vardhman_textiles_initiatingcoverage
Upcoming SlideShare
Loading in...5
×
 

vardhman_textiles_initiatingcoverage

on

  • 536 views

 

Statistics

Views

Total Views
536
Views on SlideShare
536
Embed Views
0

Actions

Likes
0
Downloads
15
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

 vardhman_textiles_initiatingcoverage vardhman_textiles_initiatingcoverage Document Transcript

  • ICICI Securities Limited Initiating Coverage March 22, 2011Rating MatrixRating : Add Vardhman Textiles (MAHSPI)Target : | 267Target Period : 12-15 months | 257Potential Upside : 4%YoY Growth (%) Set to cash in on increased demand…(YoY Growth) FY09 FY10E FY11E FY12E Vardhman Textiles, an integrated textile conglomerate, is in a sweetNet Sales 24.2 13.0 21.8 9.3 spot to benefit from the revival in the textile industry. With the largestEBITDA 18.6 55.8 30.4 8.8 domestic spindlage, Vardhman is well poised to benefit from theNet Profit (45.2) 286.3 26.6 6.3 increasing spreads between yarn and cotton prices. A crunch in global supply of cotton is an added positive. Also, it has incurred majority ofCurrent & target multiple its capex during FY06-10 and is now ready to reap the benefits thereof. FY09 FY10 FY11E FY12E We are initiating coverage on Vardhman Textiles with an ADD rating.PE 5.7 3.0 4.2 3.9 Global supply crunch, increasing spreads augur well for VardhmanTarget PE 19.3 5.0 4.4 4.1 A decline in global cotton output by 6% in cotton season (CS) 2009-10EV/EBITDA 5.8 4.7 4.7 4.8 (October to September) has led to an increased demand for Indian yarnTarget EV/EBITDA 9.7 6.5 5.4 5.3 (as India is a cotton surplus nation). The spread between cotton andPrice/BV 0.3 0.6 0.8 0.7 cotton yarn prices has increased from | 59/kg in CS08-09 to | 72/kg in December 2010. Hence, operating margins of Vardhman’s spinningStock Data segment recorded a marked improvement from 14.4% in FY09 to 24.8%Bloomberg/Reuters code VTEX IN/ VART.BO as on December 2010. Opening up of a fresh export quota in April 2011Sensex 17,988 will allow companies to resume yarn exports. We expect Vardhman toAverage volume 30,959 enjoy the benefits at least up to Q1FY12 (post which global prices mayMarket Capitalisation 1,633 correct in anticipation of fresh stocks). However, since utilisation rates areEV 3,315 at decadal highs of greater than 90% the chance of a significant price52 week H/L 377 / 228 correction in cotton yarn is bleak (refer Exhibit 18).Equity capital | 63.65 croreFace value | 10 Key positives: Well poised to cater to demand, comfortably leveragedPromoters stake (%) 61.01 Vardhman has incurred a capex of ~| 2,300 crore during FY06-10. While spinning capacity has increased 1.8x to 8,70,000 spindles, Vardhman hasComparative return matrix (%) more than doubled its weaving capacity from 432 looms (FY06) to 900Returns (%) 1m 3m 6m 12m looms currently. Vardhman is, therefore, well poised to capture theVardhman Textiles (5.2) (12.4) (17.1) 13.0 increased demand. On the debt front also, Vardhman’s debt to EBITDAAlok Industries (9.6) (20.4) (3.6) (12.7) levels stand at 3.7x (FY10) being the lowest among its peers.Arvind (10.0) (18.6) 19.9 50.9RSWM (12.3) (20.0) (8.0) 36.0 Valuations Considering swell yarn realisations, a robust demand outlook, thePrice movement downside risks like marginally softer yarn realisations and lower than 6500 400 estimated offtake in demand, we have arrived at our target price based on an average reached at by assigning a multiple of 0.65x FY12E book value 6000 350 of | 349 and 4.7x FY12E EPS of | 65.1. We are initiating coverage on the 5500 300 stock with an ADD rating with a target price of | 267. 5000 250 Exhibit 1: Valuation Metrics FY08 FY09 FY10 FY11E FY12E 4500 200 Net Sales (| crore) 2,387.7 2,965.4 3,350.7 4,081.4 4,460.7 Mar-10 Jun-10 Sep-10 Dec-10 EBITDA (| crore) 381.6 452.4 705.1 919.2 1,000.0 NIFTY Vardhman Textiles Ltd PBT (| crore) 187.2 129.6 411.3 546.9 581.6Analyst’s name Net Profit (| crore) 143.0 78.3 302.4 382.9 407.1 Bharat Chhoda EPS (|) 25.2 13.8 53.4 61.2 65.1 bharat.chhoda@icicisecurities.com PE (x) 6.1 5.7 3.0 4.2 3.9 Dhvani Modi PBV (x) 0.7 0.3 0.6 0.8 0.7 dhvani.bavishi@icicisecurities.com@icicisecurities.com EV/EBITDA (x) 8.5 5.8 4.7 4.7 4.8 ROCE (%) 6.6 5.5 11.0 14.1 13.2 RONW (%) 11.8 5.9 20.2 21.8 19.9 Source: Company, ICICIdirect.com Research ICICIdirect.com | Equity Research
  • ICICI Securities Limited Shareholding pattern (Q3FY11) Company background Shareholder Holding (%) Vardhman Textiles Ltd (Vardhman) (earlier known as Mahavir Spinning) is Promoters 61.0 part of the Vardhman Group, a large textile conglomerate with a presence Institutional Investors 23.1 across the textile value chain. Vardhman has evolved through history General Public 15.9 from a small beginning in 1965 into a modern textile major under the dynamic leadership of its chairman SP Oswal. FII & DII holding trend (%) The Vardhman Group has a turnover of over $800 million and a workforce 80 of 25,000 employees. The group has over 24 manufacturing facilities 67 67 67 61 spread across five states in India. The group has one of the largest 60 spinning capacity in India (8,70,000 spindles) and is among the largest 40 domestic yarn producers with a market share of 3.5%. 23 20 13 12 11 0 Q3FY11 Q2FY11 Q1FY11 Q4FY10 Promoters Institutional investorsExhibit 2: Group structure Vardhman Holdings Ltd (VHL) 0.75% stake 26.66% stake Vardhman Textiles Ltd (VTEX) Business: Yarn, Fabric, Steel Vardhman Yarns & Vardhman Acrylics Vardhman Spinning VTL Investments Ltd Threads Ltd Ltd Co Ltd Stake: 51% Stake: 59% Stake: 73% Stake: 100% Business: RMG/ Business: Acrylic Business: 100% Business: NBFC Industrial/ Speciality Staple Fibre cotton yarn ThreadsSource: Company, ICICIdirect.com Research ICICIdirect.com | Equity Research Page 2
  • ICICI Securities Limited Product profile Vardhman, a fully integrated textile player, is present across the textile value chain ranging from yarns, threads, fibre to fabrics and garments. Vardhman, a company with the largest domestic Exhibit 3: Product mix spindlage, derives a major portion of its revenues from the spinning segment 3,500 185 3,000 114 255 288 385 2,500 7 344 326 811 2,000 302 | crore 322 687 312 1,500 450 413 1,000 1,532 1,695 1,126 1,281 500 - FY07 FY08 FY09 FY10 Yarn Fabric Sewing Thread Steel Fibre Source: Company, ICICIdirect.com Research Yarns From a humble beginning of 14,000 spindles, Vardhman today has the largest domestic spinning capacity of over 8,70,000 spindles. The company has technical tie-ups with world leaders from Japan and Korea. Vardhman is one of the largest cotton yarn exporters from India and accounts for ~5% of the total cotton yarn exported. Vardhman offers the widest range of specialised greige and dyed yarns in cotton, polyester, acrylic and varieties of blends. It also offers value-added products like organic cotton, melange, lycra, ultra yarns (contamination controlled), gassed mercerised, super fine yarns and fancy yarns for hand knitting.Exhibit 4: Vardhman’s spinning capacity Exhibit 5: India’s organised spinning capacity 1.00 0.87 50.0 0.74 38.3 0.68 0.68 34.0 33.1 32.0 34.7 36.6 36.8 0.80 40.0 31.2 31.2 31.1 33.3 0.54 0.47 0.48 In m illion In m illion 0.60 30.0 0.31 0.31 0.40 0.21 0.21 0.21 0.24 20.0 0.20 10.0 - - FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E Spindles (nos) Spindles (nos)Source: Company, ICICIdirect.com Research Source: Textile Commissioner’s Office, ICICIdirect.com Research Over the years, Vardhman has continuously added spinning capacities to meet the increasing demand. It has more than doubled the spinning capacity from FY05 to FY10. In years of a slowdown also, the company has invested in capacity expansion to cater to the demand in the years to come. ICICIdirect.com | Equity Research Page 3 View slide
