Nitin Spinner - textile yarn story

Stock Opportunities Untested - but worth a good look
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Hi Aveek, Thanks for the revert. I was looking at year end numbers. The margins for FY15 are @ 16.6% v/s 19.6% last year. It is largely driven by power & fuel and RM costs…

Would you point me to something that can give a better understanding of its products- I have read up a few articles on slub yarns - these are coarse yarns and are used in Denims. Don’t know much about its other products…

Last year knitted fabrics contributed 15% of its sales, dont know what is the share this year. Are the margins higher in this segment? Knitted fabrics is like forward integration -but don’t know the economics of this business…

Also why do you think the coarse rage would get priority - anything specific here- is the market for this larger than higher counts category? Will it be margin accretive/dilutive?

I looked at the last 15 year numbers for Nitin and the margins, barring 2-3 years, have been in the 17-18%. What does it tell me- nothing has changed, so far, for the company which gives it better margins. The numbers are below…

The company has made respectable ROCE only in FY13 & FY14 don’t know if it is sustainable or it was a one off… but prior to that the numbers are not very interesting.

P&L metrics FY01A FY02A FY03A FY04A FY05A FY06A FY07A FY08A FY09A FY10A FY11A FY12A FY13A FY14A FY15
Gross margin 35.3% 36.9% 46.4% 42.4% 40.1% 44.6% 43.1% 44.7% 36.7% 38.1% 38.6% 30.7% 40.8% 39.1% 38.1%
EBITDA margin 16.7% 12.2% 23.1% 20.2% 18.9% 21.7% 19.8% 16.6% 10.2% 11.4% 18.5% 10.6% 19.6% 19.3% 16.6%
Recurring PAT margin 6.3% 5.7% 2.4% 2.0% 3.7% 6.4% 6.3% -1.0% -10.1% 0.3% 1.7% 0.1% 3.3% 7.1% 7.1%
Interest cost as % of sales 4.6% 2.3% 10.4% 8.8% 7.2% 5.8% 5.1% 7.1% 9.1% 5.0% 5.1% 4.9% 9.4% 3.6% 3.7%

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-Their yarns are majorly used in Knitwears and shirtings and demins. Speciality yarns such as Slubs and lycra are not that high in terms of revenue contribution as of now. Their major product is used for Knitwear where the yarns are in counts of 8-50.
-The new capex is for 100% combed yarns which are better quality (combed yarns are better in terms of fineness, less hairiness etc) and used in premium knitwears
-Focus of the company is to provide high quality premium yarns and they get some premium in the market vis-à-vis other players

No specific advantage mentioned in terms of competition. Focus is not on low priced items, focus is on quality -machines are all latest technology. They get some premium for their yarns vis-à-vis competition (we can check and verify this)
Knitted fabrics contributed 20% of topline this year. The margins are 1-2% in this business when compared to yarns.
They work on complete hedging model. Mainly hedge via forwards
Competition - Biggies -Vardhaman, Nahar. Similar sized- Gini Filaments and Gini

Margin decline - largely due to fall in cotton prices. Cotton prices fell by 15-20%. Yarn prices also fell as a result. When cotton prices fall, yarn prices adjust immediately. When prices go up. Yarn prices adjust upward with a lag of 1 month or so.

Here is a good document on the combing yarn process. http://www.cottonyarnmarket.net/OASMTP/COMBING%20PROCESS.pdf

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@rohitbalakrish_

Go through the Ambica Cotton thread … You get some valuable information about cotton count, demand, price etc.

Also, a presentation from Vardhman Textile Limited is available here (http://www.vardhman.com/vtxl-presentation-2015.pdf)… On page 9 of the presentation, there is a good elaboration on the cotton value chain. I missed to attach it earlier in either Nitin or Ambica thread.

If you have details about nature of machines they installed then kindly share … It may be of help.

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Yeah went through the Ambika Cotton thread… that certainly did help. On Nitin- their improvement in ROCE has been largely driven by asset turnover improvment, margins have been largely been in a range of 16-18% barring extremely bad years like FY-09 and FY-12…

Below is the du-pont for Nitin

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@rohitbalakrish_

These info may be helpful … may glance through…

http://www.vitruvien.com/fabric-terminology

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Have been reading about this company recently. Also have exposure to this stock. Regarding the management

Corporate History

Dinesh Nolkha (Managing Director of Nitin Spinners Ltd and son of Chairman R.L.Nolkha) laid the foundation for Nitin Spinners in 1992. After completing his CA exams he started Nitin Spinners at an initial investment of Rs 28.5 million with a capacity of 150 tons of yarn per month. In the initial phase Dinesh started with two open-end yarn spinning machines and was spinning coarse yarn below 10s count.

