VTM Smallcap Gem in Textile sector

[anandsharp]

Virudhunagar Textile Mills (VTML) was incorporated in 1946, is promoted by Mr T Kannan . Promtors holding is 75%. The company manufactures cotton fabric at its factory in Sulakkarai, Tamil Nadu. https://www.vtmill.com

Sri T Kannan holds the post of Independent Director in TVS Motor Company Limited, and Sundaram Brake Lining Limited. He is the Chairman of Audit committe in Sundaram Brake Lining Limited. And he is the Chairaman of Risk management committee in TVS motor company limited.

VTM’s established position in the grey fabric segment, and its healthy financial risk profile. These strengths are partially offset by exposure to risks stemming from intense competition and volatility in cotton prices.

Established position in the grey fabric industry: Backed by a six-decade-long presence and established market position in the cotton fabric industry, the company caters to an extensive clientele. It derives around 60% of revenue from the local market, and the balance 40% from the export market. The favorable location provides access to yarn from neighboring districts of Tamilnadu.

Healthy financial risk profile: Financial risk profile is marked by healthy gearing and debt protection metrics. Total outside liabilities to tangible net worth ratio has been comfortable at 0.19 time as on March 31, 2020 and less than one time over the five fiscals through March 2020.
It’s almost debt free company

Company is sustaining operating profitability.

Company is consistent dividend payee.

Company is continuous buying fixed asset and investing in mutual fund by using free cash flow. Total Investment 85 cr. And getting income as other income.

Modernisation and Upgradation: Company has invested 13.12 crore for installing new looms and accessories. The company’s plant and equipments are up to date with latest technology.

Company mcap is around 110 crore and book value is around 55. Company current market price is around 28. It’s debt free company. It’s undervalued company in textile sector and steady growth compunder.

Disclosure: Invested

Risk:
Exposure to risks from volatility in cotton prices and intense competition: Cost of cotton yarn accounts for around 65% of total production cost. Though the company maintains raw material stock for 30-60 days, and cotton prices may remain volatile, ability to pass on the higher input cost to customers depends on the global demand and competition scenario. In addition, the company faces intense competition from various players in the industry and shall continue to constrain its business risk profile.

[jyothi]

Did this company not peak in 2014 with highest sales, OPM and other parameters? Can you please explain what has changed in company’s favor?

[anandsharp]

Most of Textiles companies have peak out in that time frame. You will find same topline for most of textile companies. It happened because most of business gone to Bangladesh and other neighbour countries and Indian textile industry suffered a lot. Now there is good export demand and cotton prices surged. seeing good momentum and demand in Indian textile sector. expecting good quarterly result from textile companies.

[anandsharp]

Yesterday loyal textile posted superb result. it has also same topline since many year but stocks outperform the market. check vardhman textile topline.
Attaching loyal textile Annual consolidated figures

[jyothi]

Following up with your post, because I want to invest in this sector. Trying to find a tailwind and reasons for the tailwind, could not see any. Appreciate your inputs

[anandsharp]

Actually mainy companies did capex in last few year and had huge debt e.g. see nitin spinner, deepak spinner, kpr mills etc. Now cotton prices are goin up and these companies are sitting on good inventory. Also fetching good margin from export market. Textile companies have been paying debt since few quarters and interest cost burden coming down.

[jyothi]

Thanks very much for responding patiently, I will do some research and may be invest if things look good

[ankit_purohit]

Thanks for the above analysis. I ,myself have been following this company due to re-emergence of growth in textile sector. I had a few questions regarding the company

1. The clientele of the company
2. It’s CSR section of AR-2020 shows it’s intended CSR transaction Rs700 for the enhance of infrastructure of the Thiagarajar College of Engineering of which Rs 28 lacs have already been appropriated. Isn’t it related to the promoter? And if yes, doesn’t this raise a red flag.

[LarryWink]

anyone still tracking this ?

[Kalp_Jain]

Hi, the results have been impressive, is this a one-off, or is this the new normal?

[akash8844]

VTM Limited after being stagnent for many years is now posting very impressive results. These results don’t seem to be one-off.

VTM were basically into high-quality grey weaving and custom fabric production.

Their entry into super luxury home-textile division for developed market, led by Ms. Sala Kannan ( https://www.linkedin.com/in/sala-kannan-6b7a9a183/ ) is really changing the fortunes for the company. The same is being reflected in their gross margins. All we need to do is just check their annual reports for last 3 years, LinkedIn post of the company and Ms. Kannan, about the development happening (VTM Limited: Leading the Way in Sustainable Home Textiles - The Textile Magazine) (Strategy, Social Impact and Superior Quality: VT Mills thrives under Sala Kannan's Business Mantra - The Textile Magazine), interviews (https://www.youtube.com/watch?v=6ywcXeEvh-Q&pp=ygULdnRtIGxpbWl0ZWQ%3D),

Here we are thinking that this is one-off but the management is quite excited about the future and they are doing large capex to build new state of the art one lakh sft facility.
(https://www.youtube.com/watch?v=3LpJgA2KiTQ&pp=ygULdnRtIGxpbWl0ZWQ%3D).