  • ICICI Securities Limited In this segment, the company has launched quite a few variants and also offers specialised and value-added yarn, which fetches higher realisations. Some of its latest product offerings include organic cotton and contamination free yarn. Fabrics Taking a further step towards forward integration, the company entered the fabric business in 1992 and started manufacturing greige (unprocessed) fabric. It further graduated to manufacture processed fabric in 1999. Vardhman currently operates with a capacity of 900 looms and 90 million metres of processed fabric. Vardhman makes fabrics for both tops (shirting) and bottoms (trousers/pants). Apart from this, it also makes specialised fabrics like yarn dyed, special white and also finishes fabrics with effect like teflon/nanocare (which is basically an oil and water repellent). Vardhman supplies fabrics to leading apparel makers like Tommy Hilfiger, Esprit, Gap, Louis Philippe, Arrow and the like.Exhibit 6: Segment-wise fabric sales Exhibit 7: Process-wise sales mix 100 100 4 6 4 7 80 80 41 39 42 38 60 68 65 63 60 60 % % 40 35 30 31 35 40 20 19 17 19 14 12 14 16 13 6 7 7 4 20 9 15 - 10 11 9 12 10 9 FY07 FY08 FY09 FY10 - FY07 FY08 FY09 FY10 Brands RMG Exports Distributors Full Bleached Ready for Dyeing Yarn Dyed Piece Dyed Buying Houses Other ExportsSource: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research Sewing thread Vardhman entered the sewing thread business in 1982 as a forward integration to its yarn business. It is the second largest brand of specialised threads in the country. Vardhman’s product offerings in this segment include apparel sewing threads, specialty threads, textile craft, embroidery threads, kite flying threads, tea bags, cosmetic threads and industrial threads. It currently has four plants in Punjab, Tamil Nadu and Himachal Pradesh with a total capacity of 33 TPD. In 2002, it entered into a strategic alliance as a licensee with American & Efird, Inc. US (A&E) for manufacturing and distribution of A&E branded sewing threads in India. In 2008, it spun off the threads business into a new company (Vardhman Yarns & Threads Ltd) and entered into a 51:49 joint venture with A&E. Fibre In 1999, Vardhman commenced manufacturing of acrylic staple fibre used in manufacturing of hand knitted yarns, blankets, jerseys, sweaters, saris, carpets, upholstery, etc. The company’s plants are located in Gujarat with world class wet spun technology and highly automated, microprocessor controlled systems with an annual capacity of 18,000 tonnes. The company’s products are marketed under the brand name Varlan. ICICIdirect.com | Equity Research Page 4 View slide
  • ICICI Securities Limited Steel In 1972, as part of its diversification strategy Vardhman entered the steel business and commenced operations with capacity of 35,000 TPA. Currently, Vardhman has a 1,00,000 TPA of steel melting capacity and a 80,000 TPA rolling mill capacity. Vardhman’s products find usage in automotive components, forging, ball bearings, piston pins, engineering applications, railways, defence, etc. Vardhman takes pride in being a preferred OE supplier to leading OEMs like Tata Motors, Ashok Leyland, Maruti, Hindustan Motors, Toyota, M&M and Escorts among others. Vardhman has received shareholders’ and creditors’ approval for the demerger of the steel business of Vardhman into Vardhman Special Steels Ltd (VSSL), a wholly owned subsidiary of the company with effect from January 1, 2011. Further, the Board has also approved the share entitlement ratio of one fully paid equity share in VSSL for every five shares held by the shareholder. The record date for the same has been fixed as March 30, 2011. Garments Vardhman has entered into a joint venture with Nisshinbo Textile Inc. to enter the last leg of the value chain – garment manufacturing. Vardhman owns 51% in the venture. The company has incurred a capex of | 37 crore funded through equity of | 14 crore and debt of | 23 crore. The initial capacity is expected to be ~1.2 million pieces and the company plans to scale this up to 1.8 million pieces by the end of FY12. The unit has started operations in December 2010 but will be completely operational by H1FY12. As this segment is still at a nascent stage, we have not factored the same into our revenue estimates, thus far. ICICIdirect.com | Equity Research Page 5
  • ICICI Securities Limited Investment Rationale Indian cotton textile industry well placed versus peers Due to a bumper cotton crop in India, Indian textile players are in a sweet spot vis-à-vis their global peers that are required to import cotton from India. China (the largest cotton producer) is facing issues like high raw material and labour costs. Also, the appreciation of the Chinese yuan has made their products relatively expensive. Pakistan also had weather issues, which have led to a lower cotton output of 2,112 million kg in CS09-10 as compared to a consumption of 2,400 million kg. China is not planning to add spinning capacity as costs in China are increasing and it is becoming increasingly feasible for Chinese players to gradually move up the textile value chain. As a result, India is likely to be the largest beneficiary where the number of spindles is likely to increase from 36.8 million in CS09-10 to 44.3 million in CS14-15E.Of the three largest global producers of cotton, India is the Exhibit 8: India to benefit from bumper crop in CS09-10Eonly country that had a cotton surplus in CS09-10 12,000 9,705 10,000 8,000 6,800 million kg 6,000 4,963 4,252 4,000 2,112 2,400 2,000 0 China India Pakistan Production Consumption Source: International Cotton Advisory Committee, ICICIdirect.com ResearchGlobal cotton production has been on a decline for three Exhibit 9: World cotton production at six year lowyears now and has reached the lowest level in six years 9,000 26,791 28,000 26,293 26,049 25,676 7,500 26,000 23,415 million kg million k g 6,000 24,000 22,084 4,500 20,732 22,000 3,000 20,000 1,500 18,000 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 E China India USA Pakistan Others Total (RHS) Source: International Cotton Advisory Committee, ICICIdirect.com Research Global cotton production has been declining for the last three years. However, rising global cotton prices have resulted in higher area under cotton production in several major cotton producing countries. In India alone, the area under cotton cultivation is expected to increase from 10.31 million hectares in CS09-10 to 11.06 million hectares in CS10-11. Also, ICICIdirect.com | Equity Research Page 6
