Q4 results are amazing … Any thoughts
I believe Nitin at this point is not a proven investment bet and the foundation of this argument based on two parameters i have noted from the Q4 financial report -
- debts as at the year end of nearly 850 Crore and
- the relatively inefficient asset usage - turn over for the full year is about 1.5 times the value of fixed assets.
Note that we are on a commodity upcycle and during these times companies like Nitin are likely to perform well(they usually keep inventory required for 90 days which helps them realize better price for finished products in an inflationary market) - even after such added tail winds, the total real cash they could generate from business during Q4 2021 is about 88 Crore(PAT+ Depreciation). The full year cash flow expected for 2022 is about 360 Crore at best(i’m assuming that the current liabilities & assets would remain at the same level going forward, with no further investment into fixed assets
and further assuming the commodity upcycle remain and the company is able to perform at Q4 2021 levels consistently). Even after this best case scenario the net debt on book will remain at about 500 Crore at the end of 2022( and now the assets are already 2 years old). Company will need to invest further into assets during Year 3 and 4 which will again have a negative cash flow impact.
The management will be able to generate real value for shareholders only once they prove its ability to consistently grow its Revenue and EPS and start paying back its shareholders via meaningful dividends or buy backs. I believe a prudent investor should keep watching the performance quarter after quarter and buy in an SIP mode once the parameters are at least consistent/ starts improving. We will know this time next year if this story is actually worth out time and effort.
By the way, one positive I have observed is the quality of the promotors. Both R. L. Nolkha and Dinesh Nolkha are through professionals and very well informed about the market.
The current stock price is significantly discounted due to the uncertainties as metioned above and the single biggest threat is a fall in realization(due to turn in commodity cycle/ demand drop) which negatively impact the profitability and cash flow.
I believe the opportunity size is big and this one is definitely a potential multi bagger - but if you ask me whether i would invest today - my answer is a definite NO.
AJ
Disclosure: Not invested. Tracking. Assume that my views are biased and this one is certainly not an investment advice.
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The company has an outstanding debt of 864 crores as of Q4’21. The company had a debt of 1040 crores as of April’20. Company has a habit of taking very huge debt to finance expansions. As debt seems to be the biggest risk, I just took a look at the company’s debts.
Company had a term loan of 753 crores and working capital loan of 286 crore as of April 20. In Q4 21 concall company told that the interest for term loan for capex is around 4 % and for working capital, its around 7.5%. The overall cost will be around 6.5%. Inorder to get the full benefit of low cost of debt the company will be making repayment only as per the repayment schedule. So we cannot expect any accelerated debt repayment. However, cash flows will be utilized for adjustments of working capital limits.
Repayment schedule of debt
Term loans of 9400.00 Lacs in 13 variable Quarterly instalments upto Sept. 2023, 17415.00 Lacs in 20 variable Quarterly instalments upto June 2025, 47500.00 Lacs in 28 variable Quarterly instalments upto June 2027 and 1064.13 lacs in 15 Equal Quarterly instalments upto March 2024( As per AR’20).
This will come to around 134 crores of repayment every year( As per Q4 21 concall company estimated around 110 crores of scheduled repayment every year)
Other key highlights from Q4’concall
1.Yarn price:Cotton price has also gone down by 3%-4% whereas Yarn price has corrected 4%-5%.
2. EBITDA margin: The spinning segment EBITDA hovers around 16%-17% for the company and this should be taken as a benchmark. With value-added products, the company may report higher margins
3. Sales expectation: Sales with current capacity will be around Rs.2000 Cr, and can be achieved in the current year itself, subject to no serious covid related disruptions
4. Capex: The company plans to incur Rs30 crores Capex to add 7,000 spindles and do some de-bottlenecking.
Company also mentioned that the increase in margins in yarn was due to the reduction in capacity in spinning yarn industry in the past few years. ( don’t have data to verify it)
Eventhough the debt is very high, the low cost of debt is definitely soothing. Company’s new capacities coming online when demand/margins are very high is definitely a positive and will take care of short term liquidity requirements as well as debt repayment. OPM margins for Q421 was 20%. Company expects yarn spreads to moderate to 16 % ( which is OPM for current year). Lock down was announced due to covid second wave in Q1’22 in most of the states, however with company generating about 50 to 60 % from exports may do better than many other sectors. Also it is to be noted that overall yarn exports have improved by about 33 % in April- May period in comparison with the same period in FY’19. However, export of RMG of all textiles has gone down by around 13 % in the above mentioned period. This may translate to lower domestic sales for the company.
