Vardhman Textiles :: Karvy research

Worst is Behind‐ Margins Back in Business
Over the past year, the textile industry has been witnessing high volatility in
prices leading to higher turnovers amid high inventory losses. At the same
time, uncertainity prevailing in the US and European markets led to lower
demand for yarn and fabric on the exports front. The yarn and fabric
activities of Vardhman Textiles (Vardhman) contributes over 80% of
revenues. Bumper cotton season, favourable decline in price volatility
sugget stabilization of margins in the yarn business. Vardhman is expected
to maintain its growth momentum largely from Bangladesh & China. The
Company is expanding its capacities in yarn and fabric processing as well,
which we believe will aid revenue growth.

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Capacity Expansion to Aid Growth: Vardhman is undergoing capacity
expansion for its spinning, weaving and dyeing units with an investment of
Rs. 13 bn over FY13‐FY14 period. 400 looms and two units of 56,000 spindles
each are expected in FY13E and FY14E respectively. The capacity expansion
would help the Company to meet the growing demand for yarn & fabric
from Bangladesh & China specifically. As macro concerns still prevail over
the western economies, the Company is also focussing more on Japan &
Hong Kong – besides Bangladesh & China – which are its key export
markets currently.
Lower Input Cost & Stable Demand to Revive Operating Margins: Having
seen turbulent scenario during the last few quarters, the prices of yarn and
cotton peaked in Apr’11 and bottomed‐out in Aug’11. Going forward, with
the arrival of new cotton, the margins of the Company are expected to
improve substantially, as the yarn prices are stablizing with sustained and
fresh demand. We believe that the spinners would realize the normal
operating margins once again, after incurring huge inventory loss on
account of crash of yarn prices during H1FY12. We expect that FY13E would
prove to be fairly positive for yarn and fabric business.
Outlook & Valuations
We expect Vardhman’s revenue and net income to grow at a CAGR of 12.2%
and 49%, respectively in FY12‐14E. At CMP of Rs. 221, the stock trades at the
multiple of 5.7x and 4.5x of FY13E and FY14E earnings respectively. We
believe that the stock is currently available at attractive valuations. We
initiate coverage with “BUY” recommendation and a target price of Rs. 297
per share, which represents an upside potential of 34%.