300 cr expansion approved…and there is more TUF
Not sure how markets will be viewing this. Addition of debt may not be viewed positively, although TUF can compensate for it. Why this expansion so soon ? looks a tad aggressive to me !! others,pl comment on results and this expansion plans
Q1FY16 results highlight
Topline increase by 47% (YoY) from 132.7cr to 196cr
Bottomline increase by 35% (YoY) from 8.7cr to 11.8cr.
Excellent result. Indicate good demand for Nitin yarn/knit. Expanded capacity absorbed without any delay. Also point towards competent management.
Cotton spinning yarn/knitting is moving to India from our neighbours and China. Results indicate demand is very high since expanded capacity is absorbed in the market without any delay. Expansion in such environment may be a necessity to maintain competitive advantage.
Liked the results. A bit uncomfortable with the expansion. If all goes well the expansion will add value but if there is some slowdown or hiccup the debt/interest will eat up the company. It would have been great, if they had shown a couple of years of solid results + drastic debt reduction and then gone in for the expansion.
P.S Invested in FOC shares
As long as Nitin is able to get TUFS loans @4-5% and ROCE is 25-27% expansion is OK. I have trust in execution capabilities of Nolkhas who have come out of fire and will not take any risky step.
1 Like
Great set of results by Nitin. Congratulations to those who invested.
What amazes me is the huge capacity expansion of 300 crores!!! More leverage 
Seems like any other commodity industry where every one puts capacity on top if the cycle?
1 Like
Yes - Infact, that’s what amazed me It’s barely a year since they completed a Rs. 400 Cr. expansion.
Any global macro can destroy them completely at these levels of debt - I am not adding more nor am I selling.
Though the segment may be different, companies in the sector are undertaking capex due to availability of TUFS. I met another company in the sector by the name Nandan Denim Limited, who also is undergoing huge expansion due to the availability of interest subsidy (centre pkus Gujarat state) which brings the interest cost to almost zero for these players without any clear plans for the capacity utilisation. I wonder what will happen to these players when things go against them.
Had a word with CFo -
Expansion will be mostly in finer cotton yarns- demand is there, directly in competition with Ambika cotton mills
225 crore to funded under tufs - 6% interest subvention likely from raj govt
800 crore revenue target on track
Margins to improve from Q1 level
They are competing with Ambika Cotton Mills?
I personally believe Nitin should power ahead with expansion specially since India is in a sweet spot in terms of Textiles. Everything is working for textiles in cotton prices, weak rupee, labour, electricity, mess in neighboring countries etc.
Apparently they have already hit 100% utilizations post latest capex.
TUF loans are cheap. It definitely makes sense to GO FOR IT.
*Also, please note that the NP growth was lower than EBIT growth due to tax outgo (co didnt pay any tax last year).
**Questions we need to ask are how will cash flows be affected with new expansion and what will be FY17-18 revenue and eps estimate with new capacity?
Cheers
Neil
@neil991 - that’s not the way it works - look at it this way the first Rs. 300 Cr. of assets gave Rs. 480 Cr. of revenues
the next Rs. 300 Cr. (done last FY) is going to give them another Rs. 320 Cr. (company says around Rs. 800 Cr. is peak cap. utilization). so already incremental asset turns have come down from 1.5 to 1.1
Law of diminishign returns is catching up already - company may be better off dividending out and keeping high ROCE’s than play with debt and risk a wipe-out.
They just came out of CDR two years back and again are punting big.
5 Likes
@varadharajanr - Hey buddy…if the company manages to execute well, then the excess debt will amplify the EPS. Debt is a double edged sword.
The management has also stated on CNBC yesterday that margins will improve further from current levels.
And since the loans are just at 6%, its almost a god sent opportunity to go on add capacity specially since the going is good.
From an investors point of view…this is not something which I will want to hold forever. But once it crosses 125-130, thats an area where we can book out.
Warm regards
Neil
In a recent CNBC interview promoter said company will delivery 200cr topline for remaining three quarters. That is annual topline of around 1000cr. He also added operational margin will be around 18%. How many companies are delivering 18% operational margin?
Capacity utilization is at 95-97%. I am surprised how quickly they have utilized their expanded capacity!!
