when global spinning capacities are facing structural constraints, with China reducing spindle capacities, Pakistan struggling with energy and political issues, and Bangladesh operating at lower utilization levels. Against this backdrop, India’s integrated textile ecosystem, cotton availability, and improving export competitiveness position VTEX favorably to capture long-term global yarn demand growth. Over FY22-26, the Yarn segment observed flat growth due to lower yarn prices, while we expect ~5% CAGR over FY26-28, led by higher realization.

Higher cotton yarn spread helps achieve better gross margin

VTEX’s profitability remains closely linked to the cotton-yarn spread, as cotton constitutes nearly ~77% of its raw material costs at present, and the company procures ~4% of India’s total cotton production. Over the last 2-3 years, elevated domestic cotton prices, driven by MSP hikes, import duties, and supply tightness, created a structural cost disadvantage for Indian spinners versus global peers, compressing industry margins despite stable yarn demand. With global cotton prices rising due to lower crop expectations and tightening inventories, while yarn realizations continue to improve, the sector is expected to witness gradual gross margin recovery over FY26-28.

Valuation & view: Initiate coverage with a NEUTRAL rating

We initiate coverage on VTEX with a NEUTRAL rating and an EV/EBITDA-based TP of INR700, valuing the stock at 11x FY28E EV/EBITDA (20% premium to the 10Y mean). We believe the Yarn business is likely to clock ~5% CAGR over FY26-28, with better realization. Further, the garment business is expected to record ~47% CAGR due to a low base backed by capacity addition. Overall, we expect 9% revenue CAGR with more than 300bp margin expansion over FY26-28.

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