Vardhaman Textiles


(Harsh04) #1
				VARDHAMAN TEXTILES

DATE – 02 FEB 2018

Industry :
Over the last decade, the global textile and apparel trade has been growing at a CAGR (compound annual growth rate) of 5.6 %. In 2014, it stood at US$ 820 billion. Apparel categories had a larger share of 56% while textiles had the remaining share of 44% in the overall trade. The global textile and apparel trade is expected to reach US$ 1,600 billion by 2025. It is projected to grow at a CAGR of 6.3% over the next decade. The Indian textiles industry, currently estimated at around US$ 120 billion, is expected to reach US$ 230 billion by 2020
Textile plays a major role in the Indian economy. It contributes 14% to industrial production and 4% to GDP. With over 45 million people involved, it is one of the largest source of employment generation in the country. The textile industry accounts for nearly 15% of India’s total exports.

Company :
Products – Fibre, Yarn, Sewing threads, fabric, garments.
They have presence in markets like the European Economic Community, Canada, China, Japan, South Korea, Mexico, Brazil, Mauritius and the Middle East. Also emerged as a preferred supplier to global garment makers like Tommy Hilfiger, Esprit, Gap (including brands such as Old Navy), Zara, H&M, Mango, Benetton and Arrow, among others.
Future - Currently, they operate at near 100% utilisation levels in the yarn business, catering to diverse customer requirements. They are also consolidating the fabric business and are focusing on expanding capacity in this space. Going forward, they have a planned capital expenditure of ` 2,500 crore over three-four years towards the ongoing schemes at Baddi, Himachal Pradesh, as well as proposed expansion in Satlapur and Budhni in Madhya Pradesh and modernisation in other units.

Subsidiaries, Joint Ventures and Associate Companies:

  1. VMT Spinning Company Limited (VMT): This subsidiary of the Company is a Joint Venture with Marubeni Corporation and Marubeni Hong Kong and South China Limited of Japan. The Revenue from operations of the company has increased to 19,112.99 lakhs from 15,663.72 lakhs in the last year. The Net Profit of the Company after comprehensive income worked out to 826.11 lakhs as against 738.97 lakhs in the previous year registering an increase of 11.79%

  2. VTL Investments Limited (VTL): This 100% subsidiary of your Company is engaged in the business of investment. The earnings of the company mainly comes from dividend/interest earned on its investments and profits made on sale of investments. During the year, the Company has earned a net profit of 975.12 lakhs as compared to 357.01 lakhs in the previous year.

  3. Vardhman Acrylics Limited (VAL): This subsidiary of the Company is engaged in the business of manufacturing of Acrylic Fibre. Presently, the Company holds 70.74% shares in this subsidiary. During the Financial Year 2016-17, VAL recorded Revenue from operations of 36,842.96 lakhs against 44,759.18 lakhs in the previous year. The net profit of the company after comprehensive income worked out to 4,099.14 lakhs as compared to 4,080.18 lakhs in the previous year

  4. Vardhman Nisshinbo Garments Company Limited (VNGL): This subsidiary of the Company is a Joint Venture partnership of 51:49 with Nisshinbo Textiles Inc., Japan for manufacturing men’s shirts. During the year, the Revenue from Operations of the company was 5,828.84 lakhs as compared to 5,799.22 lakhs in the previous year. The company incurred a Net Loss of 53.88 lakhs as against a net profit of 153.36 lakhs in the previous year.

  5. Vardhman Yarns and Threads Limited (VYTL): Vardhman Yarns and Threads Limited, Joint Venture with American & Efird Global, LLC (A&E), is an Associate Company of the Company. It is engaged in the business of Threads Manufacturing and Distribution. During the year, the Company has sold its 40% stake in VYTL to A&E and is now holding 11% stake in VYTL. A&E is the second largest player in Threads Manufacturing and Distribution across the world. During the year under review, the Revenue from Operations were 77,857.87 lakhs as against 72,863.26 lakhs in the previous year registering an increase of 6.85%. The Net Profit for the year after comprehensive income worked out to 9,909.48 lakhs as compared to 8,991.66 lakhs during last year registering an increase of 10.21%.