However, the Nolkha family took care to ensure that their product portfolio did not clash with that at the LNJ Bhilwara Group, since Mr RL Nolkha at that time, was still working for the group. Which is the main reason that, although Bhilwara is renowned as a hub for manmade fibre textiles, Nitin Spinners turned to cotton as their main source of raw material for spinning export quality yarn.

In 1998, Dinesh decided to foray into ring spinning, which was the time when, Dinesh persuaded his father to quit his job and join the family textile business full time.

In 2000, the younger sibling – Nitin joined the business and also the first of the 14,000 ring spindles began operations. In 2002, they set up a fabric knitting plan and also kept on increasing ring spindles capacity. They took full advantage of the Textile Upgradation Fund (TUF) in the new century and also went public in 2006.

Management

Mr. R.L.Nolkha is the Chairman & key promoter of the company. A Chartered Accountant, Company Secretary and Cost & works Accountant by qualification, he is responsible for the Overall Administration, Management & strategic policy making of the Company. Being a Technocrat, first generation entrepreneur & a senior management professional, his distinguished career of over three decades in textile industry also includes working at senior level positions with Birla & LNJ group. He is also a member of several industry associations & chambers and chaired as.

Chairman - NITRA
Chairman of Rajasthan Textiles Mills Association
Committee Member of C.I.T.I.

He is the recipient of prestigious Udyog Patra awarded by the Govt of India in 2003 He started his career in 1969 with Zenith Limited, a Birla Concern and also associated with Aditya Mills Ltd. and Surya Roshini Ltd. before joining Bhilwara Group (LNJ) in 1976. He was the Managing Director of BSL Limited for 8 years before becoming Whole time Director of Nitin Spinners Limited in the year 1997.

Mr. Dinesh Nolkha - Managing Director

Mr. Dinesh Nolkha (age 42), a Chartered Accountant, Cost & works Accountant by qualification, is the Managing Director of the Company and a co-founder of the Company. Besides being responsible for the production facilities, expansion projects, day to day operations & marketing activities, his primary focus is on overseas marketing and sales promotion. He is also Vice President of Mewar Chamber of Commerce and Industry.

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Hi All,

Continuing the discussion on the company. I am trying to understand how sustainable is the current ROCE for the company. I believe ROCE (and not RoE) is the right metric, given the company has lot of debt. There are 3-4 broad question heads I have. These further have more questions… I am posting the same here. If others are interested in doing more work, then maybe we can collate all the questions and meet/call the management?

  1. Can the company improve its margins from here? To answer this questions we can look at probable heads which can give us some answers:

Revenue contribution of Specialty yarns - Currently my understanding is that it’s pretty small… what can change this? Are they doing something here
Knitted Fabrics I feel there are doing something interesting on the knitted fabric segment. This now contributes 20% of revenue, it grew by 70% YoY. During my interaction with the CFO, he mentioned that Knitted fabrics have 1-2% more margins as it is more value addition than yarns.
Cotton Cycle - How does cotton cycle affect them? I did a comparison of their gross margins and the cotton prices, I couldn’t really interpret too much as there were couple of years when there was no co-relation (FY12 & FY13). My rudimentary understanding says that low cotton prices would be better for them, as they can have some inventory gains if the prices go up. But need to understand more here
Exchange rate- Need to understand this given FY13 and FY14 were very good years, was it to do with forex? My prelim analysis says not much contribution from forex is not much (6 Crores in FY13 and 4 Crs in FY14) One peculiar thing though- the company includes forex gain/loss as part of their topline.

-Competition- Perhaps the most important, need to understand what sort of competitive pressure do they face. An interesting point I noted was that their realizations on their yarns have been pretty good. It has increased at a CAGR of 10% We need to check it for others, but usually, as a thumb rule, anything in double digits should be good.

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  1. Can the company improve its asset turns (working capita/Gross block turnover - capacity utilization)- Historical Data of Nitin- As per last 15 years data the peak asset turns was 1.5x in FY14. Currently asset turns at 1x so there is 50% improvement in the best case as per historical data… This could change if there is any change if business mix/bargaining power (WC)/productivity of machines etc. If we look at a long term view, company has successfully reduced its inventory days, which has improved from 4 months to about 2 months currently… Overall for asset turns , we can look at competitors to perhaps make an educated guess on what this industry typically has in terms of asset turns…

  2. How much and when will the company need more debt to further chase growth? - What is the revenue potential of this capex that we have done? Historically they have been going for major capex in a span of every 5-6 years, when they think they will get to new capacity?

Sorry for the long post. But if we get answers to these questions I guess we will be on top of this business.

I may have missed many important questions, please add to that.

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What is Knit and what is Woven? … A simple video illustration…

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@aveekmitra @vardharaj Picking up the thread again on this.