  • ICICI Securities Limited due to better climatic conditions the yield per hectare is likely to increase from 467 kg per hectare in CS09-10 to 506 kg per hectare in CS10-11.Apparel being a discretionary spending item took a beating Exhibit 10: World cotton consumption exceeds production by ~2,300 million kgduring the global economic slowdown. Consequently,demand for cotton was on a downtrend during that period. 26,450 26,385 30,000However, with a revival in global economies demand for 24,995 24,378 9,700 23,526 23,410cotton is projected to increase, going forward. 21,780 25,000 8,200 20,000 million kg 6,700 million kg 15,000 5,200 10,000 3,700 2,200 5,000 700 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 E China India USA Pakistan Others Total (RHS) Source: International Cotton Advisory Committee, ICICIdirect.com Research The recession had eroded demand for textiles and clothing, as global cotton use fell from 26,450 million kg in CS06-07 to 23,410 million kg in CS08-09. Global cotton consumption is expected to pick up in CS09-10 on the back of economic recovery to reach 24,378 million kg. China and India (accounting for ~60% of the global consumption) are expected to account for a large part of the increase in world cotton mill use in CS10- 11. While total global cotton consumption is expected to increase by 4% in CS09-10 to 24,378 million kg, the growth in Indian cotton consumption is expected to increase by 6% to 9,705 million kg (from 9,156 million kg in CS08-09). China is expected to outpace the global and Indian cotton consumption growth and increase its cotton consumption by 10% to 4,252 million kg in CS09-10.Global cotton prices touched an all-time high of Exhibit 11: Global cotton prices at all-time high$2.44/pound in March 2011 Global cotton prices at 3.00 an all time high of 2.50 $2.44 per pound 2.00 $/pound 1.50 1.00 0.50 - Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Source: Bloomberg, ICICIdirect.com Research In September 2010, global cotton prices crossed the $1/pound mark for the first time after June 1995 on the back of weak cotton output. According to The International Cotton Advisory Committee, the increase ICICIdirect.com | Equity Research Page 7
  • ICICI Securities Limited in output in the current cotton season is likely to be absorbed by the mills. This has led to a steep increase in cotton prices and they have crossed $2 per pound in March 2011 to touch an all-time high of $2.44 per pound. Indian textile industry to more than double by 2020The main drivers of growth are increasing population, Exhibit 12: Indian textile industryincreasing income levels, rapid urbanisation, improvingdemographics, higher organised players and increasingpenetration of retailer in small cities 376 | 000 crore 212 122 656 108 72 419 219 246 139 2005 2009 2010 (E) 2015 (E) 2020 (E) Domestic Exports Source: Technopak, ICICIdirect.com Research The domestic textile industry is projected to grow from | 2,46,000 crore in 2010 to | 6,56,000 crore by 2020, translating to a CAGR of 10.5%. The exports market is expected to be worth | 3,76,000 crore from the current | 1,22,000 crore, growing at a CAGR of 12%, faster than the domestic markets. The strong growth in exports is expected on the back of increased sourcing shift from developed countries to Asia. The global textile market is reviving after the recent global recession with increasing consumer demand. In the last five years, the Indian textile industry has grown by ~10% annually and is expected to grow at a faster rate driven by domestic consumption. Cotton balance sheet indicates cotton prices will remain firm Exhibit 13: Cotton Balance Sheet In mn bales 2009-10 2010-11 Supply Opening Stock 7.15 4.05 Crop 29.50 31.20 Imports 0.70 0.50 Total Supply 37.35 35.75 Demand Mill Consumptin 20.70 23.50 SSI Consumption 2.30 2.00 Non-mill Consumption 2.00 2.00 Exports 8.30 5.50 Total Off-take 33.30 33.00 Carry-over Stock 4.05 2.75 Source: Cotton Association of India, ICICIdirect.com Research Unlike world cotton production, India witnessed a 2.4% increase in cotton production in CS09-10. The cotton association expects production in CS10-11 to increase to 31.2 million bales (1 bale = 170 kg). Due to cotton prices reaching record highs, the acreage (10.3 million hectare) under ICICIdirect.com | Equity Research Page 8
  • ICICI Securities Limited cotton cultivation has increased significantly. Despite record production, inventories are likely to be at a five year low in CS10-11. Also, the quota for exports in CS10-11 is likely to be lower due to robust domestic demand. Considering this scenario, the chances of a steep correction in cotton prices are very bleak. Rising cotton-yarn spreadsIt has been witnessed in the past that spreads in the Exhibit 14: Cotton-yarn spreads - yearlydomestic market have increased in a year where globalconsumption is more than production. CS2009-10 has 160 68 80been one such year. Hence, the chances of significant 63 140 59 59 70softening of cotton and yarn prices are bleak. 55 55 120 52 60 48 44 | per kg 100 50 | per kg 80 40 135 60 110 121 115 110 120 30 106 103 109 40 76 20 58 66 66 61 47 47 51 54 20 10 0 0 CS-02 CS-03 CS-04 CS-05 CS-06 CS-07 CS-08 CS-09 CS-10 Cotton Prices Yarn Prices Spread (RHS) Source: Cotton Association of India, ICICIdirect.com Research Global yarn prices have increased ~60% in the last 18-20 months while cotton prices have increased only ~20% in the same period. This had a spiralling effect on the EBITDA margin of yarn manufacturers. Owing to an extended monsoon, lower output in Pakistan, increased demand from China and depletion of inventory levels for two consecutive years, cotton yarn prices are likely to remain firm in CS 2010-11 as well.Spreads in December have been the highest for this Exhibit 15: Cotton-yarn spreads – monthlyfinancial year 200 70 71 69 72 80 68 180 62 64 70 160 56 54 60 140 120 50 | per kg | per kg 100 188 188 40 80 162 170 147 150 154 152 154 30 60 116 124 117 92 106 20 40 79 81 83 83 20 10 - - Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Cotton Prices Yarn Prices Spread (RHS) Source: Cotton Association of India, ICICIdirect.com Research ICICIdirect.com | Equity Research Page 9