Key risks
Company is expanding capacities taking huge debt every few years. Eventhough capacity expansion is required to increase revenue, as there is no way to increase revenue to increase revenue as company reaches optimum utilization, however it may prove disastrous for the company if the company after expansion gets caught up in the other end of the cycle. The management’s experience is comforting. The company went into CDR in 2009 June after the recession. But the company made a voluntary exit out of CDR in 2012 and was able to stay out of major liquidity issues since.
Low cost of debt ( due to TUFS and other incentives ) and increased margins may attract new players to the yarn sector thereby moderating margins.
There are some reports showing study/ probe on cotton yarn prices/ cartelization. Any adverse govt direction can be a negative
Discl: Invested and biased. Not a recommendation, Please do your diligence
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At your mentioned run rate cash profit will be half the market cap of the company which I find attractive
May be even higher, but the company has the advantage of very low cost of debt. As long as the company is able to keep repaying debt it may not be a problem
The company was able to reach optimum utilization only in Q4 last year. So I expect tye turnover to improve this year.
I also agree totally to it. Instead of jumping into expansion every few years whenever they reach optimum utilization, they can go for a buyback or so.
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Will the recently announced textile PLI scheme have a positive impact on the company?
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Two Interesting developments expected during FY 21-22 beyond the achievement of targeted sales & PLI from transcript:-
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Debottlenecking process initiated; additional 7,296 spindles and other balancing equipment’s will be operational in Q2FY22 and will add approx. 4% of additional production capacity.
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Company expects to repay debt to around ₹ 250 Cr. appx. instead of regular yearly reduction of ₹ 130 Cr. appx.
Disc:- Invested. Not an reg. advisor. Due your own diligence.
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Promoter Buying from Open Market.
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From Presentation
Reduced debt by Rs. 227 crores during H1FY22 from March-21.
Understanding Financial Impact
Amount repaid in H-1FY 22 may reduce interest cost of ₹ 16 Cr. on annual Basis. Further expect reduction in interest cost from the debt repayments in H2 FY 22.
Disc:- Invested. Not an reg. advisor. Due your own diligence.
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Dear @rahulsports how you compare business of nitin spinners with the spinning business of Ghcl in terms of core competencies?
Notes from Exchange Filings
Capital Expenditure of Rs. 950.00 Crores on expansion project.
Proposed Capacity Addition
- Spinning 1.51 Lakh equivalent Spindles(approx.)
- Knitted Fabrics 2500 MI/PA (approx.)
- Woven fabrics 10 Million Mtrs/PA (approx)
Understanding the Needs of Expasnsion
All related capacities are currently utilized at 85% to 95%.
Disc:- Invested. Not an reg. advisor. Due your own diligence.
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Not sure if I understood your question. But here’s a comparison
GHCL –
- HT business has seen a degrowth in last 4 years ; had 35% contribution to topline
- Low ROCE; low margin business
- Divested the business to Indo Count recently, as you would be aware. To enable more focus on their strategic growth pillar- Chemical business
Nitin Spinners :
- Spinning business has grown by CAGR of 8 to 9% in last 4 years
- Margin in range of 14 to 16%
- Revenue contribution around 65% - its reducing with more focus on value added products ; higher contribution to revenue from woven & knitted fabrics
Not a like to like comparison IMO.
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Looking at the last half year results and the way the company operation is handled, i see its a big positive for the company.
- Management has been able to prove yet again the mettle and maneuver the company out of the problems of pandemic and record strong growth in H1 2022.
- Reduction in debt more than expected in H1 indicates the ability of management (to execute the big projects and) handle the debt wisely. A year back from now, there were huge doubts whether the company will be able to come out the situation at that time or not and may have to face CDR. I do not expect company to go into CDR anytime soon looking at H1 performance.
- Company is expected to give another good performance in H2 and reduction of debt.
However there are some concerns about the new CAPEX that company has announced recently 900Cr. Seem company will be raising another 650Cr debt + 300Cr internal accruals. This puts company at a stage for another long path of having to maneuver the company for a big, challenging project execution with huge debt under the belly. Any unexpected situation may put the company’s ability to replay debt to big risk. The rating update from CARE here, though has reaffirmed the existing rating, has described the risk quite well.