They are totally vertically integrated for their super luxury eco-friendly home-textile products. Check out their B2C e-commerce pacific-cotton.com

Events like Heimtextil and Bharat Tex have been big blessings for them apart from entry of Ms. Kannan.

Posting an AI generated journey of VTM’s home textile division:

# TM Limited and Pacific Cotton: Chronological Evolution of Sustainable Home Textiles Leadership

## Foundational Phase (2015–2019)

## 2015: Sala Kannan’s Leadership Entry

** March 2015: Sala Kannan joins Thiagarajar Mills (parent company of VTM Limited) as Director, bringing expertise from her economics degrees at the University of Cambridge35.*
** Strategic Vision: Focuses on vertical integration, leveraging the group’s 80-year legacy in spinning and weaving to explore higher-value textile segments34.*

## 2016: Pacific Cotton’s Inception

** January 2016: Sala founds Pacific Cotton as a subsidiary of VTM Limited, targeting luxury home textiles. Initial operations focus on design and small-batch production for niche markets35.*
** Early Strategy: Combines Thiagarajar Mills’ fabric expertise with eco-conscious materials like organic cotton and bamboo, testing prototypes with European buyers4.*

## Growth Phase (2020–2022)

## 2020: Post-COVID Pivot to Home Textiles

** Market Opportunity: Identifies surging demand for sustainable home textiles during the pandemic. VTM Limited shifts focus from apparel to home textiles, capitalizing on eco-conscious consumer trends14.*
** Operational Integration: Begins processing gray fabric from Thiagarajar Mills’ spinning units into finished home textiles at partner facilities, reducing reliance on external suppliers14.*

## 2021: Heimtextil Frankfurt Breakthrough

** Global Debut: Pacific Cotton showcases its inaugural collection at Heimtextil Frankfurt, securing partnerships with U.S. and UK retailers. The “undyed organic cotton” line gains traction for its minimalist aesthetic45.*
** Certifications: Achieves Global Organic Textile Standard (GOTS) and OEKO-TEX certifications, validating chemical-free production claims1.*

## 2022: Infrastructure Expansion

** Madurai Facility Groundbreaking: Initiates construction of a 100,000 sq. ft. LEED-certified plant to consolidate stitching, packaging, and R&D under one roof. Slated for completion in 202414.*
** Revenue Milestone: Pacific Cotton contributes ₹320 crores (19% of VTM’s total revenue), with 68% from U.S. exports of organic bedsheets and duvet covers15.*

## Maturation Phase (2023–2025)

## 2023: Circular Economy Initiatives

** QR Traceability: Partners with Green Story to implement QR codes on products, enabling customers to track carbon footprint and water usage14.*
** Waste Recycling: Launches “ReCotton” program, repurposing 12% of production waste into insulation materials and industrial wipes4.*

## 2024: Leadership & Market Recognition

** Sala Kannan’s Accolades: Featured in The Textile Magazine for blending “family legacy with disruptive sustainability”5. Pacific Cotton’s EBITDA margin reaches 18.7%, outperforming industry averages1.*
** Heimtextil 2024: Debuts tactile luxury fabric line, featuring temperature-regulating Tencel-bamboo blends. Secures $22 million in pre-orders, primarily from EU luxury retailers45.*

## 2025: Capacity Scaling & Diversification

** Facility Commissioning: The Madurai plant becomes operational, boosting production capacity by 40% and reducing lead times from 8 to 5 weeks14.*
** Indian Market Entry: Launches “Pacific Living” sub-brand for domestic consumers, adapting global designs to local preferences like Ayurvedic-dyed bedsheets15.*

## Strategic Pillars of Pacific Cotton’s Success

## 1. Vertical Integration

** Fabric Sourcing: Utilizes Thiagarajar Mills’ GOTS-certified organic cotton yarns, ensuring supply chain control and cost efficiency14.*
** In-House Innovations: Developed proprietary dyeing techniques using neem and turmeric extracts, reducing synthetic chemical use by 92%5.*

## 2. Sustainability-Led Branding

** Carbon Neutrality Pledge: Achieves 70% renewable energy usage via solar farms and wind turbines. Targets 100% by 202614.*
** Compostable Packaging: Shifts to plant-based wrappers, eliminating 28 tons/year of plastic waste1.*

## 3. Leadership & Global Outlook

** Sala’s Cross-Industry Insights: Integrates retail analytics from her prior finance career to optimize inventory turnover (6.2x in 2024 vs. 4.1x in 2021)35.*
** Geographic Diversification: Expands to Australia and UAE, reducing U.S. revenue dependency to 54% in 202414.*

