Centrum Broking
Vardhman Textiles (Accumulate)
CMP: ₹1,060
Target: ₹1,300
Vardhman Textiles Ltd (VTL), for Q2FY19 on a consolidated basis, reported good numbers mainly on account of better operational performance. EBITDA grew 68 per cent y-o-y to ₹331 crore, with margins expanding by 666 bps to 19.6 per cent. Revenue grew 11 per cent to ₹1,685 crore, on the back of good growth across segments (textile up 10 per cent and acrylic fibre up 28 per cent). Good operational performance led to net profit growth of 48 per cent to ₹196 crore.
Recommendation: VTL’s EBITDA margins witnessed expansion for the third consecutive given the low cost of cotton inventory on books and rupee depreciation benefits in the yarn and fabric segments. There is an expectation of cotton prices being elevated owing to irregular rainfall in cotton producing States such as Maharashtra and Gujarat resulting in lower yields along with higher Minimum Support Price (MSP - ₹43,000-44,000/candy). Yarn prices have come down given the subdued demand from China. With VTL’s strategy to increase captive consumption of yarn for its fabric segment we anticipate better operational performance to continue. We have thus increased EBITDA margin expectation for FY19E/20E at 17 per cent/17.3 per cent (vs 16.1 per cent/16.3 per cent earlier). As VTL is currently working at near full capacity utilisation, we believe growth in FY19 would be capped and the benefits of the current capacity expansion (₹1,400 crore in FY19E/20E) on financial performance could come in by end FY20E.
Risk factors: 1) Delay/change in government policies (domestic and international) such as FTAs, subsidies could impact the company’s operations; 2) Higher raw material prices, rupee appreciation could impact EBITDA margins.