Gist
CMP ~ 10 Rs. (FV of 10) and market cap. ~ 45 crs.
Nitin Spinners is a mid-sized (450 crs. turnover) cotton yarn manufacturer located in Bhilwara, a textile hub in Rajasthan. It has an installed capacity of ~ 80,000 spindles and 75% of its turnover is from exports (broad based markets). The company had its IPO in 2006 @ 21 Rs.
P&L snapshot
(A) Last 5 years:
| (Crs.) | '09 | '10 | '11 | '12 | '13 |
| Net Sales | 262 | 302 | 411 | 428 | 446 |
| EBIDTA % | 10.3% | 11.6% | 18.5% | 10.5% | 19.7% |
| PBT % | -ve | 0.3% | 2.4% | 0.1% | 8.1% |
| EPS | -ve | 0.2 | 1.5 | 0.1 | 3.1* |
(* - FY'13 EPS is after one-time exceptional expense discussed below. Adjusted EPS without this exceptional item comes to 5.3)
(B) Last 5 quarters:
| (Crs.) | q1'13 | q2'13 | q3'13 | q4'13 | q1'14 |
| Net Sales | 108 | 110 | 111 | 117 | 117 |
| EBIDTA % | 17.1% | 18.9% | 19.7% | 23.2% | 19.8% |
| PBT % | 5.0% | 6.6% | 7.3% | 12.7% | 10.3% |
| EPS | 0.8 | 1.1 | 1.2 | 2.2* | 1.8 |
(* - again, q4'13 is adjusted EPS without exceptional item)
Balance Sheet snapshot
| (Crs.) | '09 | '10 | '11 | '12 | '13 |
| Total debt | 299 | 309 | 284 | 249 | 215 |
| D/E ratio | 4.0 | 3.9 | 3.3 | 2.9 | 2.2 |
| Int. Cover | 1.1 | 2.3 | 3.6 | 2.2 | 3.2 |
Investment Case
Nitin Spinners faced a turbulent phase after the 2008 global crisis and resorted for debt restructuring (CDR) in 2009 due to substantial forex losses. However, in early 2013 the company has been able to voluntarily exit from CDR after paying a recompense amount to its lenders. The company claims that its efforts to successfully turnaround in 3.5 years and voluntarily exit by paying the one-time compensation is a unique feat, and this is also well-documented in CDR related media clips.
Pros
- Company has paid the entire recompense amount of ~ 16 Crs. in 2013, majority of which is shown as exceptional item in q4'13. This will also result in smart reduction in interest cost going ahead.
- Company has paid down close to 100 Crs debt in last 3 years and the D/E picture looks comfy and is improving. The interest coverage in last 2 quarters is in 4+ range.
- It is benefiting from a weak Re regime as exports form a major portion of business. Further, benign cotton prices and firm yarn prices driven by export demand are resulting in healthy operating margins.
- If company can maintain its EPS run-rate of last 2-3 quarters, it can turn out an annual EPS of 6.5-7 Rs., thereby making it ripe for a maiden dividend and cheap on P/E.
- Promoters have augmented their shareholding steadily, not in large numbers, but around 3% in last 3 years.
- Paying down debt and recompense amount can only occur from strong cash-flow generation and reflects positively on the management's outlook and integrity. Paying down debt @ 25-30 Crs per year for a company with MC of 45 Crs looks interesting indeed.
Cons
- Current operating margins are at record levels from a 5-year history, and there's always a risk of cyclical downtrend.
- CDR exit has prompted the company to announce an expansion of doubling its capacity by another 70000 spindles at a capex of 280 Crs (Nitin has been operating at full capacity as is evident from its last 4-5 quarters turnover). That is equivalent to doubling its balance sheet.
Risk Mitigants
- Company would have hopefully learnt from its past CDR experience, and would probably tread cautiously with its new expansion.
- If one reads the ARs, company presentations, PRs etc. of major textile companies like Vardhaman, Sutlej etc. there's a common thread of optimism and positive outlook for Indian textile sector at least till the remaining part of the decade. The main reasons cited are - (i) India regaining its competitiveness on cost and quality parameters vis-a-vis other SE Asian countries, and (ii) China moving out of laborious and low-end work like spinning etc.
Closing remarks
Nitin Spinners is not a growth stock. It's just a turnaround with moderate upsides. I'm not sure if there's a separate thread for distressed/ turnaround cases, but for the time-being found it befitting here.
Disclosure - I do have personal holding in last 6 months around these levels, so my views may be positively biased.
Sharing for the interest of fellow boarders, and inviting counter-views.
Keval
P.S. Sorry about the longish note, just trying max coverage at one shot.