If we consider Nanadan in specific - I feel uncomfortable. I have visited the plant and met the mgmt. I was optimistic over their performance and looking at their past performance figures that made me rely on their future. But somehow I feel the growth is slow. They kept on boasting on being No. 1 player in Denim in India and making up their capacity to 110MMPA. One full year has gone after that and the topline growth is shameful.
There was a fire at Nandan Denim and Chiripal Industries (fire is a usual incidence that occurs at the Chiripal Industries every year). This happened at Nandan Denim also this year.
I am still in favour of the company’s position in denim market. Denim has a huge demand and can grow at 15% CAGR.
Regarding Indo Count - I am still bullish. The way the company is progressing is phenomenal. Mgmt is trustworthy. And main thing is focus on bed sheets and quilts. Plus point is downfall of Alok industries. I will continue to hold it till I see any negative. US market is in good shape.
But yes, we need to constantly track Indo Count. US is the prime market where people have not got their salary hikes since last 5 years. Inflation is near 0 and rate hike is expected this year. So this can impact the markets. Lets see.
I never said I am not bullish on Indo Count, I said I am not bullish on textile stocks, being bullish on a company and its stock is a different thing altogether and more so after the company has already gone through a huge runup. I expect the EPS to expand further but not PE.
From minimizing risk perspective, it makes sense to structure the portfolio in such a way that the individual stocks(or a basket of stocks) of the portfolio have minimum correlation with each other. Viewed in that light, it makes sense to reduce your textile exposure(depends on % of allocation you have). The only exception to this rule could be if one is deeply aware of an industry/sector. I have friends who have been overweight on Pharma in their portfolio for past many years and have gained immensely. But that is looking at things from only return point of view and ignoring risk point of view. As Taleb says, one needs to think of all the alternate paths history could have taken. Just because my friends made good returns in Pharma does not mean that there was no risk taken. To me, they took quite some risk. This helps to put risk in perspective.
Secondly, it is a futile exercise to judge by how much the stock price would move - especially taking a call on PE re-rating is very difficult. But, I think you are not too far off in your assumptions regarding textile stocks as a sector. It is good that you have remembered to look at past PE of the textile sector and not just be blinded of the current bullish scenario alone. But do remember even in specific sectors - there are some companies which can buck the PE trend and get re-rated to very high levels.
Let me put down the process I follow. I do not recommend others follows this. But I have found that the below process helps me to make stress-free decisions.
After doing research and having invested in a business, just keep a tag on how the business performs and not worry too much about the price movement. As long as the management is executing their vision well(it is ok if there are some down quarters), there are no major promoter ethics issues and the business doesn’t have major(it is got to be really bad) headwinds, continue holding the stock. The only exceptions to these rules are -
Invested in the stock more as an opportunistic bet.
There is a compelling new opportunity and one does not have fresh funds to deploy
Disc: I have been overweight on Textile myself in my portfolio - own 3 textile stocks(out of total 11 stocks in portfolio) - Nandan, Indo Count and Kitex.
I don’t think there is anything wrong with Nandan’s performance in FY16 - revenue growth was in-line with existing capacity. Their Denim capacity was 99 MMPA end of FY2015 (running at max possible utilization levels of 82%-83%) and it continued to be 99 MMPA end of FY2016 too. In FY16, only spinning capacity increased from 64 TPD to 70 TPD and they diverted some of their shirting capacity to Denim too since shirting fetched lower realizations without processing. So overall it was expected that their top line would be flat or in low single digits for FY16. However their profits were expected to show an uptrend due to margin expansion (backward integration/low RM cost).
For the full year FY17 - I expect top line growth of at least 10%. Bottom line growth of at least 25%. Let us see how it unfolds.
Yes you are correct in your understanding. But, when I met the company mgmt; Mr. Govind Sharda told us that the 110 MMPA capacity will be installed by half yr end (FY 2016). We had another visit to nandan plant to check the development. The capacity was not added yet. They were expecting 10-12% growth to topline for FY 16. Yes, it has been purely a delay only and no such negative news on the business side. But, then with another fraud related to the degree certificates issued by the schools under brand “Shanti”, and back to back fires in both the companies made us less confident on the mgmt. Again i am not telling here that its a bad business or bad stock. Its my personal view after having invested for 7 months. You are correct on your side and I respect that very well.
Thanks Abhishek - I was aware of the fire accident at Nandan factory but not aware of the other 2 incidents. Thanks for bringing them to our notice.
The Shanti Business school incident certainly shows Chiripals in poor light. I will keep that in perspective. I hope the BBA course is an isolated incident and a case of mistaken process followed by the college management(or is it wishful thinking on my part ) . I see there are couple of AICTE approved courses run by them. Also their academic leadership seems to be separate and I am not sure how much the Chiripals are involved in the decision making process. For now I will give them the benefit of the doubt. Having said that, I remember Buffet’s quote - “There is never a single cockroach in the kitchen” and will certainly watch out for any such ethical issues related to Chiripal group in the future. Couple of such incidents in the future - I will certainly not hesitate to move away from this business.