I again had a word with the company, the key points are below

  • Company started out in the low value open end yarns and is now more a ring spun player which is higher value. They are in the more cluttered market of <50 count category. That’s conscious call they have taken
  • They have 3 products a) Open End Yarns b) Ring Spun Yarns c) Knitted Fabrics - this is also in the increasing order of margins of each product category.
  • The recent capacity has been for ring spun yarns and knitted fabrics. The company is slowly adding value added yarns - such as compact yarns to its product mix, but there is nothing big happening here as the market is niche and more specialized and thus growth won’t be massive
  • FY13 & FY14 were great years for the cotton yarn market, and thus the margins are on the higher side in these two years. The sustainable margins are in the range of 16-18%.
  • Cotton yarn prices in FY15 were doing by 8-10% and thus the margins were down too.
  • This new capex would allow them to do revenues of ~ 800 Crores at today’s prices (300 Crores from the new capex- this also gives us some sense on the economics of the business)

Net net, my sense is that there is not much ‘trajectory’ change happening in this company, the last two years look good because of tailwinds in the industry. Margin expansion would be tough from here (unknowns - Exchange rate, China demand )

Overall, it becomes very important to get the price right here for your margin of safety. That is where I stand on this. Would be great to have differing points on this.

Best,
Rohit

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@donald and all… I am from the textile industry… Im put up in Ahmedabad… I have some knowledge of Yarn Markets and spinning but not very detailed… If anybody who is studying this company & industry in depth and can come to Ahmedabad can arrange a meeting with the industry veterans who will help us in decoding the industry.

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@aveekmitra @varadharajanr @Donald

Did some numbers around Nitin Spinners to look at the economics of this business closely.

Basis the table above, its not a very attractive business to own. They can obviously earn an ROCE of greater than 9% on a full basis because of depreciated assets/tailwings in yarn prices, favorable exchange rates etc…But that can’t be part of the investment thesis IMO

One way of subverting this is to buy the business sufficiently cheap. (.5 P/B assuming your CoE is 20%).

Just thought of posting this. Gives a clear view on what was the reason for their higher numbers in FY13 & FY14 and what can one generally expect if things are normalized.

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Alright… Some pointers…

  1. Compact yarn as such is nothing niche…
  2. Yarn is a commodity, the price is based on quality, no pricing power to supplier.

The best way I can explain the cycle of textle industry(not garment) is like this… Broadly in textile 2 cycles run…

  1. Weaver’s/Knitter’s Upperhand (Buyers Cycle)
  2. Spinners Upperhand (Supplier Cycle)

Both the Weavers/Knitters & Spinners keep doing capacity addittion but it is generally not in sync. For a few years Weavers/Knitters will keep adding capacities and Spinners will lag (mostly due to overcapacity previously). By the end of this cycle Weavers/Knitters Capacity(Demand) will be greater than supply, at this point margin of buyers will start going down and margins of suppliers(spinners) will start going up…

The second cycle is just the reverse of above.

There are 2 outside factors which influence other than these cycles

  1. Export markets. If internationally there is good demand for yarn it insulates the spinners from the local demand/supply mismatch. Basically the cycles explained above earlier were more local but now have become more global.

  2. Cotton prices. This being a commodity business is exposed to the vagaries of the commodity price movements. when cotton price falls, the demand dries up also you face instances of Goods Return from buyers, it basically being a credit based market, supplier really can do v.little but it would be wrong to generalise things.

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A interesting study would be to see the corelation between the Inventory and Margins. Im sure they would be inversly corelated… that would also be early pointer towards the present cycle of the market…

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  1. Any data source on Working capital assumption.
  2. We should do this calculation for full capacity also.
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@Gaurav_Agarwal

I have used the historical Working capital which is about 3 months (90-100 days). On full capacity it will be greater than 10% owing to depreciation as it will bring down the capital employed. The idea here was to see what is the incremental ROCE of the business…

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@rohitbalakrish_

  1. Your point well taken. But this calculation in fact shows that it is very difficult to put a new spinning/weaving company. (RoCE being only 9%).
  2. Depreciation in this business quite significant, we need to consider that while making an investment decision.
  3. Sum of net profit for 9 year period from 2006-1014 is 40.97cr whereas cash from operating activity is 339cr (data from screener.in)
  4. Do you work with - Working Capital = Current Assets - Current Liability?
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@Gaurav_Agarwal I agree with depreciation being a major part. But I am just looking at incremental capacity and its a back of the envelope calculation that assuming that you were selling everything in a single year what would be your RoC. Working capital is Working capital is CA (Excl cash & Liquid Investments) - CL

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IMHO , I think we need to look at Nitin Spinners in its own space and no way compare it to Ambika Mills. My perspective on Nitin Spinners is that it is a company which is coming out of a mess into being a normal company. Ambika is a company which is moving from normal to a better value / managed company. Market seems to acknowledge that and that is the premium Ambika gets in its valuation over textile companies.