  • ICICI Securities LimitedThe average spread for the nine months of the current Exhibit 16: Spreads increase in year following one where consumption exceeds productionfiscal is | 65/kg, thereby reinstating the fact that spreadsincrease in a year following one where consumption 30,000 70exceeds production 68 25,000 65 20,000 59 59 60 million k g | / kg 15,000 55 52 55 55 10,000 50 5,000 44 45 - 40 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 E Global Cotton Production Global Cotton Consumption Spreads (RHS) Source: Cotton Association of India, ICICIdirect.com Research It has been witnessed in the past that spreads in the domestic market have increased in a year following the year in which global consumption is more than the production. As witnessed in 2004-05, spreads increased from | 55/kg in the previous year to | 68/kg as global cotton consumption exceeded the production in 2003-04. Similarly, spreads increased in 2008- 09 also. The year 2009-10 too has been one such year and the trend seems to be continuing. Spreads for December 2010 have touched a high of | 72/kg. This was evident in the December quarter results for all spinning companies. Indian yarn prices are 5-10% lower than international yarn prices. However, the government has imposed a ban on cotton yarn export beyond the stipulated 720 million kg and domestic yarn manufacturers are unable to book fresh orders for yarn exports. Still, companies like Vardhman have holding capacity and will hold yarn inventories till fresh quotas are opened in April 2011. This will ensure that margins are protected, going forward. ICICIdirect.com | Equity Research Page 10
  • ICICI Securities Limited Demand for cotton yarn to grow, albeit at a slower pace After declining by 1.7% in 2008-09, the total cotton yarn demand grew by 6% to 3,073 million kg in 2009-10. The growth in 2009-10 was primarily led by strong domestic demand. Going forward also, demand for cotton yarn will continue to grow backed by strong domestic demand. The Office of Textile Commissioner expects the demand for cotton yarn to grow at a CAGR of 5.1% during 2010-15E.Continued demand from major export destinations such as Exhibit 17: Cotton yarn demandChina, Bangladesh, Korea and Turkey will drive demand forIndian cotton yarn 2,500 2,000 1,500 million kg 1,000 500 - 2007-08 2008-09 2009-10E 2010-11E 2011-12E 2012-13E 2013-14E 2014-15E Domestic Demand Derived Demand Direct yarn exports Source: Office of Textile Commissioner, ICICIdirect.com Research Exhibit 18: Demand growth 12 10 9 10 8 8 8 8 6 5 5 6 4 6 6 % 5 5 5 2 4 4 - (2) 2007-08 2008-09 2009-10(E) 2010-11(E) 2011-12(E) 2012-13(E) 2013-14(E) 2014-15(E) (4) (2) Cotton yarn demand growth PFY demand growth Source: Office of Textile Commissioner, ICICIdirect.com Research The ratio of cotton yarn price and polyester filament yarn (PFY) price has been in the range of 1.4-1.6x during 2002-09. The same has gone up to a historical high of 2.3x in September 2010. Consequently, the demand for blended yarn will continue to increase at a more rapid pace. ICICIdirect.com | Equity Research Page 11
  • ICICI Securities LimitedDomestic demand for cotton yarn is expected to grow at a Exhibit 19: Cotton yarn demand mixCAGR of 6.2% during 2010-15E while that of derived anddirect yarn exports is likely to grow at 3.2% and 2.6%, 100respectively 19 18 17 17 90 20 19 19 17 80 70 22 22 21 21 20 20 25 25 60 50 % 40 30 55 59 60 61 61 62 62 56 20 10 0 2007-08 2008-09 2009-10(E) 2010-11(E) 2011-12(E) 2012-13(E) 2013-14(E) 2014-15(E) Domestic Demand Derived Demand Direct yarn exports Source: Office of Textile Commissioner, ICICIdirect.com Research Utilisation rates to be at decadal high levelsDemand growth and decadal high utilisation levels would Exhibit 20: Spinning capacity addition in Indiaminimise the pressure on spreads despite the prevailing 42.8 44.3high cotton prices 45 39.8 41.3 100 40 36.6 36.8 38.3 34.0 33.1 34.7 95 35 32.0 31.2 31.2 31.1 33.3 96 30 94 90 85 92 93 91 92 90 91 In million 25 89 85 % 20 82 15 80 10 78 75 5 74 74 76 0 70 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E FY15E Spindles Capacity Utilisation (RHS) Source: Office of Textile Commissioner, ICICIdirect.com Research Considering that the Indian textile industry is likely to double by 2020 and following demand from the apparels industry, the Indian spinning sector is likely to increase its capacity from 36.8 million spindles in FY10 to 44.3 million spindles by FY15E. Also, the capacity utilisation rates are likely to be at decadal high levels at greater than 90%. This augurs well for spinning companies as in an increasing utilisation rate and growing demand scenario, pressure on operating margin is likely to be minimal. In order to meet the future demand the Indian spinning industry would need an additional ~7.5 million spindles requiring an investment of | 18,700 crore till FY15E. Also, another | 9,500 crore would be required for replacement of ~7.5 million old spindles during FY11E-15E. ICICIdirect.com | Equity Research Page 12
  • ICICI Securities Limited Vardhman - well equipped to capitalise on opportunities Capacity addition to boost topline growth Vardhman has incurred a capex of ~| 2,300 crore during FY06-10 and expanded its spinning capacity by 1.8x to the current 8,70,000 spindles from 4,77,920 spindles in FY06. On the back of this, revenues from the spinning segment have increased at a CAGR of 15% during FY06-10. It has also more than doubled its weaving capacity from 432 looms (FY06) to 900 looms currently. We expect Vardhman’s spinning segment to maintain its share in the revenue pie and earn an incremental revenue of ~| 780 crore over FY11-12E, thereby growing at a CAGR of 22% during FY10-12E. The company has a planned capex of | 1,500 crore over the next three years. It plans to add another 1,80,000 spindles and 400–600 looms by FY13E. We believe that with the largest domestic spindlage Vardhman is well poised to further tap the opportunities that lie ahead. Exhibit 21: Vardhman’s spinning capacity 1.00 106 107 106 110 103 102 0.90 101 100 0.80 96 100 0.70 91 0.60 In million 0.50 90 % 84 0.40 82 81 0.30 78 76 80 0.20 0.10 - 70 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E Spindles (nos) Capacity Utilisation (RHS) Source: Company, ICICIdirect.com ResearchWe expect Vardhman to garner incremental revenue from Exhibit 22: Spinning segment to drive growth, going forwardthe spinning segment to the tune of | 780 crore (duringFY11E and FY12E). Considering that EBITDA margins from 3,000 250the spinning segment are also on an uptrend, the capacity 210 200addition will be earnings accretive 2,500 200 153 162 153 149 2,000 150 | crore | / kg 1,500 2,540 100 2,283 1,000 1,532 1,695 1,126 1,281 50 500 - - FY07 FY08 FY09 FY10 FY11E FY12E Spinning Segment Revenues Yarn Realisations (RHS) Source: Company, ICICIdirect.com Research ICICIdirect.com | Equity Research Page 13