## Challenges & Adaptive Strategies

** Tariff Risks: Mitigates potential U.S. duty hikes (6.7% baseline) via premium pricing and lobbying through CITI (Confederation of Indian Textile Industry)14.*
** Cotton Price Volatility: Maintains 4-month inventory buffers and forward contracts with organic farms in Gujarat5.*

## Conclusion: Redefining Ethical Luxury

From its 2016 origins as a boutique brand to a ₹1,200+ crore export powerhouse, Pacific Cotton exemplifies VTM Limited’s agility in aligning tradition with global sustainability trends. Sala Kannan’s leadership—rooted in technical expertise and ESG pragmatism—positions the company to capture 5–7% of the $42 billion organic home textiles market by 2030. With infrastructure scaling and circular innovations, VTM is poised to cement India’s role as a leader in ethical textile manufacturing.

Apart from all this, company’s balance sheet is super strong is this debt ridden sector, they are zero debt with around 100 crores of cash on the balance sheet and consistently paying dividend.

With all this the company is trading at very cheap valuation despite steep rise recently given the expertise, growth and hunger they have.

Threats of US Tariffs:

Assuming VTM Limited exports organic cotton and 100% organic bedsheets to the US, the tariff rate for HS code 63041910 is 15.9%, as per the US Harmonized Tariff Schedule Harmonized Tariff Schedule. There are no differential tariffs for organic products, posing a challenge given the US market’s importance.

Challenges:

1. Raw material pressure on the margins (however, the increasing proportion of luxury sales can mitigate it somehow)
2. Excessive dependency of one person
3. Degloblisation

Disclaimer: Invested, biased

[akash8844]

@akash8844

Here we are thinking that this is one-off but the management is quite excited about the future and they are doing large capex to build new state of the art one lakh sft facility.
(https://www.youtube.com/watch?v=3LpJgA2KiTQ&pp=ygULdnRtIGxpbWl0ZWQ%3D ).

This is EPFO monthly employees data of VTM Home Textile Division

Huge jump in new employees. Looks like expanded capacity is about to go live.

[ca.namish]

		Dec 24 qtr	Sep 24 qtr	jun 24 qtr	mar 24 qtr	dec 23 qtr	Sep 23 qtr	jun 23 qtr	9 mth dec 24	9 mth dec 23	mar 24 yr
	sales	103.52	73.16	59.14	63.76	51.02	47.23	46.11	235.83	144.19	207.96
	cost of ma	74.33	54.95	39.36	37.65	33.77	30.24	31.56	168.64	95.57	133.23
	change in	-20.95	-13.48	-6.36	3.68	-3.45	-3.71	-2.75	-40.8	-9.93	-6.24
	cogs total	53.38	41.47	33	41.33	30.32	26.53	28.81	127.84	85.64	126.99
	% cogs	52%	57%	56%	65%	59%	56%	62%	54%	59%	61%
	GM %	48%	43%	44%	35%	41%	44%	38%	46%	41%	39%
	emp exp	5.59	5.26	4.27	4.36	3.83	3.82	3.24	15.13	10.9	15.26
		5%	7%	7%	7%	8%	8%	7%	6%	8%	7%
	oth ex	17.72	13.08	13.59	13.93	10.01	8.53	7.42	44.4	25.78	39.71
		17%	18%	23%	22%	20%	18%	16%	19%	18%	19%
	ebitda	26.83	13.35	8.28	4.14	6.86	8.35	6.64	48.46	21.87	26
		26%	18%	14%	6%	13%	18%	14%	21%	15%	13%
	fin	0.35	0.27	0.17	0.28	0.25	0.12	0.28	0.8	0.65	0.94
	dep	2.33	2.31	2.27	1.6	2.08	2.64	2.57	6.92	7.29	8.9
	oth in	-0.51	-2.07	-1.33	-1.51	-1.48	-1.66	-2.65	-3.92	-5.79	-7.31
		2.17	0.51	1.11	0.37	0.85	1.1	0.2	3.8	2.15	2.53
	pbt	24.66	12.84	7.17	3.77	6.01	7.25	6.44	44.66	19.72	23.47
	tax	6.47	3.07	1.94	0.25	1.4	2.22	1.32	11.46	4.96	5.18
	pat	18.19	9.77	5.23	3.52	4.61	5.03	5.12	33.2	14.76	18.29
	tax %	26%	24%	27%	7%	23%	31%	20%	26%	25%	22%

There has been substantial increase in gross margins and that has clearly flown to ebitda margins.. Can anyone guide whether these kind of gross margins are sustainable..

[akash8844]

They were into business of cotton fabric till couple of years ago, increase in margins is largely attributed to VTM’s entry into export of luxury eco-sustainable home textiles products, majorly to the developed market. The division is headed by Ms. Sala Kannan, who actively joined the company only a few years ago. These luxury products command premium pricing , directly boosting gross margins while mitigating raw material volatility.