1Nandan Exim Limited (Nandan) is one of the largest denim manufacturers inIndia, with a capacity of approximately 70.0 mn metres per annum (p.a.). Thecompany has clocked a strong sales growth of 21.2% CAGR over FY2007-13.We expect this CAGR to increase even further, to 24.9% over FY2013-15, on theback of higher capacity and strong domestic and export orders. At current levels,the stock is trading at 0.6x its FY2014E and 0.5x its FY2015E Book Values. Werecommend a Buy on the stock with a Target Price of Rs 55, valuing the businessat 1.0x its FY2015E BV.Industry poised for tremendous opportunities at a global level: The denimindustry in India is well poised to exploit the opportunities offered by the globaldevelopments. China has witnessed a cut in the national capacity from around 3bn metres to 2.5 bn metres last year, due to a number of headwinds, markingthe beginning of a big opportunity for Indian players. Nandan Exim stands to beforemost at reaping this opportunity, having a long experience in the denimexports market, backed by a focused and dedicated management. The companyhas a number of global brands, like Ralph Lauren, Calvin Klein, Tommy Hilfigerand GAP amongst its clients, indicating the high global standards that it meets.High capacity expansion to back growth: The company has planned out a capitalexpenditure of Rs 260 cr, which is 50% of the entire gross block at the end ofFY2013. Post this expansion, the denim manufacturing capacity would increaseto 111.0 mn metres p.a., a CAGR of 25.9% over FY2013-15. The increase in thecapacity is targeted at reaping the benefits of the unique opportunity.Extension of state and central funding schemes to reduce finance cost: Thecompany will get the benefits of the Technology Upgradation Funds Scheme andthe Gujarat Textile Policy of 2012. The total interest subsidy that the companywould earn would be 12% for spinning machinery and 10% for the othermachinery.Outlook and valuation: We are very positive on the outlook of Nandan Exim Ltd,primarily owing to the strong sales growth that is expected due to opportunities inthe global denim industry and its own capacity expansion. Coupled with theassistance of various government schemes, strong demand in domestic andglobal markets augur well for Nandan.Key financialsY/E March (Rs cr) FY2012 FY2013 FY2014E FY2015ENet sales 574 703 897 1,097% chg 13.1 22.5 27.6 22.3Net profit 19 31 38 50% chg 8.3 65.2 23.4 30.5EPS (Rs) 4.1 6.8 8.4 11.0EBITDA margin (%) 14.7 15.2 15.0 15.0P/E (x) 6.7 4.1 3.3 2.5P/BV (x) 0.8 0.7 0.6 0.5RoE (%) 11.8 16.8 17.8 19.7Source: Company Reports, ResearchBUYCMP Rs 28.95Target Price Rs 55.00Investment Period 12 MonthsStock InfoSectorNiftyShareholding Pattern (%)Promoters 58.0MF / Banks / Indian Fls 0.0FII / NRIs / OCBs 4.2Indian Public / Others 37.8Face Value (Rs)BSE SensexTextilesTraded Value (Rs lacs)Market Cap (Rs cr)52 Week High / Low1019,1775,80813133/2018Analyst: Krunal DaymaTel: +email@example.comNandan EximCapitalising on growthNovember 30,June 14, 2013
June 14, 2013 2Investment ArgumentsIndustry poised for tremendous opportunities at a global levelThe denim industry in India is well poised to exploit the opportunities offered by theglobal developments. Historically, even though India has been one of the largestmanufacturers of denim, the industry has been dominated by the Chinese players.The denim manufacturing capacity in China is around 3-4 times that of India.However, recently, the Chinese denim industry has been facing a number ofheadwinds. First, the input costs, China’s long term advantage over the rest of theworld, have risen significantly in the country. Coupled with an impending rise inthe value of the renminbi, this is a huge negative for the denim exporters.Moreover, the Chinese policy suggests that they now intend to move into highervalue-add areas from the traditional low-skill, low-value areas like denimmanufacturing. Accordingly, China has witnessed a cut in the national denimcapacity from around 3.0 bn metres to 2.5bn metres last year. Theaforementioned factors seem to suggest that this might be an indicator of thegeneral trend, rather than an aberration.Last year, the US also reduced its production capacity. In fact, that has been thegeneral tendency observed in that country for quite some time now. All thesedevelopments augur well for the Indian denim manufacturers, who are gearing upto make the most of the situation. However, India is not expected to be the solebeneficiary of the cut in denim