Vardhman Textiles (VARTEX) 1290

Transcription

1 Result Update Rating matrix Rating : Buy Target : 1465 Target Period : 12 months Potential Upside : 14% What s changed? Target Changed from 1440 to 1465 EPS FY18E Changed from to 99.1 EPS FY19E Changed from to EPS FY20E Changed from to Rating Unchanged Quarterly performance Q3FY18 Q3FY17 YoY (%) Q2FY18 QoQ (%) Revenue 1, , , EBITDA (27.0) EBITDA (%) bps bps PAT (29.0) Key financials ( crore) FY17 FY18E FY19E FY20E Net Sales 6,067 6,384 7,107 8,008 EBITDA 1, ,333 1,534 PAT (after MI) EPS ( ) Valuation summary FY17 FY18E FY19E FY20E P/E EV/EBITDA Target EV/EBITDA Price to book RONW (%) ROCE (%) Stock data Particular Amount Market Capitalisation ( Crore) 7,094 Debt (FY17) ( Crore) 1,809.0 Cash (FY17) ( Crore) 43.5 EV ( Crore) 8, week H/L 1560 / 1128 Equity Capital ( Crore) 54.8 Face Value ( ) 10 Price performance 1M 3M 6M 12M Vardhman Textiles Arvind Siyaram Silk Mills Research Analysts Bharat Chhoda bharat.chhoda@icicisecurities.com Cheragh Sidhwa cheragh.sidhwa@icicisecurities.com February 8, 2018 Vardhman Textiles (VARTEX) 1290 Margins to revert to normal level from FY19 Vardhman reported healthy revenue growth of 12.3% YoY to crore (I direct estimate: crore). Revenues from textile segment grew 11.0% YoY to crore, whereas revenues from acrylic fibre rose 21.0% YoY to 86.3 crore albeit on a favourable base of demonetisation in Q3FY17 EBITDA margins for the quarter declined 740 bps YoY to 13.7% (Idirect estimate: 16.0%) mainly on account of higher raw material expense (cotton) by 1095 bps YoY. However positive operating leverage (employee and other expenses down 72 bps and 273 bps YoY, respectively) aided the margins to a certain extent. Subsequently absolute EBITDA degrew 27% YoY to crore (Idirect estimate: crore). Segment per se, EBIT margins for textiles segment declined 741 bps YoY 11% while that for acrylic segment improved significantly by 748 bps YoY to 20.2%. Company has reestimated the useful life of plant and machinery from 7.5 years to 10 years which resulted in decline in depreciation cost by 29% YoY to 60.6 crore. Benefit of decline in depreciation cost was completely offset by decline in other income by 34% YoY to 37.6 crore. The resultant PAT declined 29% YoY to crore (I direct estimate: 153 crore). Margins trend to improve going ahead FY18 has been a difficult year for VTL in terms of EBITDA margin owing to high cost cotton inventory. For 9MFY18, EBITDA margin has been at 13.8%, which is significantly lower than normal EBITDA margin range of 1822%. We expect EBITDA margin to decline to 14.6% in FY18E from 20.2% in FY17. The new cotton season has begun and cotton prices have started to soften which should aid the margin to improve from Q4FY18 onwards. We expect recovery in EBITDA margin and expect EBITDA margin to move up to 18.8% in FY19E and 19.2% in FY20E. Revenue growth to be driven by fabric segment VTL is focussing on increasing the share of fabrics in the overall revenues. The management indicated that it would incur a capex of 1500 crore over next three years with 50% to be spent on fabric capacity expansion and the remaining would be for expanding yarn capacities which would be used captively. The capacity of processed fabric is expected to be enhanced from 115 million metre (mm) to 185 mm by FY20. Revenue contribution from fabric is expected to increase from ~ 36% in FY17 to 45% by FY20. Better times ahead; steady revenue growth with improvement in margin YTDFY18 has been a tough period for Vardhman due to various issues like high cost cotton inventory and GST related issues which led to decline in margins. Revenue growth is expected to revive from FY19 as new fabric capacity comes on stream in a phased manner. Higher share of fabric revenues and lower cotton prices are expected to aid EBITDA margin going ahead. We expect revenues to grow at a CAGR of 9.5% in FY1720E to 7971 crore in FY20E. Inspite of being in a capital intensive business, Vardhman has continuously maintained debt equity ratio below 1 and has return ratios of ~15%. With expansion of processed fabric capacity, the company would be able to enhance its margins going ahead. We have a BUY rating on the stock with a target price of 1465 (PE of 9x FY20 EPS). ICICI Securities Ltd Retail Equity Research

