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vardhman_textiles_initiatingcoverage

  1. 1. 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
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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

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