  • ICICI Securities LimitedThe margins of the spinning segment have risen Exhibit 23: EBITDA margin of yarn segmentconsiderably on the back of increasing spreads betweencotton and cotton yarn prices 28 75 70 26 70 24 65 62 63 65 22 59 | / kg 20 60 % 18 54 50 52 55 16 50 14 18.1 16.5 14.4 20.2 22.5 24.8 26.6 24.8 12 45 FY07 FY08 FY09 FY10 Q1FY11 Q2FY11 Q3FY11 9MFY11 Yarn Segment EBITDA Margin Spreads (RHS) Source: Company, ICICIdirect.com Research Increasing spreads between cotton and yarn prices have aided the EBITDA margin expansion for spinners. Vardhman was no exception and we saw EBITDA margins spiralling from 14.4% in FY09 to 24.8% for the nine months ended December 2010. The current scenario with widening spreads will augur well for Vardhman as EBITDA margins from the yarn segment will improve. We expect the spinning segment to clock an EBITDA margin of 25.0% in FY11E and a marginal decline in FY12E at ~24%. Vardhman is well poised to capitalise on this margin expansion through its expanded spinning capacities. Exhibit 24: Yarn segment - EBITDA/ tonne FY07 FY08 FY09 FY10 FY11E FY12E Volume (MT) 67,266 74,928 86,567 90,928 103,008 120,488 Growth (%) 3.4 11.4 15.5 5.0 13.3 17.0 Realisation (|/MT) 152,935 148,852 153,028 162,436 210,000 200,000 Growth (%) 7.4 (2.7) 2.8 6.1 29.3 (4.8) Avg Ind Rate (|/MT) 109,000 110,000 120,000 135,000 180,000 175,000 Premium/ (Discount) (%) 40.3 35.3 27.5 20.3 16.7 14.3 Segment EBITDA (%) 18.1 16.5 14.4 20.2 25.0 24.0 EBITDA/Tonne (|) 39,576 37,381 32,284 48,982 55,473 50,587 Source: Company, Office of Textile Commissioner, ICICIdirect.com Research Vardhman’s yarn has consistently enjoyed a premium over the average industry realisations. However, in our assumptions we have been conservative and assumed a lower premium to the expected yarn prices in FY11E and FY12E. Going forward, if Vardhman’s yarn continues to command a similar premium to average industry rates then the earnings will be positively impacted by | 4.6 and | 8.9 per share in FY11E and FY12E, respectively. Exhibit 25: Sensitivity Analysis: If yarn realisations are higher than assumed FY11E FY12E Premium to market price assumed originally (%) 17 14 Premium enjoyed in FY10 (%) 20 Original EPS (|) 61.2 65.1 EPS assuming premium at 20% (|) 65.8 74.1 Source: Company, ICICIdirect.com Research ICICIdirect.com | Equity Research Page 14
  • ICICI Securities Limited Integrated model mitigates risk and also enhances profitabilityConsidering that Vardhman is present across the value Exhibit 26: Textile value chainchain, a downturn in a particular segment will mitigate thedownside risk to earnings. If yarn prices correctsignificantly, Vardhman can reduce the direct sales of yarnand sell the product at a higher level in the value chain.Also, when prices are in an uptrend, Vardhman will benefitfrom the captive capacities Source: Technopak, ICICIdirect.com Research Vardhman is already present in the fibre to yarn segment and has recently entered the garments business, which will boost profitability. As one goes higher in the textile value chain, the margins continue to increase. Also, if a particular segment faces a downturn in demand or witnesses a price correction, Vardhman can use the same as an input and sell the products at the higher end of the value chain. ICICIdirect.com | Equity Research Page 15
  • ICICI Securities Limited Risk & concerns Commodity nature of business Vardhman operates in an industry where demand supply forces and government regulations govern input and end-product prices. Any adverse movement in prices can affect the financial performance of the company. Sensitivity to cotton prices Exhibit 27: Cotton prices weigh on EBITDA margin FY07 FY08 FY09 FY10 Cotton Price (|/ kg) 54 66 61 76 Yarn Realization (|/ kg) 153 149 153 162 Yarn Segment EBITDA margin (%) 18.1 16.5 14.4 20.2 Source: Company, ICICIdirect.com Research Though in the current demand supply scenario Vardhman has been able to pass on the impact of increased cotton prices, any inability to do the same can weigh on the EBITDA margin of the company. It is evident in the table above that operating margins shrank from 18.1% in FY07 to 16.5% and 14.4% in FY08 and FY09 (years where demand was affected due to global slowdown) due to an increase in cotton prices. Also, during the same period yarn prices did not improve and actually declined in FY08 to further put pressure on the operating margin. Cotton yarn may face substitution from PFY Exhibit 28: Price differential between cotton and polyester yarn 160 135 140 121 120 115 110 109 120 103 100 |/kg 80 60 74 75 75 70 70 71 70 40 20 0 CS-04 CS-05 CS-06 CS-07 CS-08 CS-09 CS-10 PFY Prices Cotton Yarn Prices Source: Office of Textile Commissioner, ICICIdirect.com Research The ratio of cotton yarn price and polyester filament yarn (PFY) price has been in the range of 1.4-1.6x during 2002-09. The same has gone up to a historical high of 2.3x in September 2010. Consequently, the demand for blended yarn will continue to increase, thereby dampening the demand for cotton yarn. ICICIdirect.com | Equity Research Page 16
  • ICICI Securities Limited Lower than assumed yarn realisations Vardhman’s yarn has always enjoyed a 20-30% premium over industry realisations. Nonetheless, we have been conservative and assumed lower premiums of 17% and 14% in FY11E and FY12E, respectively. On the other hand, if Vardhman’s realisations get aligned with industry realisations and the premium enjoyed becomes zero then the earnings will be ~35% lower than our estimates. Exhibit 29: Downside risk to earnings assuming lower yarn realizations FY11E FY12E Originally assumed realisations (|/ kg) 210 200 Industry expectation of yarn realisation (|/kg) 180 175 Original EPS (|) 61.2 65.1 EPS assuming NIL premium (|) 38.3 42.8 Source: Company, ICICIdirect.com Research Global or domestic slowdown Vardhman derives 25-30% of its revenues from exports. Any slowdown in the global economies will adversely impact Vardhman’s revenues. Domestic textile players, including Vardhman, are bullish on the domestic consumption led demand. A slowdown in domestic offtake will also adversely affect the company and lead to under utilisation of the expanded capacities, thereby impacting the return ratios. ICICIdirect.com | Equity Research Page 17