I can sense a big value migration towards Indian is happening in textile sector. These could just be early pointer towards a bigger trend.
I don’t find this stock overvalued at all at the current price.
From what I have read and believe, economic earnings are a better indicator than reported earnings. The likes of Pat Dorsey in his book - The little book that generates wealth and also Professor Sanjay Bakshi (pls read his blog on Thomas Cook) have consistently made a mention of this. For the last 3 years, cash flow from operations for Nitin Spinners are substantially higher than the reported earnings. We still don’t have the annual report for 2015, even if I go with 2014 CFO - 86.62 crores, the stock is currently trading at just 4.5 times cash flows from Ops. This for a business which is going through a cycle of an impressive sales, profit growth, ROCE, ROE ratios. Not to forget 18% operating margins. The demand, margins, sales for the Indian textile sector is going through the roof and according to me (I reserve the right to be wrong), the trend is here to stay for a few years (with the problems of the neighboring countries) which plays to Indian advantage.
Disclosure - Invested
Neelesh,
The market cap of Nitin spinners is roughly 450 crores and it also has a debt of around 350 crores. Therefore the enterprise value is Rs 800 crores roughly and the CFO should be gauged against this number and not the market cap alone. In this case it works out to be roughly 10 times and not 4.
Also, owner earnings are useful in asset light models where the owner doesn’t have to keep ploughing back the cash flow to either maintain the existing assets or keep buying new assets to keep up with the growth. Textiles is clearly not an asset light model.
As has been pointed out many times in this thread, the key variable to watch would be the asset utilisation once the expansion has been done as idle capacity will kill the return on capital and also the reduced cash flows might not be enough to service the debt in this case.
4 Likes
Hi Mr. Sharma,
The current debt on its books is around 350 crores and added with the further 200 crore debt for expansion, the total debt comes to 550 crores. Now most of this 200 crores would be financed through TUFS at 6%, which is around 12 crores yearly or 3 crores quarterly interest. Since in the last quarter, Nitin paid around Rs. 9.8 crore as interest expense, this extra 3 crore interest would lead to a total of 13 crores in interest outgo every quarter. If you take out the deferred tax of that Nitin paid in this quarter, and forecasting the same operating profit in the subsequent quarters, it is in a comfortable position to service its debt in the coming years provided the demand for its products remains good.
1 Like
Law of diminishign returns is catching up quite fast with nitin.
Their first Rs. 200 cr. of asset block gave them Rs. 450 cr. of revenue - their next Rs. 287 Cr. is giving them Rs. 350 Cr. and their next Rs. 200 Cr. will give them Rs. 300 Cr. by their own admission (targeting Rs. 1000 Cr.).
These TUF loans have always been at 5-6 %. So, I expect ROE to drop soon - significantly.
3 Likes
I don’t think that is the right way to look at it…
The Return on Investment will largely depend on margins.
Since there seems to be a slow shift of textile/garment sourcing to India (from China/Pak/Bangladesh), the demand environment seems to be quite strong. This is reflecting in improved margins across the industry… The margins are also helped by low cotton prices… and some govt. incentives like TUFS…
Everyone is trying to capture the moment by increasing capacity (which is why you see every textile player announcing capacity expansion plans)… Once new capacity comes on board, then supply will slowly catch up with demand… And then margins will decline to normal levels…
The risk is that everybody puts up so much capacity, that supply will outstrip demand… In which case margins will fall drastically, as well as there will be unutilized capacity… Meaning, the indebted players will get into stress, then distresss,… and so on…
Any unfavorable macros (e.g. depreciating yuan, incentives by China to textile manufacturers, slowing consumer sentiment in US/Europe, sudden increase in cotton prices, etc.) can also spoil the story - and often without warning…
Disc. Not invested
3 Likes
Screener data reveals that margins are already under pressure FY14-TTM comparison…higher sales higher op but with lower opm by 300 bps approx. With competition catching up, In time things can get worse…
Yup - that’s why i said that - its called law of diminishing returns. Sure as hell, it happens to every mediocre company - only exceptional companies with giant moats like google, apple, unilever, emami escape it- every single company I have known that keeps adding fixed assets in an inflationary environment to fund growth will have this problem.
3 Likes