Vardhman Textiles (MAHSPI) 990

Transcription

1 Result Update Rating matrix Rating : Buy Target : 1100 Target Period : 12 months Potential Upside : 11% What s changed? Target Changed from 910 to 1100 EPS FY17E Changed from to EPS FY18E Changed from to Rating Changed from Hold to Buy Quarterly performance Q1FY17 Q1FY16 YoY (%) Q4FY16 QoQ (%) Revenue 1, , , EBITDA EBITDA (%) bps bps PAT Key financials ( crore) FY15 FY16 FY17E FY18E Net Sales 6,786 6,637 6,774 7,261 EBITDA 1,118 1,315 1,454 1,622 PAT (after MI) EPS ( ) Valuation summary FY15 FY16 FY17E FY18E P/E EV/EBITDA Target EV/EBITDA Price to book RONW (%) ROCE (%) Stock data Particular Amount Market Capitalisation ( Crore) 6,188 Debt (FY16) ( Crore) 2,209.0 Cash (FY16) ( Crore) EV ( Crore) 8, week H/L 1105 / 651 Equity Capital ( Crore) 62.5 Face Value ( ) 10 Price performance 1M 3M 6M 12M Vardhman Textiles Arvind Siyaram Silk Mills Research Analysts Bharat Chhoda bharat.chhoda@icicisecurities.com Steady operational performance; fabric capacity expansion to boost revenues... August 26, 2016 Vardhman Textiles (MAHSPI) 990 Vardhman Textiles (VTL) standalone revenues came in line with our expectations. However, the EBITDA margin was higher than our expectations on account of an 84 bps improvement in gross margin to 51.8%. Revenues grew 1% YoY to crore, in line with our estimate of 1406 crore EBITDA grew 2% YoY to 290 crore and was higher than our estimate of crore. EBITDA margins were also higher than our expectation of 19.3% at 20.7%. Higher employee cost (up 75 bps YoY to 7.5%) negated the gross margin improvement while EBITDA margin grew 20 bps YoY. Interest cost increased 4% to 24.9 crore while depreciation declined 8% YoY to 79.9 crore leading to PAT growth of 1.4% YoY to crore On a consolidated basis, the company reported a flattish topline with 1% YoY growth to 1474 crore. The EBITDA margin improved 120 bps YoY to 21.2% with EBITDA registering growth of 7% YoY to 312 crore. Consolidated EBITDA margin improvement was driven by higher EBIT margin in the acrylic fibre segment, which increased from 8.3% in Q1FY16 to 22% in Q1FY17. Consequently, PAT increased 24% YoY to crore Fabric segment expansion to aid revenue growth, margin expansion VTL spent ~ 180 crore on capex in FY16 for modernisation, debottlenecking and is looking to spend ~ 600 crore in next two to three years to add 225 looms to its current capacity of 1316 looms. This may result in an expansion in its fabric capacity by 45 million metre to the existing processing capacity of 110 million metre. It plans to augment its value added fabric segment capacity as it is less sensitive to cyclical cotton prices. VTL s new printed fabric capacity of 9 million metre should commence production in Q3FY17 aiding overall margins improvement. The impact of this expansion is likely to be visible in later part of FY18. Cotton scenario comfortable for Vardhman; prices to decline by Q3FY17 VTL s management indicated that their margins would not be impacted by the rise in cotton prices as they had sufficient stock of cotton purchased up to April 2016, when cotton prices were comparatively lower than current prices. The management expects cotton prices to decline by Q3FY17. They guided that the EBITDA margin would be at the upper end of their earlier guidance of 18-22% Expansion plans on track; margin expansion, lower debt to boost earnings growth VTL has maintained they are planning a higher revenue share from the fabric owing to the planned capacity expansion. The company is setting up a facility for printed fabric, which has comparatively higher margins and should aid in margin improvement, going ahead, which would eventually drive overall profitability of VTL in FY17/18. Also, lower depreciation and interest cost in FY17, FY18 would aid profit growth. On the balance sheet side also, VTL is comfortably placed with a debt equity ratio of 0.6x. With the planned debt reduction, we expect debt-equity ratio to decline to 0.2x by FY18E. We have revised upwards our FY17, FY18 earnings estimates and upgraded the valuation multiple. We have revised our target price to 1100 (valuing the company at 4.5x FY18E EV/EBITDA) with a BUY recommendation. ICICI Securities Ltd Retail Equity Research

2 Standalone Variance analysis Q1FY17 Q1FY17E Q1FY16 YoY (%) Q4FY16 QoQ (%) Comments Revenue 1, , , , Other Operating Income Revenues grew 1% YoY to 1400 crore vs. our expectation of 1406 crore. Yarn volumes grew 2% YoY while fabric volumes grew 8% YoY Raw Material Expense Employee Expense Manufacturing & Other Expense EBITDA EBITDA Margin (%) bps bps Depreciation Interest Other Income EBITDA grew moderately by 2% YoY to 290 crore, which was higher than our estimate of 272 crore. EBITDA margins were at 20.7%, higher than our estimate of 19.3% PBT Tax Outgo PAT Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Revenue 6, , , , EBITDA 1, , , , EBITDA Margin (%) bps bps PAT EPS ( ) Assumptions Current Earlier FY15 FY16 FY17E FY18E FY16 FY17E FY18E Yarn Segment Volume (MT) 176, , , , , , Avg. Realisation ( /kg) Fabric Segment Volume (Lakh meters) 2,814 3,092 3,297 3,506 3,092 3,278 3,506 Avg. Realisation ( / meter) ICICI Securities Ltd Retail Equity Research Page 2

