Nitin Spinner - textile yarn story


(NIRAJ PARIKH) #1

Nitin spinners ltd. is engaged in the business of manufacturing of cotton yarn and knitted fabric. the range of yarn that the company manufactures includes open end yarns from ne 5/1 to ne 24/1 (nm 8/1 to nm 40/1), multifold open end yarns, ring spun combed yarns from ne 16/1 to ne 50/1 ( nm 27/1 to nm 85/1), multifold ring spun yarns, compact yarns, fancy slub yarns, core spun yarns, s & z twist yarns, dyeable cheese cones-soft package, 100% organic cotton yarns and blends and bci/tbc certified yarns. the company manufactures knitted fabrics, as well as fabrics with elastane. the range of knitted fabrics includes single jersey, pique structures, interlock structures, rib structures and three thread fleece. it has combined installed capacity of nearly 80000 spindles & 4000 rotors, manufacturing 25000 tons of yarn and threads per annum, the company has carved a niche for itself on the textile map of the country.

Market Cap: 179.65 CroresCurrent Price: 39.20Book Value: 34.96
Stock P/E: 4.82Dividend Yield: 1.59%Stock is 10.00 paid up
Listed on BSE & NSE Company website52 Week High/Low: 41.35 / 15.55
Average return on capital employed 5Years: 15.02% ROCE3yr avg: 18.70%
Return on equity 5years growth: None% NPM last year: 7.12%
Return on equity preceding year: 15.09% Return on equity: 29.94%
NET PROFIT MARGIN: 0.07% PEG Ratio: 0.05 Price to Sales: 0.33
the company has equity base of 45.83 crore backed by 85.72 crore reserves. total assets of the company
valued at rs 275.72 crore & total debt figure stands at rs 144.17 crore. long term debt-equity ratio stands at 0.99.
promoter holds 63.78% stake in company without any pledge shares. recently company has paid dividend for the first time.
nitin spinners capacity expansion has been completed in february instead of ahead time stipulated
in march 31. it will reflect in march quarter results. 72480 spindles,18 knitting machines has been installed before 9 february 2015.
the project has been completed at a cost of rs. 281 crores against project cost of rs. 286 crores .
current annual sales are rs 450-500 crore & annual net profit rs 35-36 crore, with this capacity addition
we can expect projected annual sales of rs 600-650 crore for year 2015-16 &
projected annual net profit of rs 45-50 crore for year 2015-16. with this projection we can expect
projected eps of 12 for 2015-16.currently nitin spinners is trading at below 5 pe,
even if we apply very conservative pe multiple of 7x of its projected eps of 12
we can easily arrive at a price target of rs 84.
disclosure: holding some quantity of nitin spinners.


(Aveek Mitra) #2

Good analysis Niraj …

Any company which voluntarily come out of CDR / BIFR is an interesting story to watch. Also, with the expanded capacity, growth visibility is there for next few years amid stiff competition. Promoters have also purchased stakes till Rs. 30 odd level.

Another interesting point to me is that company is generating about Rs. 85 cr. of cash from operation while market cap in Rs. 182 Cr.

If I compare it with Ambika Cotton I find they generate Rs. 37 Cr. (Rs. 88 Cr in 2013) against a mkt cap of Rs. 518 Cr.

Also their sales volume is higher than Ambika though OPM is 5% lower … ROCE is almost same for both companies… But the valuation gap is much wider. But I am yet to check the similarities / differences between two companies.

In my preliminary analysis it seems to be a good bet with reasonable margin of safety.


(NIRAJ PARIKH) #3

thanks for encouraging me. i am comparing with Ambika. I t is right that CFO is quite good. Recent expansion will add to bottom line by 50%. There is lot of safty in this stock. at the P/E of 10 stock may perform to 100 to 120/-.

NIRAJ


(NIRAJ PARIKH) #4

thanks for encouraging me. i am comparing with Ambika. I t is right that CFO is quite good. Recent expansion will add to bottom line by 50%. There is lot of safty in this stock. at the P/E of 10 stock may perform to 100 to 120/-.