  • ICICI Securities Limited Financials Topline to grow at a 14% CAGR during FY10-12E Exhibit 30: Product Mix 120 100 4 6 5 5 14 14 10 8 7 7 80 12 11 10 9 14 13 23 22 22 60 19 19 24 % 40 52 54 52 51 56 57 20 - FY07 FY08 FY09 FY10 FY11E FY12E Yarn Fabric Sewing Thread Steel Fibre Source: Company, ICICIdirect.com Research We expect Vardhman to post a CAGR of 14% in topline during FY10-12E lead by strong growth in the yarn segment. Though the revenues of the yarn segment have grown at 15% CAGR during FY07-10, we expect the same to grow at a CAGR of 21% during FY10-12E. We expect yarn, fabric, steel and fibre sales to grow at a CAGR of 21%, 9%, 7% and 9%, respectively, during FY10-12E.During FY11E and FY12E, we expect incremental revenues Exhibit 31: Topline growth trendto the tune of | 845 crore from the spinning segment alone 5,000 4,500 221 4,000 210 291 3,500 279 415 185 398 3,000 114 255 976 2,500 7 288 385 897 326 344 2,000 - 302 811 322 687 1,500 312 413 450 1,000 2,283 2,540 1,532 1,695 500 1,126 1,281 - FY07 FY08 FY09 FY10 FY11E FY12E Yarn Fabric Sewing Thread Steel Fibre Source: Company, ICICIdirect.com ResearchVardhman’s yarn has consistently enjoyed a premium over We expect the spinning segment (on a consolidated basis) to grow from |average industry realisations. Conservatively, we have 1,695 crore in FY10 to | 2,540 crore in FY12E, growing by | 845 crore in aassumed a lower premium to the industry, going forward. span of two years. We expect the realisation to increase from | 162/ kg inIf it continues to enjoy the same premium then the upside FY10 to | 210/ kg in FY11E and marginally soften to | 200/kg in FY12E. Onto the earnings can be significant the back of increased spindlage, we expect volumes in the spinning segment to grow from 90,928 MT in FY10 to 1,20,488 MT in FY12E. We expect the fabric segment to grow from the current | 811 crore to | 976 crore in FY12E, growing at a CAGR of 10% during FY10-12E. We expect realisations of the unprocessed fabric (~30% of total fabric sales) to increase from | 52/ metre in FY10 to | 54/ metre in FY12E while that of ICICIdirect.com | Equity Research Page 18
  • ICICI Securities Limited processed fabric will increase from | 93/metre in FY10 to | 99/ metre in FY12E. In FY12E, we expect the unprocessed and processed fabric volumes to increase to 53 million metres and 70 million metres, respectively, (from 46 million metre and 60 million metre in FY10). In the steel business, we expect revenues to increase at a CAGR of 7% during FY10-12E. Also, we expect the billets segment to post a healthy growth of 21% on a lower base (largely led by 20% volume growth). We expect the rolled products side of the business to marginally grow from | 273 crore in FY10 to | 286 crore in FY12E led by marginal volume and realisation growth. On the subsidiary front, Vardhman’s two leading subsidiaries Vardhman Acrylics and Vardhman Yarns and Threads are expected to grow at a CAGR of 9% and 4%, respectively, during FY10-12E. EBITDA to be maintained with marginal compression Exhibit 32: Enhanced profitability 24.00 22.52 22.42 21.04 22.00 20.00 17.64 18.00 % 15.98 15.26 16.00 14.00 12.00 FY07 FY08 FY09 FY10 FY11E FY12E EBITDA Margin Source: Company, ICICIdirect.com Research On the back of a healthy improvement in spinning margins, we expect an upward movement in the EBITDA margin for FY11E. However, in FY12E we expect marginal pressure on the operating margin on the back of resistance in demand from downstream industries – weaving and garmenting. Due to this, we expect the margins from the spinning segment to face marginal pressure. In FY10, spinning margins improved to 20.2% from 14.4% in FY09 while the fabric segment witnessed margin expansion from 11.2% in FY09 to 15% in FY10. ICICIdirect.com | Equity Research Page 19
  • ICICI Securities Limited Exhibit 33: Segmental EBITDA margin 25 16 24 15 15 20 20 14 14 18 13 13 17 14 15 12 12 11 11 11 10 10 FY07 FY08 FY09 FY10 FY11E FY12E Yarn Fabric (RHS) Source: Company, ICICIdirect.com Research The yarn segment has seen substantial operating margin expansion on the back of increased demand from the apparel industry. Going forward, we expect the operating margin of the yarn segment to increase to 25% in FY11E and marginally correct to 24% in FY12E on the back of increased input cost pressure. On the other hand, in the fabric segment we foresee pressure on the operating margin due to higher yarn prices. Inability to pass on the impact of increased yarn prices will pressurise the EBITDA margin. We expect the margins of the fabric segment to soften to 13% in FY12E. Lowest debt to EBITDA levelsAfter incurring a large part of capex also Vardhman is Exhibit 34: Peer comparison of debt to EBITDA levels (FY10)comfortably leveraged compared to its peers Debt/EBITDA 7.0 6.6 6.4 6.0 5.0 4.6 3.8 3.7 4.0 x 3.0 2.0 1.0 - Alok Industries Raymond Arvind Welspun India Vardhman Textiles Source: Company, ICICIdirect.com Research Vardhman has the lowest debt to EBITDA levels among its peers. This gives it comfort to further raise debts to fund its expansion. Also, in a rising interest rate scenario, Vardhman will be in a very comfortable position to service its debt. ICICIdirect.com | Equity Research Page 20
  • ICICI Securities Limited Solvency positionDespite significant capex during FY06-10, Vardhman is Exhibit 35: Debt to peak in FY12Ecomfortably leveraged compared to its peers. Historically, Debt to Equity Ratio FY07 FY08 FY09 FY10 FY11E FY12EVardhman has maintained better solvency ratios. We Vardhman Textiles 1.5 1.9 1.8 1.6 1.5 1.6expect the same to continue this trend, going forward Alok Industries 3.3 4.0 3.8 3.2 3.0 3.0 Arvind 1.5 1.6 1.9 2.0 1.5 1.2 RSWM 2.3 3.1 4.0 4.6 6.3 4.8 Average 2.1 2.7 2.8 2.8 3.1 2.7 Interest Coverage Ratio FY07 FY08 FY09 FY10 FY11E FY12E Vardhman Textiles 6.8 3.1 1.6 3.7 4.0 3.5 Alok Industries 4.6 4.1 2.7 2.3 1.5 1.7 Arvind 1.2 1.2 0.6 1.1 1.8 2.4 RSWM 2.8 1.0 (0.3) 1.8 2.0 2.3 Average 3.8 2.3 1.1 2.2 2.3 2.5 Source: Consensus Estimates, ICICIdirect.com Research Vardhman, like most textile companies, has witnessed a steep increase in debt levels over the last few years. This was mainly on account of expansion activity conducted by the company. A large part of the repayment for Vardhman will kick in from FY14-15. Hence, we are likely to see a marked improvement in the return ratios, going forward. In October 2010, Vardhman raised | 200 crore through a QIP issue of 58,82,352 shares at the rate of | 340 per share. The proceeds of the same will be used to meet expansion plans and retire the outstanding FCCB. Return ratios Exhibit 36: Return ratios to remain healthy 24.0 21.8 22.0 20.2 19.9 20.0 16.5 18.0 16.0 14.0 11.8 14.1 % 13.2 12.0 11.0 10.0 8.9 5.9 8.0 6.0 6.6 5.5 4.0 FY07 FY08 FY09 FY10 FY11E FY12E RoE RoCE Source: Company, ICICIdirect.com Research Vardhman’s return ratios have been under pressure in the last few years owing to the expansion activities of the company. However, as the expanded capacities are fully utilised and as profitability gets enhanced, we expect the return ratios for Vardhman to improve significantly, going forward. We expect the RoCE to improve from 11.0% in FY10 to 13.2% in FY12E. Also a large part of the debt repayment is scheduled during FY14- 15. Post this one is likely to witness an improvement in the return ratios. ICICIdirect.com | Equity Research Page 21