3 Consolidated Variance analysis Q1FY17 Q1FY16 YoY (%) Revenue 1, Consolidated revenues marginally increased by 1% YoY on account of flattish topline growth in 1.0 the standalone business which contributes ~ 90% of the topline Other Operating Income Raw Material Expense Employee Expense Manufacturing & Other Expense EBITDA EBITDA Margin (%) Consolidated EBITDA margin improved 120 bps due to improved margin in acrylic segment Depreciation Interest Other Income PBT Tax Outgo PAT Extraordinary Iterm 0.0 PAT (after extraordinary item) Share of Profit/(Loss) in associate Minority Interest PAT after MI,Share of P/(L) ern ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Revenues from new fabric capacity to aid revenue growth in FY18 VTL s revenues grew at a CAGR of 15% in FY09-15, driven by stellar revenues from the yarn and fabric segment. Over the years, the company has benefited from (a) capacity expansion and (b) strong export demand (specifically in FY14). The change in Chinese cotton yarn policy in 2012 had been a huge positive for Indian cotton yarn exporters to China. China had increased MSP of cotton prices to provide incentive to its farmers, resulting in a huge rally in cotton prices globally. Higher domestic cotton prices in China resulted in huge demand for Indian cotton yarn in China, which was duty free. However, in FY15, China reversed its cotton policy, resulting in a sharp fall in global cotton prices, which significantly impacted the Indian spinning industry. Post the high growth phase, FY16 was a year of consolidation for VTL. With new fabric capacity coming onstream in phases from Q3FY17, we expect a gradual pick-up in revenue growth. Hence, we expect revenues to grow at a CAGR of 4.6% in FY16-18E to 7261 crore in FY18E. Exhibit 1: Revenue trajectory crore 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000-3,351 2,965 2,162 2,388 FY07 FY08 FY09 FY10 4,972 4,418 4,641 FY11 FY12 FY13 1,194 1,280 1,416 1,282 Q1FY14 Q2FY14 Q3FY14 Q4FY14 6,166 FY14 1,418 1,488 1,429 1,408 Q1FY15 Q2FY15 Q3FY15 Q4FY15 6,786 FY15 1,386 1,375 1,436 1,390 Q1FY16 Q2FY16 Q3FY16 Q4FY16 6,637 FY16 1,400 Q1FY17 6,774 7,261 FY17E FY18E Note: The revenue numbers for the full year are for the consolidated entity, while the quarterly numbers are on a standalone basis Healthy topline growth was achieved on the back of 22.4% and 24.8% growth in FY09-15 in the yarn and fabric segments (including internal consumption), respectively. Going forward, due to changes in China s cotton policy, the yarn segment is likely to witness lower growth. As exports reduce, the fabric segment is likely to continue to grow owing to growing demand for processed fabric. ICICI Securities Ltd Retail Equity Research Page 4

5 Reduced depreciation/interest with margin expansion to boost PAT growth Owing to the cyclical nature of the business, the company witnesses bumper years where operating margins swell and then normalised years. The normal operating margin range for the company is 18-22%. In FY11, the company witnessed a strong operating margin of 24.8% owing to a steep rise in yarn prices. In FY14, the operating margin improved to 23.7% owing to strong exports mainly driven by Chinese imports. The management expects operating margins to be in the upper end of 18-22% over the next two years. The printed fabric capacity is expected to come on-stream from Q3FY17, which would have higher margins and should aid margin improvement, going ahead. The proportion of fabric revenues would be higher as fabric capacity is expected to ramp up from 110 million metre to 155 million metre by FY18E. Furthermore, the company had provided higher depreciation under the new Companies Act in FY15. However, the same is likely to decline, going ahead, leading to higher profitability. We expect PAT to improve at 22% CAGR in FY16-18E. Exhibit 2: EBITDA and EBITDA margin trend crore 1,800 1,600 1,400 1,200 1, , , , , ,454 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 FY16 Q1FY17 FY17E FY18E 1, % 19.8 EBITDA EBITDA Margin Exhibit 3: PAT and PAT margin trend crore 1, FY07 FY08 FY09 FY10 FY11 FY12 FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 FY16 Q1FY17 FY17E FY18E % Net Profit 71 Net Profit Margin ICICI Securities Ltd Retail Equity Research Page 5

6 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 4: Debt/equity trend 2.5 x FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Exhibit 5: Return ratios trend FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E % RoE RoCE ICICI Securities Ltd Retail Equity Research Page 6