production capacities in China and US. Theproduction from these countries would be shifted to a number of countries likePakistan, Bangladesh and some of the South East Asian nations. However, even asmall slice of this capacity would constitute a big opportunity for Indian players.India has added roughly 100 mn metres of capacity in the same time periodduring which China and US reduced their capacities. A depreciated rupee will alsofavour the Indian denim players. The Indian manufacturers’ order books arereported to have risen by around 10-15% in the past one year, as per the industryestimates.For its part, Nandan Exim stands to be foremost at reaping this opportunity,having a long experience in the denim exports market, backed by a focused anddedicated management. The company receives around 10% of its revenues fromexports. However, on the back of favourable global scenario, the company aims toincrease its export revenues from 10% to more than 20% by FY2015. Thecompany’s ambitious plans are backed by its solid track record and marqueeclient list. The clients of the company include some global leaders like RalphLauren, Tommy Hilfiger, Calvin Klein, GAP, Armani Exchange and Walmart,indicating the high standards that the company’s products meet.High capacity expansion to back growthNandan Exim has grown at a rapid pace in the past, backed by a visionary andaggressive management, which has responded proactively to increasingopportunities in the denim industry, both, in India and globally, by rapid capacityexpansion. The denim manufacturing capacity has been raised from 30.4 mnmetres per annum (p.a.) to 70.0 mn metres p.a. over the period FY2006-13. Thisis a significant increase in capacity, especially considering that during the time,
June 14, 2013 3there was the global economic crisis of an unprecedented dimension. The entirecapacity of the company is fully automated, with minimal human intervention.Going ahead, the management plans to add capacity even more aggressively.The company has planned out a capital expenditure of Rs 260 cr, which is 50% ofthe entire gross block at the end of FY13. Post this expansion, the denimmanufacturing capacity would increase to 111.0 mn metres p.a., a CAGR of25.9% over FY2013-15. This new capacity is expected to be commissioned inFY14.Exhibit 1: Denim capacity set to increase sharplySource: Company Reports, ResearchThe increased capacity will make the company one of the biggest not only in India,but also the world. As an indicator, Arvind Ltd, India’s largest manufacturer ofdenim, had a capacity of 110.0 mn metres p.a. at the end of FY2012. Theincrease in the capacity is targeted at reaping the benefits of the uniqueopportunity that presents itself to Indian denim manufacturers, with the reduction inChinese capacity and hopes of the financial crisis abating. The company alreadyhas a sizable presence in exports to Latin American, Middle East, Asia and Africancountries and expects the revenues from exports to increase to 20% from 10%currently, despite a healthy growth in the domestic market. The company will beable to capitalize on its strengths in the industry to gain from this scenario. Thecompany has an advantage over most of its peers in terms of cost, which will makeit well poised to utilize its expanded capacity effectively. Besides, the company’smarketing channels are in place, so as to support the growth that the companyaims to achieve.Extension of state and central funding schemes to reducefinance costThe capacity expansion that the company has planned would be funded byinternal accruals and debt. As for debt, the company will get the benefits of theTechnology Upgradation Funds Scheme that was extended in June 2012 after abrief period of suspense over whether it would be persisted with anymore. Thecompany will get an interest reimbursement of 5% on any debt taken for its newcapacity expansion under this scheme. Moreover, the company would also benefitfrom the Gujarat Textile Policy of 2012, which is similar to the central TUF scheme303642 42 4250 5170100 100020406080100120FY06FY07FY08FY09FY10FY11FY12FY13FY14FY15(mnmetresp.a.)Denim Capacity
