In consolidation mode… • Vardhman Textiles :: ICICI Securities, PDF link

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In consolidation mode…
• Vardhman Textiles’ (Vardhman) Q2FY15 results were better than our
expectations on the revenue as well as PAT front. However, the
EBITDA margin was a major disappointment
• Revenues increased 16.3% YoY to | 1,487.5 crore (I-direct estimate:
| 1194 crore). EBITDA margin at 15.0%, down 1119 bps YoY was
lower than our estimate of 20.2% owing to increased input costs and
lower realisation in the yarn segment. The management indicated
that currently margins in the fabric business were higher than the
yarn business
• Due to a weak operational performance and increased depreciation,
as per the new Companies Act, PAT dipped 48.4% YoY to | 91.7
crore (I-direct estimate: | 62.3 crore)
Full benefits of capacity expansion to accrue
From FY09 to FY14, Vardhman has spent ~| 2,200 crore towards
expanding capacity. It has almost doubled the number of spindles to over
1 million and added over 400 looms. During FY14, Vardhman added
20,000 spindles and 200 looms. It also completed the expansion of the
processing house in FY13.
Further capex to happen only in FY17E
While the capacity expansion work has been completed over the last few
years, Vardhman is looking at consolidating its position. It has achieved
topline growth at a CAGR of 15.8% during FY09-14, which is likely to
taper to 8.7% CAGR over FY14-16E. The management has indicated that
FY15 and FY16 would be years of consolidation. Also, it would expand
the fabric capacity in FY17E with a capex of | 400 crore to be done in two
phases set to be completed by the first half of FY18.
Comfortable leverage; situation likely to further improve
Despite the continuous capacity expansion, Vardhman has managed to
curtail the debt-equity under 2.0x (since FY09). This is a commendable
feat considering that the textile space, especially spinning, is a capital
intensive business. Some of its peers in the same business have high
debt, which further impacts profitability. We expect the debt-equity to fall
from 1.0x in FY14 to 0.5x by FY16E as the management has indicated that
it would repay ~| 1100 crore of debt over the next two years.
Changes in depreciation policy to subdue earnings
As per the new Companies Act, the spinning machinery has to be
depreciated over 7.5 years. Vardhman earlier depreciated the same over
10 years. Hence, there has been a steep increase in the depreciation for
FY15E and the same is expected to remain elevated even in FY16E. From
FY17E onwards, however, the depreciation would normalise.
Fully integrated textile player at inexpensive valuation; maintain BUY
FY14 was an exceptional year with strong topline and bottomline growth
on the back of strong exports. While the same is unlikely to continue, we
remain positive on Vardhman Textiles owing to the strong balance sheet
and its leadership position in the market. We like the company’s
conservative approach, which has aided it to maintain balance sheet
health despite being one of the largest textile players in the country. The
company could either use the surplus funds to retire debt or acquire a
smaller player. We believe either of these moves could be positive for the
company. Hence, we maintain BUY with a revised target price of | 500
(valuing the company at 3.5x FY16E EV/EBITDA).

LINK
http://content.icicidirect.com/mailimages/IDirect_VardhmanTextiles_Q2FY15.pdf