Nandan Denim Limited - No. 1 position in denim play

Hi guyz,

This is my first write up, so kindly forgive me if i have missed any information. Do ask for any further info if required.

Nandan Denim Limited
One world with Denim…

Industry Snapshot –
Denim industry is one of the fastest growing (niche) industry in India. The Indian denim apparel market was valued at 13,500 crore in 2013, as per a report by management consulting firm Technopak, accounting for 5% of the total apparel market. It has been growing at a CAGR of 14% to 15%, outpacing the global denim apparel market, which is clocking a CAGR of 3% to 5%. The domestic denim market is projected to register a CAGR of 15% to 27,200 crore by 2018. In volume terms, the domestic denim apparel market has witnessed faster growth vis- à-vis exports during the five-year period FY2009-FY2013. India is the 2nd largest denim manufacturer in the world with 1,000 MMPA capacity, next only to China. The country is the 4th largest exporter of denim fabric in the world after China, Pakistan and Turkey. Asia accounts for about 70% of the global denim fabric production.

Global Denim Capacities (MMPA)

China 3,497
India 1,000
Latin Americas 1,082
European Union 698
North Americas 406
Africa 164
Australia 15
Others 880

The Indian denim jeans market is largely unorganized, with branded market accounting for only 30% share. According to a white paper by RNCOS, the ratio of organized and unorganized market will change significantly due to changing consumption patterns. Tier II, III cities and towns have emerged as significant demand drivers for the denim industry. Large players are exploring the unchartered waters through low range products, considering the affordability of consumers.

Denim Apparel Market in India

2013 13,500 crore 2018 (P) 27,200 crore
2023 (P) ` 54,600 crore

City Type Population (%) % in Market Share

Mega Metro 4 37
Metro 3 12
Tire 1 3 8
Tier 2 4 8
Rest Of urban 18 20
Rural 68 15
Total 100 100

The China Threat –

Earlier Indian denim industry used to face tough competition from China, even though cotton (the major input) was scarce in China (compared to India). The things have changed and forced China denim manufacturers to divert/shutdown their denim business. Costly labour and environmental issues/charges played the role. This came to vanish the competitiveness of China in global markets as well in Indian markets. Further, cotton being in abundance in India, India gradually became competitive. This led Chinese manufacturers restrict their business to polyester yarns/non cotton fabrics only.

Potential of Denim Industry In india –

1). Large Population base.
2). Only 9% of Females consuming Denim!!
3). Organized segment contributing only 30%.
4). China diverting its attention to non cotton based textile sector.
5). Govt. support ( TUFS, VAT rebate, etc.).

Company Snapshot

Nandan Denim belongs to the famous Chiripal Group - having huge portfolio of products under its name. Nandan is the denim wing of the group – run by Mr. Deepak Chiripal(CEO) nephew of Mr. VedPrakash Chiripal (the Chairman of the company). Brij Mohan Chiripal is the brother of Ved Prakash Chiripal and is the MD of the company.
Nandan Denim Limited (NDL) is the second-largest textile company in India. Located in Gujarat, the textile hub of India, the Company is engaged in the manufacture of denims, cotton fabrics and khakis through fully integrated facilities. With a projected denim manufacturing capacity of 110 MMPA, NDL is currently the 2nd largest manufacturing facility in India. After achieving the said capacity, Nandan will gain the first position in India surpassing Arvind Limited. Company has increased its capacity by almost 57-58% in last two years (from 70MMPA to 110MMPA*). Company is currently running on 99MMPA capacity with 85% capacity utilization(70 to 99 MMPA already installed during 2014-15). Company has also made expansion through backward integration. It used to produce around 50% of yarn through backward integration and procure the rest of the 50% requirement from outside. This year it has increased its spinning capacity from 54MMPA to 124MMPA – bringing the need of outside procurement to just 20%. Both the expansions will be completed by first quarter of 2017.
Company is planning to get into Denim processing to provide value added products to explore the global markets like Arvind. It has recently started for this expansion, which would materialize in 2nd or 3rd quarter of 2017. Company is planning to increase the strength of the Product Development Centre by increasing the staff strength (hiring more and more fashion designers), increased R&D efforts, etc. The processing facility is under construction, which will be complete by end of 2nd quarter FY 17.
Company enjoys 10-11% of the market share in the denim industry in India (post expansion). Company’s target customer group was the Indian mass market and not the premium denim market that wants value added products. But, now with increased focus on processing and product development efforts, company is targeting the premium market. Company intends to increase its market share in exports in next 3-5 years. Currently 10-12% of the topline comes from exports which company wishes to increase to 35% in next 2-3 years (no compromise on Indian business - Indian business growing at the rate of more than 20%).