June 14, 2013 4in its impact on the company. The company would get an additional 5% interestsubvention under this state policy. In case of spinning machinery, the interestsubvention would be 7% under this scheme. As such, the total interest subsidy thatthe company would earn would be 12% for spinning machinery and 10% for theother machinery. The interest rate charged by the banks for these loans is ~ 13%.Consequently, the cost of debt to the company would turn out to be only 1% forspinning machines and 3% for the remaining ones, making its capacity expansiona very cheap one. We expect the interest rate to fall from 9.2% in FY2013 to 8.0%in FY2015, despite the fact that financial leverage is expected to increase in thisperiod. The interest rate has already fallen from 10.2% in FY2012 to 9.2% inFY2013. Besides these interest cost based advantages, these schemes also providefor other benefits. The Gujarat state policy provides for a power tariff subsidy of Rs1 per unit for a period of 5 years on new capacity of cotton spinning and cottonweaving units. Moreover, it also provides for a VAT refund on purchases of rawmaterials and intermediate goods for a period of 8 years. These added benefitsalso add to the attractiveness of the company’s expansion plans.Exhibit 2: Cost of debt to go down on government subsidy schemesSource: Company Reports,Credit-worthiness to hold in good steadThe company also enjoys a good credit-worthiness. The company’s gearing ratio isaround 1.8x, which is well within the industry’s accepted standards of 2.0x.Recently, the ratings agency, Fitch Ratings, assigned the company a long-termrating of BBB-(ind) with a stable outlook. Going ahead, with the large capitalexpenditure planned, the total gearing ratio is bound to increase. However, webelieve that this ratio would not reach unmanageable proportions and will, in fact,return to 1.8x in FY2015, after the operations from the expanded capacitystabilize.0.0%2.0%4.0%6.0%8.0%10.0%12.0%051015202530354045FY09 FY10 FY11 FY12 FY13 FY14 FY15RscrInterest(LHS) Interestcost (RHS)
June 14, 2013 5Exhibit 3: Financial leverage to remain in manageable proportionsSource: Company Reports,FinancialsTop-line to increase on the back of expanded capacityWe believe that Nandan’s sales would increase from Rs 703 cr in FY2013 to Rs1,097 cr in FY2015, a strong CAGR of 24.9%. This increase would come mainlyon the back of the higher capacity and the opportunities thrown up by the globaldenim industry developments. The capacity would increase from nearly 70.0 mnmetres p.a. to 111.0 mn metres p.a. over FY2013-15, a CAGR of 25.9%.Volumes, however, would grow at a CAGR of 19.5% over the same period, asthere will be some time required to absorb the output from the new capacity. Wehave estimated the realizations to grow at a CAGR of 6.0% over FY2013-15, muchlower than the 11.2% increase experienced over the last 5 years.Exhibit 4: Volumes to increase on the back of enhanced capacitySource: Company Reports, Research0.00.51.01.52.02.53.03.50100200300400500600FY07FY08FY09FY10FY11FY12FY13FY14FY15RscrDebt(LHS) DebtEquity Ratio (RHS)0.020.040.060.080.0100.0120.0FY08FY09FY10FY11FY12FY13FY14FY15Mnmetresp.a.Capacity Volumes
June 14, 2013 6Operating Margins to be maintained at the current levelsOperating margins in this business are subject to cotton price movements. Asudden change in cotton prices may have an unfavourable impact on operatingmargins. However, the company has historically been able to pass on all or mostof the increases in cotton prices, as indicated by the strong 11.2% CAGR in denimrealizations over FY2008-12. We expect that in the future as well, the company willbe able to defend its gross margins. The management expects employee costs toincrease at around 10-12% every year, owing to the high employee churn rate inthis industry. Overall, we have estimated that the company would be able tomaintain its operating margins slightly below the FY2013 levels of 15.2%, ataround 15.0%. The EBITDA would increase from Rs 106.9 cr to Rs 164.8 cr overthe same time period, owing to the increase in sales.Exhibit 5: OPM expected to remain stableSource: Company Reports, ResearchGross Block to increase owing to capacity additionThe company has planned a capital expenditure of Rs 260 cr, required to increasethe denim capacity from 51.1 mn metres p.a. at the end of FY2012 to 111.0 mnmetres p.a. by FY2015. The capacity has already been increased to nearly 70.0mn metres p.a. by the end of FY2013. We have assumed the capacity addition tobe completed in FY2014. The gross block is expected to increase to Rs 735 cr inFY2015, compared to Rs 515 cr in FY2013, a total increase of 42.7%.0.02.04.06.08.010.012.014.016.018.020.0020406080100120140160180FY08FY09FY10FY11FY12FY13FY14FY15%RscrEBITDA (LHS) OPM(RHS)