7 Valuation VTL has maintained that they are planning a higher revenue share from the fabric owing to the planned capacity expansion. The company is setting up a facility for printed fabric, which has comparatively higher margins and should aid in margin improvement, going ahead. This would eventually drive overall profitability of VTL in FY17/18. Also, lower depreciation and interest cost in FY17, FY18 would aid profit growth. On the balance sheet side also, VTL is comfortably placed with a debt equity ratio of 0.6x. With the planned debt reduction, we expect the debt equity ratio to decline to 0.2x by FY18E. We have revised upwards our FY17, FY18 earnings estimates and upgraded the valuation multiple. We have revised our target price to 1100 (valuing the company at 4.5x FY18E EV/EBITDA) with a BUY recommendation. Exhibit 6: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY15 6, (43.5) FY16 6,636.9 (2.2) FY17E 6, FY18E 7, (4.9) ICICI Securities Ltd Retail Equity Research Page 7

8 Company snapshot ( ) 1,400 1,200 1, (%) Jul-14 Oct-14 Jan-15 Mar-15 May-15 Aug-15 Oct-15 Jan-16 Mar-16 Jun Aug-16 Price (R.H.S) Idirect target Consensus Target Mean Pointer Value Source: Bloomberg, Company, ICICIdirect.com Research 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 Mar-08 consumer markets in India and for exports to other countries Dec-08 Board approves buyback of FCCBs Jul-10 Board approves demerger between Vardhman Textiles, Vardhman Special Steel and their respective shareholders and creditors Aug-10 Decides to issue equity shares through QIP up to 200 crore to be subscribed by qualified institutional buyers Oct-10 Shareholders, creditors approve scheme of arrangement and demerger between Vardhman Textiles and Vardhman Special Steels May-13 Net profit rises 103% YoY in Q4FY13 on the back of strong exports, which led to margin expansion Aug-13 PAT rises 163% YoY in Q1FY14 on the back of continued export demand, which aided strong topline growth and margin expansion Nov-13 Continued export demand and margin expansion lead to PAT growth of 154% YoY in Q2FY14 Feb-14 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 Mar-14 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% May-16 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 30-Jun Adishwar Enterprises, L.L.P. 30-Jun Devakar Investment & Trading Company Pvt. Ltd. 30-Jun IDFC Asset Management Company Private Limited 30-Jun Templeton Asset Management Ltd. 30-Jun UTI Asset Management Co. Ltd. 30-Jun Franklin Templeton Asset Management (India) Pvt. Ltd. 31-May Sundaram Asset Management Company Limited 30-Jun Dimensional Fund Advisors, L.P. 31-May Oswal (S P) 30-Jun Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Promoter FII DII Others Recent Activity BUYS SELLS Investor name Value (Mn) Shares (Mn) Investor name Value (Mn) Shares (Mn) Vardhman Group UTI Asset Management Co. Ltd Marshall Investment &Trading Company Pvt Ltd State Street Global Advisors (France) S.A Templeton Asset Management Ltd AXA Investment Managers Asia (Singapore) Ltd DSP BlackRock Investment Managers Pvt. Ltd Santander Asset Management UK Limited Reliance Nippon Life Asset Management Limited Sundaram Asset Management Company Limited Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16 FY17E FY18E Total operating Income 6, , , ,261.0 Growth (%) Raw Material Expenses 3, , , ,110.3 Employee Expenses Manufacturing Expenses 1, , , ,671.5 Selling Expenses Administrative Expenses Total Operating Expenditure 5, , , ,638.6 EBITDA 1, , , ,622.4 Growth (%) Depreciation Interest Other Income PBT , ,288.4 Total Tax PAT PAT (after minority interest) Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY15 FY16 FY17E FY18E Profit before Tax , ,288.4 Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Taxes Paid Others CF from operating activities 2, , ,057.7 (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds -1, Dividend paid & dividend tax Others CF from financing activities -1, Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY15 FY16 FY17E FY18E Liabilities Equity Capital Reserve and Surplus 3, , , ,306.5 Total Shareholders funds 3, , , ,369.0 Total Debt 1, , , Deferred Tax Liability Other LT Liabilities Minority Interest / Others Total Liabilities 5, , , ,000.4 Assets Gross Block 6, , , ,069.8 Less: Acc Depreciation 3, , , ,218.4 Net Block 2, , , ,851.4 Capital WIP Total Fixed Assets 2, , , ,934.3 Investments , , ,248.0 Inventory 1, , , ,188.2 Debtors Loans and Advances Other Current Assets Cash Total Current Assets 3, , , ,049.9 Creditors 1, , , ,102.5 Provisions Total Current Liabilities 1, , , ,257.1 Net Current Assets 2, , , ,792.9 Others Assets Application of Funds 5, , , ,000.4 Key ratios (Year-end March) FY15 FY16 FY17E FY18E Per share data ( ) EPS Cash EPS BV 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 Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (Apparel) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Kewal Kiran Clothing (KEWKIR) Hold Page Industries (PAGIND) Sell Rupa & Company Unrated Vardhman Textiles (MAHSPI) Buy Arvind Ltd (ARVMIL) Buy ICICI Securities Ltd Retail Equity Research Page 10

11 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 11

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