  • ICICI Securities Limited Changes in depreciation policy Vardhman currently depreciates its spinning assets over a 10 year period. Under IFRS, the management could decide to depreciate the same over 15-20 years as the life of a spinning asset ranges from 17-20 years. If the management decides to go ahead with this, the savings per share at the net level could be to the tune of ~| 11 (~17% of FY12E EPS). Also, the said savings will boost the return ratios for the company. Our back of the envelope calculations indicate that if IFRS is implemented w.e.f. FY12, Vardhman’s RoE and RoCE will go up by 189 and 336 bps, respectively. However, as there is not much clarity on the implementation of IFRS we have not factored the benefit of the same into our estimates. Exhibit 37: Incremental earnings and return ratios from changed depreciation policy (| crore) FY12E Depreciation assuming asset is depreciated over 10 years 235.75 Depreciation under IFRS (assuming asset is depreciated over 15-20 years) 137.52 Savings 98.23 Incremental EPS (|) 11 Incremental ROCE(bps) 189 Incremental ROE(bps) 336 Source: Company, ICICIdirect.com Research ICICIdirect.com | Equity Research Page 22
  • ICICI Securities Limited Valuation Vardhman is trading at a discount to the 5 year P/E and P/BV Vardhman is currently trading at ~56% discount to its five year median P/E and a ~34% discount to its five year median P/BV. Considering the steep increase in yarn realisations and a robust demand outlook, the stock can comfortably trade above the five year median multiples. However, bearing in mind the downside risks like marginally softer yarn realisations and lower than estimated offtake in demand, we believe it should continue to trade at its median five year multiples. We have arrived at our target price based on an average of the value received by assigning a multiple of 0.65x FY12E book value of | 349 and 4.7x FY12E EPS of | 65.1. We are initiating coverage on the stock with an ADD rating and a target price of | 267 signifying 4% upside from current levels. Exhibit 38: Trading at ~56% discount to five year median P/E 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 - Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 5 yr Median P/E 1 Year Fwd P/E Source: ICICIdirect.com Research Exhibit 39: Trading at ~34% discount to five year median P/BV 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 - Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 5 yr Median P/Bv 1 Year Fwd P/Bv Source: ICICIdirect.com Research ICICIdirect.com | Equity Research Page 23
  • ICICI Securities Limited Exhibit 40: Peer comparison EBITDA Debt to RoE RoCE P/E P/BV Particulars Margin EBITDA FY12E FY12E FY12E FY11E FY12E FY11E FY12E FY12E Unit % % % x x x x x Vardhman Textiles 22.4 19.9 13.2 4.2 3.9 0.8 0.7 3.4 Alok Industries 28.0 12.3 10.9 5.7 4.0 0.6 0.5 4.3 Arvind 13.6 11.2 11.4 11.1 6.8 0.9 0.8 3.7 RSWM 12.5 29.3 12.2 6.4 4.9 1.6 1.3 4.5 Source: Consensus Estimates, ICICIdirect.com Research We undertook a rating activity whereby we assigned weights to several financial parameters and ranked the companies in the peer group to decipher the company with superior financials. We have assigned a 15% weightage each to EBITDA margin, return on equity, P/E ratio and P/BV ratio and a 20% weightage to return on capital employed and debt to EBITDA ratio. Even based on these parameters, Vardhman stands out as the best among its peers. Exhibit 41: Rating Matrix Company EBITDA Margin RoE RoCE P/E P/BV Debt/EBITDA Vardhman Textiles 2 2 1 1 2 1 Alok Industries 1 3 4 2 1 3 Arvind 3 4 3 4 3 2 RSWM 4 1 2 3 4 4 Weighted Average Ranking Final Ranking Vardhman Textiles 1.5 1 Alok Industries 2.5 2 Arvind 3.1 4 RSWM 3.0 3 Source: Consensus Estimates, ICICIdirect.com Research ICICIdirect.com | Equity Research Page 24
  • ICICI Securities Limited Exhibit 42: Profit and loss account (| crore) FY07 FY08 FY09 FY10 FY11E FY12E Net Sales 2,162.1 2,387.7 2,965.4 3,350.7 4,081.4 4,460.7 % Growth 10.4 24.2 13.0 21.8 9.3 Other Income 25.4 38.0 52.9 85.2 70.0 95.0 Raw Materials 954.1 1,095.4 1,405.2 1,505.5 1,819.9 1,993.7 Manufacturing Expenses 525.9 587.7 680.2 737.1 861.6 918.5 Employee Expenses 132.5 162.5 200.1 214.9 264.3 292.1 Sell. & Admin. Expenses 171.2 161.5 230.6 188.5 216.3 256.5 Total Exp. 1,784.7 2,007.0 2,513.1 2,645.7 3,162.1 3,460.7 % Growth 12.5 25.2 5.3 19.5 9.4 Operating Profit 381.3 381.6 452.4 705.1 919.2 1,000.0 Depreciation 122.4 162.0 243.4 256.6 285.4 316.3 Interest expense 38.3 70.4 132.4 122.3 156.9 197.1 PBT 246.0 187.2 129.6 411.3 546.9 581.6 Tax 56.0 44.2 51.3 108.9 164.1 174.5 Net Profit 190.0 143.0 78.3 302.4 382.9 407.1 % Growth (24.7) (45.2) 286.3 26.6 6.3 Net Profit (after minority int) 185.6 135.0 171.3 261.5 338.8 356.0 Equity 56.6 56.6 56.6 56.6 62.5 62.5 Dividend % 40.9 40.9 32.3 40.7 51.5 113.9 EPS (from ordinary activities) 33.5 25.2 13.8 53.4 61.2 65.1 Source: Company, ICICIdirect.com Research Exhibit 43: Balance Sheet (| crore) FY07 FY08 FY09 FY10 FY11E FY12E Equity Share Capital 56.6 56.6 56.6 56.6 62.5 62.5 Share Application money - - - - - - Reserves & Surplus. 1,093.8 1,206.4 1,326.6 1,547.5 1,848.7 2,121.4 Secured Loans 1,508.2 2,178.5 2,232.7 2,346.5 2,818.0 3,388.0 Unsecured Loans 263.6 255.4 300.5 296.5 34.0 40.3 Minority Interest 15.8 77.6 228.7 272.0 316.0 367.1 Deferrred Tax 97.3 163.4 208.0 228.7 235.0 260.0 Total Liabilities 3,035.4 3,937.9 4,353.0 4,747.9 5,314.3 6,239.4 Net Block 1,239.9 2,219.2 2,561.4 2,553.3 2,804.4 3,157.6 CWIP 541.5 334.1 69.4 45.3 378.4 407.0 Investments 57.6 5.4 140.1 92.3 125.0 225.0 Goodwill on consolidation - 5.1 5.1 2.9 - - Inventories 730.3 937.7 739.6 1,297.0 1,285.9 1,417.7 Sundry Debtors 261.9 287.2 345.9 475.8 559.1 672.2 Cash & Bank 222.8 71.9 373.0 262.4 139.7 304.6 Loans & Adv. 260.9 348.9 409.1 348.3 375.0 418.0 Current Assets 1,475.9 1,645.6 1,867.6 2,383.5 2,359.7 2,812.4 CL & Prov. 279.5 271.5 290.5 329.4 353.1 362.8 Net Current Assets 1,196.4 1,374.1 1,577.1 2,054.1 2,006.6 2,449.7 Total Assets 3,035.4 3,937.9 4,353.0 4,747.9 5,314.3 6,239.4 Source: Company, ICICIdirect.com Research ICICIdirect.com | Equity Research Page 25