2 Company Analysis Consolidated Variance analysis Q3FY18 Q3FY18E Q3FY17 YoY (%) Q2FY18 QoQ (%) Comments Fabric capacity to be commissioned Consolidated revenues by FY20 rose 12% YoY on account of growth in textiles For FY17, VTL reported revenue segment by growth 11%. Acrylicof business 3% YoY revenues to rebounded strongly crore. andvtl grew Revenue Raw Material Expense 1, , ,467.0 is running ,523.1 at almost 8.2full by capacity 21% YoY, albeit utilisation. a low base Hence, revenue growth is expected to remain muted in FY18E. VTL spent ~ 304 crore on capex in FY17, 39.2 consisting of crore in yarn business mainly on account of Employee Expense modernisation and 116 crore in the fabric business mainly on account of Manufacturing & Other Expense new printing unit in Baddi (9 million metre capacity). With new printed fabric capabilities, VTL has entered the space of women s top fabrics and EBITDA EBITDA Margin (%) expanded 736 bps the 13.0range 71 bps of men s Increase in shirt cotton fabrics. prices impacted The margins company had previously announced capex worth Reestimation 600 crore of useful (FY16) life ofout plant of & machinery which from the 7.5 company to 10 years has led to Depreciation Interest Other Income PBT Tax Outgo already 29.1spent crore decline in towards depreciation cost expanding the capacity for the 27.7 processed 1.7 fabric The 2.1management recently announced additional capex 56.8 of crore 51.2 to further enhance the capacity of yarn and fabric over a period 30.9 of three years. 6.2 Post completion of both the projects, the capacity 62.9 of processed fabric 26.8 is expected to be enhanced from 115 mm to 185 mm PAT by FY20. Share of Profit/(Loss) in associate Minority Interest PAT after MI,Share of P/(L) associates Extra Item With new fabric 2.1 capacity coming onstream in phases, we expect a gradual 28.9pickup in 1.8 revenue growth from FY19E onwards. We expect revenues 0.0 to grow 0.0 at a CAGR of 8.6% in FY1719E to 7156 crore in PAT after Extra Item FY19E Exhibit 1: Revenue trajectory 8,000 Change in estimates 7,156 6,786 7,000 FY18E FY19E6,166 FY20E 5,895 6,067 6,338 ( Crore) 6,000 Old New % Change Old New % Change Old New % Change Comments 5,000 4,418 4,6414,972 We have marginally changed our revenue Revenue 6, , , , , , estimates for FY18E/FY19E and FY20E 4,000 3,351 EBITDA 1, , , , , , ,000 2,162 2,388 We revise our estimates downwards for FY18 1,608 2,000 1,1941,2801,4161,282 1,4181,4881,4291,408 1,4771,4781,5361,477 account 1,4741,5641,531 of high raw material expense 1,562 and we EBITDA Margin (%) bps bps bps expect revival in margins from FY19E onwards 1,000 PAT EPS ( ) crore FY07 FY08 FY09 FY10 FY11 FY12 FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 FY15 Q2FY16 FY16 Q3FY17 FY17E FY18E FY19E Note: The revenue numbers for the full year are for the consolidated entity, while the quarterly numbers are on a standalone basis ICICI Securities Ltd Retail Equity Research Page 2

3 Exhibit 2: Revenue trajectory Company Analysis Fabric revenues to spur growth For FY17, VTL reported revenue growth of 3% YoY to crore. VTL is running at almost full capacity utilisation. Hence, revenue growth is expected to remain muted in FY18E. The company had previously announced capex worth 600 crore (FY16) out of which the company has already spent 300 crore towards expanding the capacity for the processed fabric. The management recently announced additional capex of 1000 crore to further enhance the capacity of yarn and fabric over a period of three years. Post completion of both the projects, the capacity of processed fabric is expected to be enhanced from 115 mm to 185 mm by FY20. With new fabric capacity coming onstream in phases, we expect a gradual pickup in revenue growth from FY19E onwards. We expect revenues to grow at a CAGR of 9.7% in FY1720E to 8008 crore in FY20E crore 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 2,162 2,3882,9653,351 FY07 FY08 FY09 FY10 4,418 4,6414,972 FY11 FY12 FY13 1,1941,2801,4161,282 Q1FY14 Q2FY14 Q3FY14 Q4FY14 6,166 FY14 1,4181,4881,4291,408 Q1FY15 Q2FY15 Q3FY15 Q4FY15 6,786 FY15 1,4771,4781,5361,477 Q2FY16 5,895 FY16 1,608 1,4741,4941,467 Q3FY17 6,067 FY17 1,5621,5561,648 Q2FY18 Q3FY18 8,008 7,107 6,384 FY18E FY19E FY20E Note: The revenue numbers for the full year are for the consolidated entity, while the quarterly numbers are on a standalone basis Exhibit 3: Yarn sales volume Exhibit 4: Grey fabric and processed fabric sales volume Metric Tons 56,000 54,000 52,000 50,000 48,000 46,000 44,000 49,747 49,641 50,673 50,930 51,360 52,785 51,839 52,107 49,217 48,404 53,374 51, , Q2FY15 Q3FY15 Q4FY15 Q2FY16 Q3FY17 Q2FY18 Q3FY18 Q2FY15 Q3FY15 Q4FY15 Q2FY16 Q3FY17 Lac meters Q2FY18 Q3FY18 Yarn Grey Fabric Processed Fabric Source: Company, ICICIdirect.com, Research Source: Company, ICICIdirect.com, Research ICICI Securities Ltd Retail Equity Research Page 3