Corporate Governance -

Company since last year, was simply a promoter driven company with less number of independent directors on board. This year they have appointed two more independent directors –one with rich experience in financial markets and the other having a wonderful knowledge about branding. Deepak Chiripal is the CEO of the company (the nephew of Ved Prakash Chiripal). He has a wonderful experience in the denim market for years now. He was the man before the growth of the company over years. With his niche focus on Denim Industry, professional mgmt and rich insights from independent directors is a great mix salad on table.

Company Fundamentals

CMP – 130/- (last week).
PE – 10.34
Market Cap- 610 Cr.
Dividend Yield – 1.19%
Debt/Equity- 1.82 (Debt from TUFS has increased this ratio – Debt from TUFS recd at 2-3%).
ROE – 21.64%
Sales Growth (3 years CAGR) – 24%.
EV/EBITDA – 9.
PEG ratio - 0.30.
Tax % - 25-27%.
OCF last year – 133 Cr. (This year, FY16 – 200Cr(P) – from the horse mouth).
NPM las year – 4.40%.
This year NPM – 5.3% (Sept Quarter).
OPM – 15-17%.
Net Worth – 258 Cr.

Valuations –

Attached.

Insights from Management meet and Plant Visit

We met the president of the company – Mr. Govind Sharda. After a 2 hour discussion with Mr. Sharda at the corporate office; he accompanied us to the plant. He was a very polite person and answered to the point.

Question 1
What is the risk of input cost price hike (cotton) ?
Ans – Company has no risk. Whatever increase in price of cotton is passed through to the clients. Adding further he said; you can see this in the company’s OPM over years.

Question 2
What are the company’s expansion plans once the 110MMPA capacity is achieved?
Ans – Once all is done – spinning capacity, denim fabric capacity and processing plant facility; company would like to streamline the process, go for internal efficiency and re-engineering. On asking further – what after that? He replied, company wants to expand its shirting division and also enter into garmenting business. But this needs a big team and focus from top mgmt which will slowly come over next 5-7 years.

Question 3
What is the rationale of bringing Polus Global in the company at 200/-?
Ans – There are two angles to this issue !!
1). Polus Global view point – Polus global wanted to increase its stake from mere 0.35% to 5% in the company. Owing to the illiquidity in the market, the market price of the company shoot up from 140 to 168 when an investor tried taking 70000 shars. What will happen to the CMP if Polus is standing to take 25lac shares. He also added, that Polus is a very small fund compared to others and was not having entire 50 crores to deploy in company, to which they decided to get issued warrants (paying merely 25% rest 75% in 18 months time). Polus is also invested in many other Indian companies like Zee Learn, Sangam Textiles, etc.
2). Company view point – Company knows that its share is undervalued currently. This is due to illiquidity in the markets. 60%-64% of the shares are held by promoters and 20%-25% are held by long term investors who do not want to sell. This brings the effective float to just 10-15%. They have advised the promoters not to buy further shares in the company (to maintain liquidity) and brought in Polus by diluting the equity.
(It can be a marketing strategy, to bring the fund into picture at 200/- and shoot up the price to that level. But I feel the stock to be much undervalued, which provides a good margin of safety. In addition to that Devkinandan Cop LLP (promoter-Devkinandan is the father of Chiripal Bros) was last year continuously buying stake in the company (5%) and this year it is still buying (0.5% as of now). Polus issue should be taken as a green flag rather than a red flag.