  • ICICI Securities Limited Exhibit 44: Cash flow statement (| crore) FY07 FY08 FY09 FY10 FY11E FY12E Net Profit Before Tax 246.0 187.2 129.6 411.3 546.9 581.6 Depreciation 122.4 162.0 243.4 256.6 285.4 316.3 Interest Expense 39.7 65.6 127.6 116.3 156.9 197.1 Direct Tax Paid (64.7) (32.7) (37.2) (73.6) (164.1) (174.5) (Income)/ Loss from Assc. (4.0) (0.8) (0.0) (0.1) (0.1) (0.1) Interest / Dividend Income (19.1) (14.4) (29.4) (38.2) (38.2) (38.2) Other Non Cash (Inc)/Exp (9.2) (27.1) 45.0 (32.3) (6.3) (25.0) CF before change in WC 311.1 339.8 478.9 640.1 780.6 857.3 Inc./Dec. in WC (106.9) (295.8) 85.9 (628.8) (122.6) (297.5) CF from operations 204.2 44.0 564.8 11.3 658.0 559.9 Pur. of Fix Assets (net) (837.7) (795.7) (178.1) (227.1) (797.6) (659.3) Purchase of Investments (net) 3.2 (4.5) (128.3) 55.3 (32.7) (100.0) Income from Inv 15.9 15.2 28.5 39.9 39.9 39.9 CF from Investing (818.6) (785.1) (277.8) (131.9) (790.4) (719.4) Inc./(Dec.) in Debt 656.6 652.8 36.4 144.4 4.2 604.9 Inc./(Dec.) in Net worth - - 130.7 2.6 200.0 - Others (93.4) (62.6) (153.1) (137.0) (194.5) (280.4) CF from Financing 563.2 590.1 14.1 10.0 9.7 324.5 Opening Cash balance 274.0 222.8 71.9 373.0 262.4 139.7 Closing Cash balance 222.8 71.9 373.0 262.4 139.7 304.6 Source: Company, ICICIdirect.com Research Exhibit 45: Key ratios FY07 FY08 FY09 FY10 FY11E FY12E Expenditure Break-up (%) Raw Material Expenses 55.1 56.7 56.1 59.2 61.0 60.4 Manufacturing Expenses 29.5 29.3 27.1 27.9 27.2 26.5 Personnel Expenses 7.4 8.1 8.0 8.1 8.4 8.4 Profitability Ratios (%) EBITDA Margin 17.6 16.0 15.3 21.0 22.5 22.4 PAT Margin 8.8 6.0 2.6 9.0 9.4 9.1 Per Share Data (|) Revenue per share 381.8 421.6 523.6 591.6 652.8 713.5 EBITDA per share 67.3 67.4 79.9 124.5 147.0 160.0 EV per share 567.2 573.9 462.2 585.3 695.0 760.8 Book Value per share 203.1 223.0 244.2 283.2 305.7 349.3 Cash per share 39.3 12.7 65.9 46.3 22.3 48.7 EPS 33.5 25.2 13.8 53.4 61.2 65.1 Cash EPS 55.2 53.9 56.8 98.7 106.9 115.7 DPS 4.0 4.0 2.0 3.0 5.0 10.0 Return Ratios (%) RoNW 16.5 11.8 5.9 20.2 21.8 19.9 RoCE 8.9 6.6 5.5 11.0 14.1 13.2 RoIC 7.2 4.0 2.3 7.8 8.5 8.0 Financial Health Ratios Operating Cash flow (| crore) 204.2 44.0 564.8 11.3 658.0 559.9 Free Cash flow (| crore) (630.1) (773.4) 75.8 (273.1) (191.1) (161.9) Capital Employed (| crore) 2,922.3 3,697.0 3,916.4 4,247.2 4,763.3 5,612.2 Debt to Equity (x) 1.5 1.9 1.8 1.6 1.5 1.6 Debt to Capital Employed (x) 0.6 0.7 0.6 0.6 0.6 0.6 Interest Coverage (x) 6.8 3.1 1.6 3.7 4.0 3.5 Debt to EBITDA (x) 4.6 6.4 5.6 3.7 3.1 3.4 Source: Company, ICICIdirect.com Research ICICIdirect.com | Equity Research Page 26
  • ICICI Securities Limited Exhibit 46: DuPont Analysis DuPont Analysis (x) FY07 FY08 FY09 FY10 FY11E FY12E PAT / PBT 0.8 0.8 0.6 0.7 0.7 0.7 PBT / EBIT 0.9 0.9 0.6 0.9 0.9 0.9 EBIT / Net Sales 0.1 0.1 0.1 0.1 0.2 0.2 Net Sales / Total Assets 0.7 0.6 0.7 0.7 0.8 0.7 Total Assets / Networth 2.6 3.1 3.1 3.0 2.8 2.9 Source: Company, ICICIdirect.com Research Exhibit 47: Growth parameters (YoY Growth %) FY07 FY08 FY09 FY10 FY11E FY12E Net Sales 10.9 10.4 24.2 13.0 21.8 9.3 EBITDA 5.2 0.1 18.6 55.8 30.4 8.8 Net Profit (7.0) (24.7) (45.2) 286.3 26.6 6.3 Source: Company, ICICIdirect.com Research Exhibit 48: Turnover ratios Turnover Ratios FY07 FY08 FY09 FY10 FY11E FY12E Working Capital / Sales (x) 0.5 0.5 0.4 0.5 0.5 0.5 Inventory turnover (days) 123.3 127.5 103.2 110.9 115.0 116.0 Debtor turnover (days) 44.2 42.0 39.0 44.8 50.0 55.0 Creditor turnover (days) 47.9 39.9 29.1 24.7 28.0 26.0 Current Ratio (x) 5.3 6.1 6.4 7.2 6.7 7.8 Source: Company, ICICIdirect.com Research Exhibit 49: FCF calculation Free Cash Flow (| crore) FY07 FY08 FY09 FY10 FY11E FY12E EBIT (post-tax) 200.0 167.7 126.3 329.7 443.7 478.6 Add: Depreciation 122.4 162.0 243.4 256.6 285.4 316.3 Less: Changes in working capital (106.9) (295.8) 85.9 (628.8) (122.6) (297.5) Less: Capex (845.6) (807.3) (379.8) (230.6) (797.6) (659.3) FCF (630.1) (773.4) 75.8 (273.1) (191.1) (161.9) Source: Company, ICICIdirect.com Research Exhibit 50: Valuation ratios Valuation Ratios FY07 FY08 FY09 FY10 FY11E FY12E Price to earnings ratio (x) 8.6 6.1 5.7 3.0 4.2 3.9 EV / EBITDA (x) 8.4 8.5 5.8 4.7 4.7 4.8 EV / Sales (x) 1.5 1.4 0.9 1.0 1.1 1.1 Dividend Yield (%) 1.4 2.6 2.5 1.9 1.2 2.0 Price / BV (x) 1.4 0.7 0.3 0.6 0.8 0.7 Source: Company, ICICIdirect.com Research ICICIdirect.com | Equity Research Page 27
  • ICICI Securities LimitedRATING RATIONALEICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assignsratings to its stocks according to their notional target price vs. current market price and then categorises themas Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and thenotional target price is defined as the analysts valuation for a stock.Strong Buy: 20% or more;Buy: Between 10% and 20%;Add: Up to 10%;Reduce: Up to -10%Sell: -10% or more; Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai – 400 0293 research@icicidirect.comANALYST CERTIFICATIONWe /I, Bharat Chhoda MBA (FINANCE) Dhvani Modi MBA (FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of theviews expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will bedirectly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts arent registered as research analysts by FINRA and might not be an associated person of the ICICI SecuritiesInc.Disclosures:ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leadingunderwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage ofcompanies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securitiesgenerally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analystscover.The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential andmeant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, withoutprior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors andemployees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securitiesfrom doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securitiespolicies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. Thisreport and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financialinstruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of theirreceiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specificcircumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investmentobjectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluatethe investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for anyloss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand therisks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject tochange without notice.ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have receivedcompensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investmentbanking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of threemonths following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specifictransaction. It is confirmed that Bharat Chhoda MBA (FINANCE) Dhvani Modi MBA (FINANCE) research analysts and the authors of this report have not received anycompensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earningsfrom Investment Banking and other business.ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of theresearch report.It is confirmed that Bharat Chhoda MBA (FINANCE) Dhvani Modi MBA (FINANCE) research analysts and the authors of this report or any of their family members doesnot serve as an officer, director or advisory board member of the companies mentioned in the report.ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make useof information contained in the report prior to the publication thereof.This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securitiesdescribed herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of andto observe such restriction. ICICIdirect.com | Equity Research Page 28