4 High cost cotton to impact FY18 margin Pressure on EBITDA margin continued in Q3FY18 as EBITDA margins for the quarter declined 736 bps YoY to 13.7%. The key factors which led to the decline were; a) High cost cotton inventory (Shankar6) b) global yarn prices reducing leading to unfavourable market for Indian spinners impacting the export competitiveness for India. The operating margin for FY18 is expected to be negatively impacted by the high cost cotton inventory. In FY17, the company accounted for extraordinary profit on sale of investment to the tune of crore (on account of sale of stake in Vardhman Yarn and Threads) and 42.7 crore on account of sale of land parcel at Hoshiarpur. Owing to the extraordinary profit, PAT for FY17 rose 59.7% YoY growth to crore. We expect PAT to remain soft in FY18E owing to absence of exceptional income. However, with the change in the useful life of plant and machinery from 7.5 to 10 years, is expected to moderate the PAT degrowth in FY18E owing to decline in depreciation cost. Exhibit 5: EBITDA and EBITDA margin trend crore 1,800 1,600 1,400 1,200 1, , , , ,333 1, FY15 Q2FY16 FY16 % Q3FY17 FY17 Q2FY18 Q3FY18 FY18E FY19E FY20E EBITDA EBITDA Margin Exhibit 6: PAT and PAT margin trend crore 1, (100) 401 FY Q2FY FY Q3FY FY17 Q2FY Q3FY FY18E FY19E 917 FY20E % Net Profit Net Profit Margin ICICI Securities Ltd Retail Equity Research Page 4

5 Healthy return ratio and low debt provide comfort Despite the ongoing capex over the years, the company has managed to bring down the debt/equity ratio. The fact that the company has curtailed the debt/equity ratio under 2.0x is commendable considering the capital intensive nature of the business. Exhibit 7: Debt/equity trend 2.5 x FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Exhibit 8: Return ratios trend % FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E RoE RoCE ICICI Securities Ltd Retail Equity Research Page 5

6 Valuation YTDFY18 has been a tough period for Vardhman due to various issues like high cost cotton inventory and GST related issues which led to decline in margins. Revenue growth is expected to revive from FY19 as new fabric capacity comes on stream in a phased manner. Higher share of fabric revenues and lower cotton prices are expected to aid EBITDA margin going ahead. We expect revenues to grow at a CAGR of 9.5% in FY1720E to 7971 crore in FY20E. Inspite of being in a capital intensive business, Vardhman has continuously maintained debt equity ratio below 1 and has return ratios of ~15%. With expansion of processed fabric capacity, the company would be able to enhance its margins going ahead. We have a BUY rating on the stock with a target price of 1465 (PE of 9x FY20 EPS). Exhibit 9: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY17 6, FY18E 6, (44.6) FY19E 7, FY20E 8, ICICI Securities Ltd Retail Equity Research Page 6