Nitin seems to be doing ok but there are other factors which is beyond. Last time Nitin did a capex, the financial crisis stuck and Nitin took a hit. Ambika was able to overcome the crisis because of its debt management. Again now Nitin has done a massive capex. If there is no major economic issues, it should do well. Ambika is better poised because of its low debt.

I think this is a pure commodity play. If push becomes shove, the suppliers are going to squeeze your margins irrespective of the machines / quality of the products. The companies that have scale and prudent debt management are the ones that are going to survive. Having said that the market does not have huge expectations of Nitin but if Nitin can cut down debt and have a good dividend payout it may get re rated.

Textile sector as such is not doing well due to high debt and other legacy issues. So ppl do not expect much of textile companies.

Even though high debt is a problem with Nitin, it should be analyzed in detail. LT Debt is usually for Capex while ST debt is for working of the company. LT Debt usually are available at cheaper rates than ST Debt. LT Debts are planned while ST Debt are adhoc.

Till last year Nitin had been reducing its ST debt considerably and also it is v less when compared to the LT Debt. Having a very small ST debt is only possible if you are able to bargain with your suppliers and your client. Ideally suppliers should be paid longer where as the money is collected quickly from clients. When you have a commodity product, clients will pay promptly only when they are satisfied. Proper client selection is also important. Only scale and payment as scheduled to suppliers will buy you time.

For 2014-15 both debts have shot up. This could be attributed to the heavy capex they have implemented. When compared with the peers for 2013-14, Nitin seem to have a v good st/lt debt ratio and also finance costs/total debt ratio.

IMHO we cannot dismiss all textile companies because of their debt. Nitin seems to be managing their debt prudently. Also Nitin Spinners have been in and out of CDR and they would definitely not want to get into CDR again (Having said that anything is possible in the volatile environment)

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New Project Detail

BLOW ROOM Trutzschler
CARDING Trutzschler
BR D/F Rieter
UNILAP Rieter
COMBER Rieter
FR D/F Rieter
SPEED FRAME Zinser Speed 51M
RING FRAME KTTM RXI240 With Auto Doffer & With Link Coner
COMPACT SYSTEM FROM SUSSEN GERMANY 29000 SPINDLES
AUTOWINDER Savio Polar Link Coner
Count Range 12s to 40s
Total Spindles 72500

Product range

  1. SLUB Yarns in count range of Ne-16s to Ne-32s. Please inform SLUB PATTERN alongwith your requirement.
  2. 100% Cotton Ne-20/2,24/2,30/2,40/2 TFO Double Yarns.
  3. 100% Cotton OPEN END yarn with 1900 CSP in ount range of 7s to 24s.
  4. Ne-40/1 100% Cotton Compact Combed Yarns For Weaving
  5. ring spun 100% cotton combed yarns in
    Conventional/Organic/BCI Ne-20s ,Ne-24s,Ne26s,Ne28s,Ne-30s,Ne-32s,Ne-34s,Ne36s and Ne-40s.
    6.ORGANIC/BCI/TBC certified yarns.
  6. grey knitted fabrics for exports.
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Why the fall and subsequent CDR

The press release from Nitin gives the reason for the fall as “due to forex losses and adverse business scenario in 2007-08”. Let us look more deeply and check how other companies like Ambika Cotton Mills survived and also what will happen if a scenario like 2007-2008 happens to Nitin

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There were 2 periods when the company’s profit went down

  1. In 2006 the company went in for a capex and funded it through IPO + debt. The global crisis hit in 2008 when the company implemented its capex. Subsequently the company got into CDR.

  2. In 2011 the volatility of cotton prices along with the closure of dyeing units in Tirupur became a double whammy

The above two incidents were related to the sector. So let’s see if this corresponds to other companies in the sector. We will be comparing Nitin Spinners with ACML (Ambika Cotton Mills Limited) because ACML has been already vetted by Prof

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It seems that ABCL also underwent the above 2 pain periods but they were able to sail through because they were making profits and the periods resulted in drop of profits. Whereas Nitin Spinners were making less profits + a capex and the 2008 period led them to make losses.

So what happens if a 2008 arises, Nitin will be definitely affected but hopefully the current cash flow will sail them through. The MD also found out to go over 2008 he needed to get into value added products like slub yarns and lycra yarns.

Having said that, Nitin Spinners has implemented a heavy capex in Feb 2015. The interest for those LT funds should be kicking in Q1 and Q2 of the next financial year. If the company can get over these quarters, it should do well (without any force majeure)

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