Question 4
What will be the EBITDA margins over next 3 years?
Ans- Yarn manufacturers earn around 10-12% of EBITDA margins depending upon quality. Further, increase share of exports will fetch good returns per metre (due to value added products offered). He added, Arvind currently enjoys 180 per metre and we only 130 per metre. Improved focus on consolidation of business (integration), bringing cost efficiency, offering value added products, etc. will help the company to touch the EBITDA margins in the range of 20-24% from just 17% right now.

Threats

1). Raw material price - Please refer question 1 asked to mgmt.
2). China comeback - As per the reports, China has started concentrating on non - cotton products - since they do not have access to cheap cotton (they have to rely on imports) and costly labour and environmental issues have made this market unattractive for them. Correct me if I am wrong here.
3). Competitors - Arvind is a diversified company - is not only focused on denim like nandan. It focuses expansion in knitting business. They havent added any capacity since last 5 years atleast. Aarvee Denims has good capacity, but there is some family dispute going on with less focus on business. Industry is growing at 15-18% CAGR - so competition is less and every player has got some market share to play in.

Moat - Company is a niche player in Denim having fully integrated facilities from cotton to spinning to fabric. It enjoys low cost advantage due to backward integration and efficiency in operations. It enjoys 10% market share in domestic market (which is not a joke) - this shows company has real great distribution networks. Company is trying its hands in value added products - to help its product differentiation.

Disc : Invested at 70,100 and 130 and bought some at 140 last week.valuation - nandan denim.xlsx (11.3 KB)

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Thanks for wonderfull writeup.

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@abhishek90

Very nicely analysis on Nandan Denim. The company looks really promising and attractively priced. Just one thing which I wish to have clarity is to by knowledge there is no excise duty currently levied on textile. If GST comes then automatically textile industry would come under taxation. How would GST affect Nandan & industry on the whole.

i had invested and exited Nandan denim in the past.
What i didn’t like was issue of warrants to promoters and other group companies in similar line of business.

Hi ManishinLucknow,

Earlier they did issue warrants to promoter and promoter group, which they subsequently cancelled. Later this year, they issued warrants to polus global (PE fund) at 200 each. Polus global is not a promoter group. We asked the president about the rationale of bringing polus global in the company to which their answer was not that comforting. It is very clear that the FII was brought in to market the company and highlight its true value. We should not look at this as a red flag…rather it is a very very green flag.

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Hi manish26,

I need to work out on this. Will get back to you in a day or two.

Hi @manish26 here you answer regarding GST.

I think it will benefit textile industry

thanks Abhishek for the clarification.
After the announcement in Apr 2015 regd issue of warrants I stopped tracking the company.
I agree that issue of warrants at 200 to non-promoter is a green flag.
However, there must be something wrong with the FII Polus Global to subscribe to warrants at Rs 200 when the stock was quoting at around Rs 130 in Sept ( and at lesser price prior to that) . Why not buy from open market ?

Hi manish,

The volumes are very less. Its very tough to get 70000-80000 shares from the market. Polus Global wanted to have 25 lac shares which is just impossible to have at 130 or 160 levels. Price will shoot up once the buy requirement has been set for. Block deal was also not possible because no long term investors wanted to sell their stake.

Just a news - Dolly Khanna holds this company from 30 levels and still holds it. A VC firm run by ex-CIO fidelity investments has also invested some portion since long and still holds. We can find name of Dolly Khanna and other veterans from the AR.

What is strange is from the company’s angle - why did they dilute the equity. What is the rationale to bring polus global in the picture? Simple answer - marketing - to which my decision of investing doesnt affect at all. It is good infact for me that my investment is being shown by the company to be still undervalued. This gives me real confidence about the MOS and the upside potential.

Disc: My views may be biased since I am invested. Company shares 20% of my portfolio. Do your own due diligence before taking action.

I no more hold NDL but here are my two cents.

Dolly khanna’s purchasing price is most probably from 60+ levels as I had purchased the stock before any big name was involved with the company. If I recall correctly, DK first appeared in the SHP in march 2015.

The big issue here is the debt levels. Also the business is quite capital intensive. One can own it purely on basis of growth potential but expecting rerating from these levels seems a little far fetched.