June 14, 2013 7Exhibit 6: Gross Block expected to increase by 64%Source: Company Reports, ResearchPAT to grow at a high pace of 26.9% CAGROver FY2013-15, the PAT growth is estimated to be 26.9% CAGR, higher than thesales growth of 24.9%. The main reason is that the company’s interest costs arenot expected to rise at the same rate as the PAT, primarily because of the interestsubsidy schemes of the central and the Gujarat governments. The overall interestrate is expected to fall from 9.2% in FY2013 to 8.0% in FY2015, leading to a mere10.2% CAGR in interest payments, over the duration in which sales are expected torise at a CAGR of 24.9%. Notably, this increase comes despite an assumption ofhigher tax rate. We have estimated a tax rate of 20% in FY2014 and FY2015,compared to an effective tax rate of 13.2% in FY2013.Return ratios to firm up significantlyNandan has witnessed a fluctuation in the return ratios in the last 8 years, anindication of the turbulent times we have witnessed in the global economy.However, going ahead, with the rapid increase in sales and PAT, we expect thereturn ratios to firm up from the 16.8% (RoE) in FY2013 to 19.7% in FY2015. We0100200300400500600700800FY07FY08FY09FY10FY11FY12FY13FY14FY15RscrExhibit 7: PAT growth expected to be 27% CAGRSource: Company Reports, Research; Note: PAT Margin excludes XO items0.01.02.03.04.05.06.07.0(10)0102030405060FY07FY08FY09FY10FY11FY12FY13FY14FY15%RscrPAT(LHS) PATMargin (RHS)
June 14, 2013 8expect this increase to be gradual, as the company’s new capacity getscommissioned and gets absorbed over time.Exhibit 8: RoE expected to increase to 19.7% by FY2015Source: Company Reports, Research(2.0) 3.0 8.0 13.0 18.0 23.0FY07FY08FY09FY10FY11FY12FY13FY14FY15%
June 14, 2013 9Outlook and valuationWe are very positive on the outlook of Nandan Exim Ltd, primarily owing to thestrong sales growth that is expected due to opportunities in the global denimindustry. Historically, China has dominated this industry. However, with Chinesepolicy directed towards presence in higher value-added areas, the time is ripe forplayers like Nandan to make a mark globally. The company’s exports still do notfully tap major destinations like US and Europe. So, there is a tremendouspotential to grow in the international markets. Besides, the Indian domestic marketalso has been performing very well, posting a growth of nearly 10% in orders. Thisbig opportunity, coupled with the assistance of various government schemesaugurs well for Nandan. The capacity expansion to 111.0 mn metres p.a. isexpected to provide the requisite trigger for future growth.Overall we expect the company’s sales to grow at a CAGR of 24.9% over FY2013-15, while PAT is expected to grow at a CAGR of 26.9% over the same period,despite our estimation of a higher tax rate of 20% in FY2014 and FY2015,compared to an effective tax rate of 13.2% in FY2013. The relatively higherBottom-line growth is expected primarily due to the decrease in the interest costs,based on the interest subvention schemes of the central and state governments.On the bourses, the stock has historically traded in the range of 0.6x to 1.9x itsone year forward Book Value and a band of 5x to 11x one-year forward EPS. Webelieve that since this is a capital intensive business, P/BV is a more appropriatemethod of valuing the stock. The stock is currently trading at 0.6x its FY2015EBook Value and 2.5x its FY2015E EPS. We have assigned a Target Multiple of 1.0xto its one-year forward Book Value, which is slightly less than the long termaverage valuation of 1.1x its one-year forward BV. We recommend a Buy on thestock with a target price of Rs 55.Exhibit 9: One year forward P/BVSource: BSE, Company Reports, Research0.020.040.060.080.0100.0120.0Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12Rs0.5x0.8x1.1x1.7x1.4x
June 14, 2013 10About denim IndustryIndia is one of the largest players in the global denim industry. However, the sizeof Indian denim manufacturing capacity dwarfs in comparison with China. Thedenim industry in India has 8-10 major players, with a total capacity of around800 mn metres p.a. In comparison, China has a capacity of 2.5 bn metres p.a.Other major manufacturers of denim, Pakistan and Turkey have a capacity of 500mn metres p.a. The Indian industry is almost completely organized in nature, withlittle or no presence of unorganized players. The combined capacity is expected toincrease to 1,000 mn metres p.a. in the year 2013. The largest player in thedenim industry in India is Arvind Ltd, with a capacity of nearly 