NIRAJ


(NIRAJ PARIKH) #5
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(JKS) #6

screener shows a contingent liability of 250 cr as con. did not take a detailed look but thought that I will put this across


(Aveek Mitra) #7

@ Kalyan

Not an issue as

  1. 180 Cr. was on the capital commitment on expansion project (which seems to have completed) — It has most probably been paid as expansion project is completed. It will correspondingly increase the Net Block and Long term loan in Balance sheet.

  2. Disputed liability Rs. 8 cr. (part of regular business)

  3. Outstanding BG and Bill discounting : Rs. 50 Cr. (part of regular business)

  4. Export obligation under EPCG scheme : Rs. 11 Cr. (can be easily met)


(Varadharajan Ragunathan) #8

Niraj/Aveek

Thanks for the idea - I chased upon this spent some time and I see a lot of value. A few pointers :

1). spoke to company secretary who then put me onto someone in sales - he said they are seeing a good 20 % = growth ahead in an improvement in margins because of cotton prices and increasing premiumization (now they are blending 5 % imported cotton to improve yarn quality which improves realizations)

2). my experience is that when a CDR happens and a company does capacity expansion post, they become quite judicious and tend not to go overboard on capacity utilization

3). there was an article in outlook business about the business confidence in bhilwara and they had interviewed nitin spinners as an aside. Their MD showed a lot of confidence and about their capacity expansion paying dividends.

4). I spoke to a guy who I know well in tamil nadu who is an expert in CDR for textile mills who said that textile mills in rajasthan and gujarat are at an advantage since that they are closer to where incremental cotton cultivation belts are. TN is losing its advantage because of increasing cost of labour and power - a fact that is shown in their EBITDA marigins coming down and EBITDA margins of the companies in gujarat/rajasthan going up.

Given the strong cash flows and near 4 x PE and tail winds, I am a buyer below Rs. 37-38.


(NIRAJ PARIKH) #9

thanks varadhrajan for encouraging me. I like your approach to call company secretary.

company’s growth will take care of debt which 250+. i see lot value in this stock.


(NIRAJ PARIKH) #10

thanks varadhrajan for encouraging me. I like your approach to call company secretary.

company’s growth will take care of debt which 250+. i see lot value in this stock.


(Aveek Mitra) #11

Varadharajan,

Good that you talked to Company insider … As I mentioned earlier in the thread too that when a company comes out of CDR voluntarily and banks again start lending them and rating agencies upgrade their ratings (CARE done it six months back) then there must be something cooking (hopefully positive) …

One question for management is while expanding capacity to more than double, what technology they are going for. From Spinnovation Issue 27 I have gathered that out of their existing 77616 Spindles they have converted 12000 spindles to EliTe Compact Spindling system in 2012. Are they going for the similar compact system?

And secondly, I did a comparison between Ambika and Nitin which I am sharing with you all … Need more input and insight on those.

Thirdly, from the newspaper clipping it seems Southern Players like Ambika are importing Cotton more for cost benefit than quality benefit. Is this information correct? Check the link…

Please comment on the excel file attached…

AMBIKA-NITIN.xlsx (16.5 KB)


(Donald Francis) #12

Guys,

Just wanted to interject a note of caution on due Process. As a first-step, the process demands an industry map, players, capacities, compact vs regular yarn, blending mix, all major business issues/variables outlined - that’s the background - which will lend perspective to the Quality of individual players!

Nitin Spinners & Ambika both look to be good businesses.

Let’s ignore the valuations for the time being, till due diligence is completed on understanding the industry, main issues, differentiated players, and focus then on specifics of individual businesses.

It’s good to have an investment hypothesis of your own for sure. But we haven’t completed even 10% of the scuttlebutt/hard work that is needed to understand the industry and its issues - and we are already seen to be delivering verdict on the merits of Business A, or B.

You will be richer for focusing attention on Industry issues and the main variables - and talking to 10 folks in the know. Talk to more people, quiz them harder. Ask them for better references. One phone call/conversation is never enough.


(Aveek Mitra) #13

A pointer to an website which has valuable information…

http://www.yarnsandfibers.com/ … One may find lot of data points there…

The attached presentation can also throw some light on the issue about different technologies.

Friends, please add new input / insight into this large, complex but mostly commoditized industry to see if we can find any hidden value anywhere like we had in Kitex.


