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D r a g g e d i n t o t h e r e d b y i n v e n t o r y l o s s …
Vardhman Textiles’ (Vardhman) Q1FY12 results were very disappointing
as the company suffered heavy inventory losses. The company reported
a topline of | 960.2 crore (I-direct estimate: | 812.1 crore) translating into
a 19% YoY growth on the back of strong growth in both the yarn and
fabric segment. On account of high cost inventory held by the company it
faced heavy inventory loss. Consequently EBITDA margin for the quarter
fell significantly from 22.5% in Q1FY11 and 29.7% in Q4FY11 to 3.8% in
Q1FY12. A higher interest burden further dragged the bottomline of the
company. As a result Vardhman reported a loss of | 43.1 crore in
Q1FY12. Considering the inventory pile up for the sector as a whole and
softening cotton prices we believe that Vardhman will continue to face
operating margin pressures and have accordingly reduced our FY12E and
FY13E EBITDA margin estimates by 550 – 600 bps.
ƒ Inventory loss due to substantial correction in cotton prices
During Q1FY12 cotton prices (Shankar-6 grade) corrected by ~38%
to ~ | 38,000 per candy. Vardhman was holding cotton which was
priced higher than this and hence incurred an inventory loss during
the quarter. Historically raw material costs typically ranged between
45 – 50% of sales. The same increased to 68% of sales in Q1FY12
thereby impacting the operating margin of the company. We believe
that this as an aberration. Though the company might not be able to
clock historically high margins (24.7% - FY11) it will still be able to
clock an EBITDA margin in the range of 14 – 16% during FY12E and
FY13E (if cotton prices do not correct substantially from current
levels).
V a l u a t i o n
Considering the bleak outlook we have revised our estimates downwards.
However, bearing in mind the recent correction in the stock (~30% in 3
months) we believe that at these levels the downside risk is minimal. At
CMP, the stock is trading at 9.2x and 6.8x its FY12E and FY13E EPS of
| 20.2 and | 27.3 respectively. We recommend a BUY on Vardhman
Textiles with a revised target price of | 207 (based on an average arrived
at by assigning a multiple of 0.8x FY13E book value and 4.5x FY13E EPS).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
D r a g g e d i n t o t h e r e d b y i n v e n t o r y l o s s …
Vardhman Textiles’ (Vardhman) Q1FY12 results were very disappointing
as the company suffered heavy inventory losses. The company reported
a topline of | 960.2 crore (I-direct estimate: | 812.1 crore) translating into
a 19% YoY growth on the back of strong growth in both the yarn and
fabric segment. On account of high cost inventory held by the company it
faced heavy inventory loss. Consequently EBITDA margin for the quarter
fell significantly from 22.5% in Q1FY11 and 29.7% in Q4FY11 to 3.8% in
Q1FY12. A higher interest burden further dragged the bottomline of the
company. As a result Vardhman reported a loss of | 43.1 crore in
Q1FY12. Considering the inventory pile up for the sector as a whole and
softening cotton prices we believe that Vardhman will continue to face
operating margin pressures and have accordingly reduced our FY12E and
FY13E EBITDA margin estimates by 550 – 600 bps.
ƒ Inventory loss due to substantial correction in cotton prices
During Q1FY12 cotton prices (Shankar-6 grade) corrected by ~38%
to ~ | 38,000 per candy. Vardhman was holding cotton which was
priced higher than this and hence incurred an inventory loss during
the quarter. Historically raw material costs typically ranged between
45 – 50% of sales. The same increased to 68% of sales in Q1FY12
thereby impacting the operating margin of the company. We believe
that this as an aberration. Though the company might not be able to
clock historically high margins (24.7% - FY11) it will still be able to
clock an EBITDA margin in the range of 14 – 16% during FY12E and
FY13E (if cotton prices do not correct substantially from current
levels).
V a l u a t i o n
Considering the bleak outlook we have revised our estimates downwards.
However, bearing in mind the recent correction in the stock (~30% in 3
months) we believe that at these levels the downside risk is minimal. At
CMP, the stock is trading at 9.2x and 6.8x its FY12E and FY13E EPS of
| 20.2 and | 27.3 respectively. We recommend a BUY on Vardhman
Textiles with a revised target price of | 207 (based on an average arrived
at by assigning a multiple of 0.8x FY13E book value and 4.5x FY13E EPS).
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