Disclosure:- held NDL in the past from 57 levels. Booked around 170 levels. Do not consider this as a recommendation to buy/sell

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Hi Nikhil,

Agree with you nikhil that debt levels are too high. But, additional debt has been brought at a mere interest of 1-3%. TUFS benefit + Guj Govt benefit. Interest coverage ratio is high and that should comfort us. Out of total Interest cost of say 13% - company gets 5% subsidy from TUFS and 6% from Guj Govt. So net interest cost is 1-3%. We can buy this, since I feel it to be lot undervalued. Your views invited on this.

Best regards,
Abhishek shah.

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@abhishek90

Agree with you on the subsidised loan but there were news(rumors?) about TUFS subsidy being stopped.

I’m not sure if it’s true or not but it made me realize that the company’s survival seemed to depend a lot on subsidies from govt. / TUFS. So I booked out.

Consider a scenario where a Rs. 650+ cr Mcap company has debt of Rs.600 cr. Not the best business around, I say.

I once invested when risk reward ratio seemed quite favorable to me. Can’t feel that comfort now. Of course it’s completely a personal view. Circumstances may actually get better for NDL going forward and my views may prove to be for naught.

Please understand that this post is not meant to demoralize anyone. Rather an attempt to make everyone see the risks through my glasses.

Regards

FWIW, promoters have pledged 37.97% of their holding.
http://www.moneycontrol.com/bse/shareholding/shp_promoters.php?sc_dispid=NE06&qtrid=86.00

Disc: Not invested

I looked at this but look at this

Denim is slowing and arvind has been indicating so in its conference calls. Anyone old enough will remember how arvind went bankrupt because of a denim crash in 2000. I am not so sure of a debt fuelled expansion right now.

As for polus global fund, can someone clarify which fund house it belongs to and whos’ the fund manager - I searched on linkedin and google but cou;d not find - they have invested into ansal properties in india but that’s all. I can’t imagine that a fund would risk capital into warrants and risk the loss of a complete write-off without any shareholder rights. In an institution, it would be frowned upon.

And if the share market crashes, they can’t even get out - there’s no liquidity, no shareholding either.

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Hi Nikhil,

Thanks for your valuable comment. You are correct - company with a Mcap of 650cr and debt of 600Cr. But, what if we see this as a positive factor. Stock is undervalued and debt has been received at cheap levels. Nandan has never faced any problem from TUFS/Guj Govt. Lets forget the word debt here !!

Dear Ragunathan,

Thanks for your views. Arvind and Nandan are totally different - in terms of their market and style.
Nandan is a mass market player - increasing its sales through market penetration whereas Arvind plays globally through differentiating its products. Indian domestic industry has bee growing at CAGR of 15-18% over several years. Global markets have been increasing at 3-5% CAGR only. Arvind is going to obviously face growth problems since the industry growth rate is in single digits. Moreover, Arvind has been from the very beginning concentrating on more than one items like knitting and has now entered into cosmetics also. Nandan is focussed purely into denim over years.
I am a CA and my firm had Arvind as its client. There is a huge difference between the mgmt of both the companies.
According to me lack of concentration on denim business, mgmt (weak corp governance) and overall global denim market impacted Arvind. Nandan seems to be far far better than Arvind. I might be wrong, and I respect your views. Just keeping my views on the table for a healthy discussion.

Dear Sandeep,

Thanks for your views. I had a talk on this with Mr. Govind Sharda. He told this pledge was made when company had corporate loan in its books. Now the loan is paid off this year. Company will very soon be releasing the pledged shares.

Hi,

I was looking about NDL sometime last week. Found this video on youtube https://www.youtube.com/watch?v=p952PFOEuoE

Gives some information about capex, OPM, export market

Disclosure: Not invested, tracking

Dear All,

With all due respect.

I use to track this scrip when it was around Rs. 30 (2.5 years back) and bought decent quantity as well but exited at Rs 55.