7 Recommendation history vs. consensus estimate ( ) 1,620 1,420 1,220 1, Feb15 Apr15 May15 Jul15 Aug15 Oct15 Dec15 Jan16 Mar16 Apr16 Jun16 Jul16 Sep16 Oct16 Dec16 Jan17 Mar17 May17 Jun17 Aug17 Sep17 Nov17 Dec17 (%) Feb18 Source: Bloomberg, Company, ICICIdirect.com Research Price Idirect target Consensus Target Mean % Consensus with Buy Key events Date Event Signs joint venture agreement with American & Efird Inc, a subsidiary of Ruddick Corporation, US to manufacture, distribute and sell sewing thread for industrial and Mar08 consumer markets in India and for exports to other countries Dec08 Board approves buyback of FCCBs Jul10 Board approves demerger between Vardhman Textiles, Vardhman Special Steel and their respective shareholders and creditors Aug10 Decides to issue equity shares through QIP up to 200 crore to be subscribed by qualified institutional buyers Oct10 Shareholders, creditors approve scheme of arrangement and demerger between Vardhman Textiles and Vardhman Special Steels May13 Net profit rises 103% YoY in Q4FY13 on the back of strong exports, which led to margin expansion Aug13 PAT rises 163% YoY in Q1FY14 on the back of continued export demand, which aided strong topline growth and margin expansion Nov13 Continued export demand and margin expansion lead to PAT growth of 154% YoY in Q2FY14 Feb14 Owing to stringent policies, China continued to import yarn. This led to revenue growth of 31% YoY and PAT growth of 110% YoY in Q3FY14 as well Mar14 Baring Private Equity Partners hikes stake in Vardhman Textiles by acquiring additional 1.1% stake taking its total holding in the company to 3.1% May16 VTL sells 40% stake in its subsidary Vardhman Yarns & Threads for a consideration of 396 crore Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Vardhman Group 18Jan % Adishwar Enterprises, L.L.P. 19Jan % Devakar Investment & Trading Company Pvt. Ltd. 30Sep % Templeton Asset Management Ltd. 30Sep17 4.5% DSP BlackRock Investment Managers Pvt. Ltd. 31Dec17 3.0% Reliance Nippon Life Asset Management Limited 31Dec17 2.6% HDFC Asset Management Co., Ltd. 31Dec17 2.6% Franklin Templeton Asset Management (India) Pvt. Ltd. 30Sep17 2.4% Mahavir Share Trust 30Sep17 1.3% UTI Asset Management Co. Ltd. 31Dec17 1.2% Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Dec16 Mar17 Jun17 Sep17 Dec17 Promoter FII DII Others Recent Activity BUYS SELLS Investor name Value (Mn) Shares (Mn) Investor name Value (Mn) Shares (Mn) Templeton Asset Management Ltd Adishwar Enterprises, L.L.P Paras Syndicate Mahavir Share Trust UTI Asset Management Co. Ltd L&T Investment Management Limited Sundaram Asset Management Company Limited Vardhman Group Principal PNB Asset Management Company Ltd NFJ Investment Group LLC Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary Profit and loss statement Crore (Yearend March) FY17 FY18E FY19E FY20E Total operating Income 6, , , ,007.8 Growth (%) Raw Material Expenses 2, , , ,847.4 Employee Expenses Mfg, Admin & selling Exps 1, , , ,042.0 Total Operating Expenditure 4, , , ,474.0 EBITDA 1, , ,533.9 Growth (%) Depreciation Interest Other Income Exceptional income PBT 1, , ,299.3 Total Tax PAT Minority Interest / Others PAT (after minority interest) Growth (%) EPS ( ) Cash flow statement Crore (Yearend March) FY17 FY18E FY19E FY20E PAT Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Others CF from operating activities 1, (Inc)/dec in Investments (Inc)/dec in Fixed Assets (Inc)/dec in CWIP Others CF from investing activities Issue/(Buy back) of Equity (6.1) 1.5 Inc/(dec) in loan funds Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Yearend March) FY17 FY18E FY19E FY20E Liabilities Equity Capital Reserve and Surplus 4, , , ,994.8 Total Shareholders funds 4, , , ,051.1 Total Debt 1, , , ,136.8 Deferred Tax Liability Other LT Liabilities Minority Interest / Others Total Liabilities 6, , , ,633.0 Assets Gross Block 6, , , ,540.3 Less: Accu Depreciation 3, , , ,437.2 Net Block 2, , , ,103.1 Capital WIP Total Fixed Assets 2, , , ,148.5 Investments 1, , , ,578.0 Inventory 1, , , ,457.2 Debtors ,009.2 Loans and Advances Other Current Assets Cash Total Current Assets 2, , , ,228.3 Creditors 1, , , ,385.3 Provisions Total Current Liabilities 1, , , ,402.2 Net Current Assets 1, , , ,826.1 Others Assets Application of Funds 6, , , ,633.0 Key ratios (Yearend March) FY17 FY18E FY19E FY20E Per share data ( ) EPS Cash EPS BV ,074.6 DPS Cash Per Share Operating Ratios EBITDA Margin (%) PBT Margin (%) PAT Margin (%) Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio ICICI Securities Ltd Retail Equity Research Page 8

9 ICICIdirect.com coverage universe (Apparel) CMP M Cap RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E Kewal Kiran Clothing Buy Page Industries Hold Rupa & Company Buy Vardhman Textiles Buy Arvind Ltd Buy EPS ( ) P/E (x) EV/EBITDA (x) ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/10%; Sell: 10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 10

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