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Monday, October 26, 2009

Vardhman Textiles Ltd:Future growth prospects and outlook

Scripscan:Vardhman Textiles ltd

Story:Vardhman Textiles has three Special Business Units (SBUs), in the business of yarn, fabric and steel manufacturing. Vardhman Threads (VTL) is a 100% owned subsidiary of the company while it also has holdings in three other subsidiaries, namely, Vardhman Yarns and Threads (VYTL), Vardhman Acrylics (VAL) and VMT Spinning Co (VMT).The company produces a variety of cotton, polyester and blended yarns, and different varieties of popular and specialised fabrics under its textile-linked SBUs. Through the steel SBU, it provides OE (Original Equipment) products to various automobile manufacturers.It is a leading manufacturer of sewing as well as specialty threads. Exports accounted for nearly 25% of the total revenue in FY ‘09. More than one-third of the exports came from yarn products while the rest were fromfabrics.The company was implementing two major expansion plans in Madhya Pradesh since early ‘08. While the weaving capacities are onstream, spinning and processing units are expected to function at their full capacities in the coming quarters.Out of this, unutilised capacities of 60,000 spindles may be operational by March ‘10. The company now plans to consolidate its spinning units (7.5 lakh spindles) to raise output.Vardhman is also planning to forward integrate its fabric business, adding garments manufacturing to its portfolio. That would be in a joint venture with Nisshinbo Textile, Japan. The company will hold 51% stake in this subsidiary and production of shirts is expected to commence by September ‘10.In the last four financial years, sales have risen at a compounded annual growth rate (CAGR) of 7%. After two dismal quarters, revenue rose by 10% in the June ‘09 quarter. The profit margins rebounded significantly in the latest quarter due to stabilising interest and depreciation costs.The interest and depreciation costs grew at a CAGR of 21% in the last four years, in line with a compounded growth of 23% in gross block. Theses costs dragged the company’s total profitability even as operating profits grew at a CAGR of 14% during the period.However, for the coming two years, the company is not planning any major capex and hence expects the debt cycle to peak out by March ‘10.The company’s stock has outperformed Sensex in last two months and its m-cap has more than doubled from the start of ‘09. Currently, the stock is trading at a price-to-earnings multiple of 12, which is nearly twice its average for the period ‘02-09.At the current market price of Rs 150, the stock is trading at around 40% discount to its book value. Besides, the return on capital employed for the year ended March ‘09 was 20%, which is higher than Alok Industries’ , an integrated textile company. Given the large product portfolio and operating efficiency, investors could look to buy the stock on dips.

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