(Keval Pathak) #14

@ All

Am pleased that this company has been re-introduced for discussion. Had initiated a string on Nitin in Aug 2013 on VP, but i think the idea faded amidst the sea of hi-growth consumer stories then.

http://www.valuepickr.com/forum/untested-worth-a-look/74678876

There are newer angles and triggers with Nitin since the above write-up and they are being well-covered now. I had initiated the string after a very positive feedback from a friend who had visited their plant and met the management/ promoters in 2013. I feel the promoters were plain unlucky with timing of their maiden venture in 2006-07 as macro factors were unsupporting. But a management which claws back from the brink of closure to emerge more strongly and expand is truly merit-worthy.

@Niraj - you haven’t mentioned the 2009-2012 down phase of the company in your note, which only adds to the merits. But this has been well-pointed out by @Aveek and @Vardharajan

Keval


(Keval Pathak) #15

I was also motivated to write on a textile story like Nitin after reading this crisp note on the Indian Textile industry being a dark horse for this decade -

http://novannoes.blogspot.in/

The blog is bit dated but the recent traction in stories like Kitex, Vardhman, Ambika etc. seem to re-inforce its contents.

Keval


(NIRAJ PARIKH) #16

thanks Keval for your suggestion.I am new to this blog and learner.I took only the growth part of this company.I admit my mistake of not mentioning the bad phase of company. I am surprised that you have initiated thread in 2013. thanks for drawing attentions.


(Aravind Sankeerth) #17

I compared it with RSWM and other spinning mills and found it not so interesting afterall


(Rohit Balakrishnan) #18

Hi Guys,

Building on the discussion - here is an interview of the founder- it is slightly dated and thus talks about moving up in terms of value addition… couple of interesting points where he mentions that they want to focus on profits rather on scale…

There are couple of concerns that I have at this moment purely based on numbers, need to understand the business in more detail

  • Capital intensive business- The company has been expanding its gross block rapidly. Around 2006-07 it did a massive capex of 208 Crores- at that time the topline was 100-120 Crores. The company is again looking to ramp up its gross block with a capex expansion of 280 Crores…This has implications on the balance sheet. The leverage could kill this company if some mishaps happen along the way (huge fluctuation in cotton prices/INR appreciation).
  • Sustainable EBITDA margins of this business- the margins have been fluctuating for the company, given their recent expansion and their purported foray into value added yarns (What exactly are they?) what can we expect from them.

The FY15 results are out, their EBITDA margins have shrunk by 300 basis points largely driven by power and RM costs and fuel cost (they have expanded capacity, does it mean that they will also have to increase captive power capacity??)

Lot of questions on the business- will list them and then post it here…


(Rohit Balakrishnan) #19

Here is an interesting article that talks about the yarn industry in India and how it is focusing on specialized yarns. The article talks about synthetic, and natural fibres, so not all is relevant to Nitin Spinners which only makes cotton yarns. But the broad idea is helpful to understand that there is some up-movement happening in the yarn industry in India -which will yield better margins to the spinners. The next question is what categories of yarn are special, where is Nitin playing , who does it compete?


(Aveek Mitra) #20

@rohitbalakrish_

As per my calculation EBITA margin is 16.8% (Q4 '15), 15.9% (Q3 '15) and 17.9% (Q1 '15). RM as % of sales reduced to 61% from 64% but power cost is linearly increasing from 8% to 8.8% … Is it due to stabilization of new plant and trial run? I don’t know. But their power purchase price is less than internal generation cost … How is it happening that also I don’t know. But the revenue growth YOY is impressive keeping in mind the fact that new plant is only two months into operation.

Overall result and balance sheet is as per expected lines … Contingent liability converted to books as debt and asset.

Going forward, they need to increase the asset turnover to service the debt and for that probably the coarse range (<40s) would get priority over high value added category … So, volume growth and EBITA growth are key monitorable …
Possibility of generating “real” free cash flow for investors is sometime away and the cost and profitability would be mostly linear. unless they can do something spectacularly different.

Business wise, it is not comparable with Ambica (for its high end, higher value added products) or with Vardhman (for its range and capability) … But a simple, linear and possible turnaround play.

Disc.: Small exposure (<1% of portfolio) and bought at much lower price.