Further there are concerns of raw material cost surge in short term. The textile industry dealing with the record cotton prices for last 1 year. Though the prices are expected to soften later this year, it is still at record highs.
Having said this, i see NSL is proving to be a turnaround story from the situation of the last year. The management is quite strong and i think their decision for the proposed expansion seems be well envisaged coming at the time when the company is coming out of the blues of pandemic, this could be the right time for the CAPEX as per management. The recent addition of the stake by DIIs and FIIs shows the company performance expected to improve here on. Management has added too which also tells they are confident of the performance going forward. I would not be surprised if the company is able to do this proposed CAPEX with same level of debt as existing in next couple of quarters.
Disc: Not invested but tracking and planning for taking position in small scale.
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Notes Investor Presentation Q-3 FY 2021-22
Capacity Spinning and Woven Fabrics to Increase by 25% by FY 24. (5th Page of Slide)
Gross Margin increase by 4.6% on 9 Month Basis.(9th page of Slide)
Dis: Invested. No Advise.
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70% of revenue is from yarn business…presently yarn prices are trading higher… if it normalises and EBIDTA comes to industry historical benchmark of 15-17%, Nitin’s revenue would be 1900-2200 cr with existing capacity, EBIDTA would be 300-340 cr and PAT 130-150 cr…Addl capacity will increase 30% revenue ie 700 cr and EBIDTA by 112 cr… Have to wait and watch the rate at which they rise the debit… With 70-80 cr interest and 30 -40 cr depreciation, not likely to add anything meaningful to bottom…
Your views are expected…
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Not certain about returning back to industry benchmark but also benefit of competitive cost advantage and economies of scale will help.
Notes from the Q3 FY 22 call:
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Seeing strong demand in both Domestic & International markets & widening the existing product portfolio
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Confident of growth momentum to continue, as China + one strategy is clearly working.
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Cotton prices expected to stay higher as they are, leading to higher yarn prices, helping the company to get much higher revenue & strong margins. Factors:
• All spinning yarn capacities running at 100%; consumption is increasing
• Bangladesh, Vietnam are all starved of yarn – and they will be buying. -
Higher Prices likely to sustain? - will come to know only by June this year (cotton crop). Inflationary trend is prevailing currently – which includes cotton also…
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Decline in Knitted Fabric segment YoY mainly due to last year being exceptionally well, when Knitted Fabric unit operated at 100% utilization, while the normal utilization for this segment remains at 75-80 pct. (never runs at 100%) . So no decline in demand per se
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Spinning business usually has avg margin of 16 to 18%. In upcycle its – 25% . Down cycle – 12 - 14%.
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Avg margin should be 18 to 20% - sustainable for next 1-2 years…
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Capex of 950 crores to expand capacity across all three segments: Spinning, Knitted Fabric & Woven Fabric, the same is expected to complete by Sep '23.
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Land for proposed capex –already available. Procured some land in the existing facility.
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Did some debottlenecking last year. This year also we will be doing some debottlenecking to add some capacity
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Long term debt 525 cr by Mar 2022…
• Long term debt in next 18 months would be around 900 cr. 200 cr debt repayment will happen + 600 cr new debt likely to come in
• Short term debt requirement: 225 cr at the end of this year. 400 cr at the end of next year
Disc: Invested
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Agreed till Q4 no looking back.
Points are put in logical way
Does anyone know if Nitin Spinners is working to/ participating in the PLI scheme announced by GOI? Nitin Spinners is anyways doing the 950Cr CAPEX, so wondering this can be done through the PLI scheme to reap the benefits of the same. If anyone has any info on this topic (any commentary from management, any news …) can pls. help share? I saw some new articles in recent past with the names of the firms participating in PLI, but could not see NSL name hence trying get info.
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Brilliant Result by Nitin Spinners
Investor Presentation - https://www.bseindia.com/xml-data/corpfiling/AttachLive/e2e799ab-7ad5-4aca-bb95-73488c36c8a4.pdf
- 65% top line increase in FY22 against FY21, The respective increase in Net Profit is 372%
- Company has market cap of ~1,250 Cr, It has repaid debt and interest cost of ~ 350 Cr. with free cash flow just during FY22.
- Expansion planned to increase capacity by 25-30% from current capacity
- Ace investor Dolly Khanna acquired about 4 quarters ago and have been increasing stakes since then
Disc : Initiated position after seeing the Q4 and FY’22 results
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