I don’t consider pharma as a risky sector as it is not cyclical in nature.
My theory is to keep less than 30% holding in cyclical sectors like cement, sugar, textile, aquaculture.
and pick remaining 60% from sectors which align with India’s long term growth story like agrochemical, consumer goods, auto/auto-ancillaries, hfc, pharma
I am thinking of decreasing my textile exposure more so on this news
I have just started looking at it today and have been reading the discussion here and at other places on internet,
From which I understand and as already pointed out they are mass player and not premium players. They export to countries like Africa Bangladesh and Latin America and do not have any top names as direct clients but only indirect ones - which makes me wonder about the quality of product - as quality brings in premium pricing. In absence of it will they be able to charge higher margin?
Also I fail to under why the price is still @ 130 if marquee investors are already invested. I mean it made a high of 174 and came back to 135.
This makes me even more curious and wonder if the interest in textiles faded already, when I see welspun syntax when Ashish Kacholia invested and today’s price are almost same…
Also no detail information about Polus Global on Internet. Strange?
Guys,we have been dealing in denim since denim started in India .We have been amongst foremost distributors of denim.Almost 20-22 years since we are in it.We have never hold any single shares of any textile stocks with specific reasons of bad quality mgmts they r not at all for shareholders ,As on today the margins have eroded like anything and no point talking about any denim mills in the country whosoever it may be. Cost of making denim has sincerely gone down,lots of local players has started making it. Export oriented units in the country with ethical practices are Arvind ,Raymond’s and Mafatlal.Rest are extremely doubtful and u will see all the shares related to denim to like a falling knife
?? @harshil - well, this is too blanket an approach, and I think against the facts. Why do you say so when textile stocks have been amongst the best wealth creators in last 3 years?
Yes there are always bad apples, but they are picked up and thrown out and don;t stay in the basket for long. I feel there are a handful other mid-sized players who are playing their cards quite well.
Harshil, it will be helpful if you can share and expand bit more about the outlook of denim market in India. I personally seek your views on another denim player Suryalakshmi.
Harshil bhai thanks for sharing your on the ground experience. Very valuable. Most discussion is armchair thinking here, which is helpful, but such on the ground insight is most helpful!
From what I can gather, the promoters have basically pledged all their holdings.(https://www.screener.in/company/NDL/). This is a big cause for concern for me.
On the face of it, NDL seems considerably undervalued for a top denim player which claims 10% market cap (although i doubt this number very much). Growth in debt (debt/equity of 1.8 now) is another major concern. Form the comments above, its seems that this excessive borrowing is to exploit the subsidies provided.
However, could someone explain why the promoters have pledged nearly 27% of their holdings? And, who is buying this stake?g
Disc: Took up a 5% exposure last year. Views might be biased.
Hey Keval… I would just like u all to dig more deeper facts as well as what did the promoters actually did in other business… There was clothing brand which they used to run ,closed down few years back,till date distributors are awaiting for their remaining payments.Facts matter at the end of day.Most important thing Is ,there any business in the country which calls up the distributor and tells them that we will give u credit period of 60 days.Why should any corporate give credit periods if they are so good ?
As far as pledging is considered ,if they are so big what is the need to pledge ? Please try to find out the moat in the business ,If at all u find it ?
The big draw for me is increased capacity, excellent profits over the last five years, and low valuations in the denim segment that is set to grow at at least at 15% CAGR.
Industry estimates put the current domestic consumption of denim at between 700-800 MMPA, while 200-300 million metres are exported. Assuming the domestic market grows at a compounded annual growth rate of 15-18 per cent (the current growth rate), that demand would reach 2 billion metres by 2020. It has not been doing great for now but demand should scale with above numbers. The good part is Capacity expansion has completed.
Nandan Denim raising 100 crores through warrants route convertible at Rs 200. Current price at 143. Upside potential of 40% from current levels. Promotor equity dilution from 58% to 52℅ over the course of warrants maturity. In last 6 months, promotor stake has come down from 61℅ to 58℅ and it may come down further at maturity of warrants.
Reason for warrants: Working Capital requirements and Corporate action. Corporate action part is still not clear.
Holding it
Disc: Invested. No recommendations. Please do your due diligence.
They did this a year back also…They brought polus globus last time…and this time someone else…the company has got TUF benefit for capex…it has internal accruals…so why does it need more capital…because they are also not doing any additional capex…
It’s a textile business…in that the management has a proven bad name…think about this…they might be bringing their black money back in india…converting them white by holding for one year…
I have met both the management and the IR of the company…IR is a marketing agency trust me…and for management you can do some Google…
Purely sharing my views…please take your own decision…
) . I see there are couple of AICTE approved courses run by them. Also their academic leadership seems to be separate and I am not sure how much the Chiripals are involved in the decision making process. For now I will give them the benefit of the doubt. Having said that, I remember Buffet’s quote - “There is never a single cockroach in the kitchen” and will certainly watch out for any such ethical issues related to Chiripal group in the future. Couple of such incidents in the future - I will certainly not hesitate to move away from this business.