110 mn metres p.a.The driver of growth for the industry is both, export orders as well as domesticmarkets. While the domestic market has been growing at a rate of 10% yoy,exports are clocking a growth of 10-15%, backed by the vacating of space by theChinese players. The domestic market in India is still severely underpenetrated,with per capita consumption of jeans at 0.3 p.a., compared to nearly 2.0 p.a. forthe US. This under-penetration provides a big opportunity to the denimmanufacturers in the domestic market as well.About the companyNandan Exim Limited, established in 1994, has gained prominence amongthe Denim Fabrics Manufacturers in India. Nandan Exim Ltd is one of thelargest manufacturers of Denim in the country, with a capacity of about 70.0mn metres p.a. at the end of FY2013. Based in Ahmedabad, the company hasbeen engaged in the supply of various textile products, especially denim toseveral parts of the world. The business is extended to several countries likeEurope, USA, Morocco, Egypt, Syria, Bangladesh, Sri Lanka and LatinAmerica.The company belongs to the diversified Chiripal group, which has presence inthe fields of Petrochemicals, Spinning, Weaving, Knitting, Fabric Processing,Chemicals, Infrastructure, Packaging and Educational Initiatives, offeringemployment to more than 20,000 people directly or indirectly. Having startedwith a few power looms, the group has evolved into multi-activity, multi-product Textile House that produces fiber to apparel under one roof. TheChiripal group has various divisions like Wovens Processing, Knits, PolarFleece, Flocking, Embroidery and Chemicals with which it is able to cater tothe needs of varied customer groups.In addition, the group has also integrated facilities to manufacture PartiallyOriented Yarn (POY) and Fully Drawn Yarn, thus ensuring regular supply ofraw materials required for manufacturing various fabrics. The group hasfurther diversified by setting new projects for manufacturing Bottom Weights,Denims, Home Furnishings and Cotton Knitted Fabrics. Besides being a majorplayer in textiles, the group has also developed an Integrated Textile Park nearAhmedabad. It is a well developed industrial park for small and mediumEnterprises that works on plug n play concept with ready availability of allfacilities required for successful functioning of textile business.Nandan counts as its customers, players like Calvin Klein, Ralph Lauren,Tommy Hilfiger, Armani Exchange and GAP, signifying its status as one of thetop players in the global denim manufacturing industry.
June 14, 2013 14DisclaimerThis document is solely for the personal information of the recipient, and mustnot be singularly used as the basis of any investment decision. Nothing in thisdocument should be construed as investment or financial advice. Eachrecipient of this document should make such investigations as they deemnecessary to arrive at an independent evaluation of an investment in thesecurities of the companies referred to in this document (including the meritsand risks involved), and should consult their own advisors to determine themerits and risks of such an investment.First Step Capital, its affiliates, directors, its proprietary trading and investmentbusinesses may, from time to time, make investment decisions that areinconsistent with or contradictory to the recommendations expressed herein.The information in this document has been printed on the basis of publiclyavailable information, internal data and other reliable sources believed to betrue, but we do not represent that it is accurate or complete and it should notbe relied on as such, as this document is for general guidance only.First Step Capital or any of its affiliates/ group companies shall not be in anyway responsible for any loss or damage that may arise to any person from anyinadvertent error in the information contained in this report.First Step Capital has not independently verified all the information containedwithin this document. Accordingly, we cannot testify, nor make anyrepresentation or warranty, express or implied, to the accuracy, contents ordata contained within this document.This document is being supplied to you solely for your information, and itscontents, information or data may not be reproduced, redistributed or passedon, directly or indirectly.Neither, First Step Capital, nor its directors, employees or affiliates shall beliable for any loss or damage that may arise from or in connection with theuse of this information.