Vardhman Textiles (VTL), for Q2FY19 on a consolidated basis, reported good numbers mainly on account of better operational performance. Ebitda grew 68% y-o-y to Rs 331 crore, with margins expanding by 666 bps to 19.6%.
Vardhman Textiles (VTL), for Q2FY19 on a consolidated basis, reported good numbers mainly on account of better operational performance. Ebitda grew 68% y-o-y to Rs 331 crore, with margins expanding by 666 bps to 19.6%. Strong operational performance was due to the low-cost cotton inventory and benefit of rupee depreciation. Revenue grew 11% to Rs 1,685 crore on the back of good growth across segments (textile up 10% and acrylic fibre up 28%). Good operational performance led to a net profit growth of 48% to Rs 196 crore.
VTL’s ebitda margins witnessed expansion for the third consecutive given the low cost of cotton inventory on books and rupee depreciation benefits in the yarn and fabric segments. There is an expectation of cotton prices being elevated owing to irregular rainfall in cotton producing states like Maharashtra and Gujarat, resulting in lower yields along with higher minimum support price (MSP — Rs 43,000-44,000/candy). Yarn prices have come down given the subdued demand from China.
With VTL’s strategy to increase captive consumption of yarn for its fabric segment, we anticipate better operational performance to continue. We have thus increased the ebitda margin expectation for FY19E/ 20E to 17%/17.3% (vs 16.1%/ 16.3% earlier). As VTL is currently working at near full capacity utilisation, we believe growth in FY19 would be capped and the benefits of the current capacity expansion (Rs 1,400 crore in FY19E/20E) on financial performance could come in by end-FY20E. We believe better cotton-yarn spreads, stability in raw material prices and ramp up in utilisation are key triggers for future growth. At the CMP, VTL trades at 8.1x its FY20E EPS. We maintain our Accumulate rating and value the stock at 10x FY20E EPS, giving a target price of Rs 1,300.
Trade war concerns between US-China and lower demand from China impacted yarn prices. We believe rupee depreciation gains in the fabric segment (where in VTL has 2 months order book and 35-38% is exports) and higher conversion of yarn into fabric could aid ebitda margins (benefit of lower yarn prices). We thus expect ebitda margins of 17%/17.3% in FY19E/20E.