  6. Vardhman Special Steels Limited: Vardhman Special Steels Limited (VSSL) is an Associate Company of the Company. The Company holds 31.39% shares of VSSL. During the year, the Revenue from Operations of the Company was 75,312.90 lakhs as compared to 72,551.41 lakhs in the previous year. The Net Profit for the year after comprehensive income worked out to 1,891.01 lakhs as compared to 405.12 lakhs in the previous year. 43 DIRECTORS’ REPORT ANNUAL REPORT 2016-17

  7. Vardhman Spinning & General Mills Limited: Vardhman Spinning & General Mills Limited (VSGM) is an Associate Company of the Company. The Company holds 50% shares of VSGM. It is a trading Company dealing in the business of Cotton and Fibre. During the year, the Company has not traded any goods. So, the Revenue from Operations is Nil for the Financial Year 2016-17. The Company incurred a Net Loss of 6,851 as against a net loss of 27, 292 in the previous Year.

Valuations :

CMP = 1300
M.Cap = 7480 Cr
Enterprise Value = 9610 Cr
Debt to Equity ratio = 0.52
PEG Ratio = 0.29
PB x PE = 19.15
CROIC = 20 %
RoE = 18%

EPS growth last 5 yrs at CAGR of 24%
Sales growth last 5 yrs at CAGR of 4%

I have used Ben Graham’s formula to arrive at the intrinsic value.
The original formula from Security Analysis is :
V = EPS x (8.5 + 2g)
where V is the intrinsic value, EPS is the trailing 12 month EPS, 8.5 is the PE ratio of a stock with 0% growth and g being the growth rate for the next 7-10 years.

V = 109.1 x (8.5 + 2x5)
V = 2018

Management Quality :
Mr. S.P Oswal is the MD. I have googled with the names of Directors and company for any frauds or SEBI notices. No such cases are reflected.

Risk Analysis :

  1. 35% of the total sales of the company is exports. Hence company is exposed to currency risks.
  2. Raw material cost is about 50% of the sales. Hence any increase in cotton prices will put pressure on the margins. This margin risk is also evident from that last 4 quater results which show OPM reduced to 12% in Sep 2017 from 21 % in Dec 2016.
    The cotton prices are said to go up in this year.
    http://www.thehindubusinessline.com/economy/agri-business/cotton-prices-seen-holding-firm-in-2018-on-slow-arrivals/article10001997.ece
    https://www.icac.org/Press-Release/2018-(1)/PR-1-2018-Global-Consumption-Increasing
  3. Textile industries are capital intensive by nature and hence bottomline may squeezed due to fixed capital costs and rising cotton prices.

Disclosure : Not Invested. Tracking. Intend to invest soon.


(Nolan) #2

There are a few good textile players available at reasonable valuations. But volatile cotton prices and adverse FX conversion rates are causing temporary headwinds for domestic textile industry.


(sambandham82) #3

In this formula, 8.5 is a constant or you have assigned this value?
If it is a constant, on what basis, this was determined?


(sambandham82) #4

yes. Sutlej Textiles looks even cheaper with good expansion plans.


(Harsh04) #5

8.5 is the p/e value at zero growth rate.
It is a constant in the original formula given by Ben Graham.
So the intrinsic value arrived at, is a very conservative scenario assuming 5% growth rate.

If u ask me why 8.5, why not 2.5… i really donot know the answer. Seniors might be able to put some light on how Graham derived or concluded this formula.


(calminvestor) #6

Hi @Harsh04

It helps to think of a zero growth rate company as a steady stream of fixed cashflows into the future. Applying a discount factor to the future cashflows (since INR 10 today > INR 10 1 year from today), you can arrive at the current value of those cashflows. This value divided by one year’s cashflows is the PE. If the cashflows are constant, the value of PE will depend on the discount factor used. For my calculations, I arrived at 11x PE as suitable for a zero-growth company.

Have tried to develop a first-principles approach to this in a post I had done a while ago:

Cheers


([email protected]) #7

Dear Harsh04,
please refer to the URL below, which will provide you more insights.


thank U.


(sumit680) #8

Hello everyone…i have some research on VTL and would like to bring following points to your notice-:

  1. I think management under Shri Oswal is quite ethical, conservative and reliable…

  2. The company is in a phase of consolidation to their core buisness and they are saving their cash chest for a capacity expansion soon.

  3. An application of DCF model on their excellent cash flow make the stock an undervalued one with a discount of 50% atleast…

  4. The textile is bound to grow in future…

  5. They have a good succession plan in place…

^. A good execution capability asdemonstrated in past.

  1. With all the positive factors i think the buisness has very low barriers to entry and is cyclical in nature …the profitability hugely depends upon the price of raw material…

With my few months of experience im betting upon VTL for a long term and averaging down my holdings…i have got it to 1225 from 1350… the story will reach its climax somewhere in third qtr of 2019…

I request guidance from senior members on this less popular stock…

Regards…