Few Red flags which I noticed at that time were:

  1. At that time there was no separate website. They have one group website.
    http://www.chiripalgroup.com/index.php?page=manufacture_home&id=7
  2. Other unlisted entities which are also into textile division. Not able to understand why they got listed only one entity and not others.
  3. CFO (Mr. sanjay Agarwal) said pledge share was due to loan taken for other group companies but not for NDL.
  4. Criminal case against its promoter and other group companies.
    http://www.chiripalgroup.com/Right%20Issue-Final%20Lof-14-12-07.pdf
  5. Lavish lifestyle of promoter. (This may not be the concern of many but I personally look for it).

Almost after 6 months of my tracking Crisil came out with Buy report and at that time only, long stuck Orange Mauritius Investments Ltd exited from the stock and Globe Capital Market Ltd & New Leaina Investments Ltd entered. Thereafter, promoter started buying and Dolly Khanna (Globe Capital Market Ltd exited) entered in the range of Rs 60-65 from where stock sky rocketed and touched Rs 170.

Contradictory event,
Promoter is buying shares through open market but not releasing its pledge shares rather diluting it through issue of warrants at higher price.

Is below situation possible?
Raise money by pledging shares ------ start buying (at lower price) in open market to attract investors-------roped in well known punters and take the price to higher levels------dump the stock either by issue of warrants or QIP at higher price-----Enjoy holiday in Las Vegas…. :stuck_out_tongue_winking_eye: :wink:
[Just a view]

Regards,

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Thanks lot Kartik. I had the same concerns when i thought of investing here.
But, look at the performance of the company over years. I think no company can do all the 5 things together -
1). Pay dividends.
2). Pay Taxes.
3). Generate decent ROE.
4). Generate enough cash flows.
5). Make Fraud.

I have met the management, and am pretty sure that the action of bringing polus global was merely a marketing activity. They have hired an investor relations officer, changed the composition of Board of directors - brought some real knowledgeable independent directors. Till all these years they concentrated only on business. Now they are concentrating on market cap as well as business. They felt their shares to be very undervalued and not much discovered. I donot see any reason to worry on pledged shares issue if the company is earning enough. Also read the AR FY 15 - they have clearly written that the pledging was done for corporate loan they had taken. I assume they shall be removing the pledge sooner.
Also, with due respect, would like to put here - we are investors who sit with a laptop and a broadband connection and apply our skills - search for gems in the oceans…Compare this with a businessmen who invests money, works hard, understands the market, goes through tough times, incurs losses, competes with the industry forces, finally creates a brand and name and finally money. I feel our work much easy than that of those businessmen. My 2 cents - we get the diversification benefit - investing in 6-10 companies, where as when starting a business - you start with only one and eventually scale up by diversifying the brand name into different businesses. We can easily switch over our investments if it falls 20%-50%, which for a businessmen is quite tough.
All what I want to say is, its tough doing business, and I discount some small frauds which management does for their own benefit. We cannot get everything perfect. Take any businessmen, they have been involved/alleged of having done some wrong/odds. Even Dhirubhai Ambani was one of them. You cannot imagine a company booking all the profits in white. Some of them definitely goes to the promoters - think of the real estate markets. Chiripal had a past like every promoter has. The crux is not to hold and drag that past into present - the crux is to see if they have actually tried to change their past - and yes in case of Nandan. Mr. Deepak Chiripal is a young and dynamic person, has real good values and understands the business very well - this is what i have heard from market - not ofcourse the people working there.
I inquired this from a white collar employee working at Arvind.

I might be biased, and please do your own diligence. I see Nandan doing a good business over years, giving good ROE, dividend, good mgmt (now), good opportunity out there( aggressive expansion done), etc. I discount other issues like pledged shares, diluting shareholding (in this case only), aggressive marketing of the company, etc. According to me the company is truly undervalued, it should command value of more than 200 (at least 240-260 today) and much more over years to come.

See the cotton based textile industry - its growing - China has lost its competency.
See the denim market - 15-18% CAGR growth.
See the company expansion plans - at real cheap capital from banks.
See the change in mgmt.

My quote for this investment -
Heads i win, tails i don’t lose much !!

Disc: I am invested, and my views might be biased. I appreciate your views and deep thinking on the red flags. They are justifiable. I put my views on the table. Let me know further on this. Thanks.

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