VARDHMAN Textile

At a P/E of 13.2, the stock is trading well above the average of past 4 years

VARDHMAN Textile, one of the oldest and most-diversified integrated textile manufacturers, leads the textile companies whose stocks have outperformed the Sensex in 2009. While the Sensex gained about 75% in 2009, the M-cap of Vardhman textile has more than tripled in the year. Along with a revival in demand and declining interest cost, the stock also seems to be supported by the recent run on cotton yarn prices. 

   The company produces variety of cotton, polyester and blended yarns, different varieties of popular and specialised fabrics under its textile linked SBUs. Exports accounted for close to 25% of the total revenue in the year ended March 2009. More than one-thirds of its exports came from yarn products, while the rest was accounted for by fabrics. Subsequently, the more than 20% rise in the cotton and yarn prices during the past six months, appears to justify the upswing in its stock price, as investors expect better margins in the quarters to follow. 

   While the revenues growth in the quarter ended September '09 was a reasonable 4%, it followed a healthy gain of 10% in the June '09 quarter, after the previous two dismal quarters. Moreover, in the latest two quarters, the interest and depreciation cost has stabilised, boosting net profitability. On a trailing year basis as well, the past two quarters experienced a decline in interest costs. For the coming two years, the company is not planning any major capex, and hence, expects the debt cycle to peak out by March 2010. 

   Of the two major expansion plans, the company has taken up since early 2008, spinning and processing units are expected to function at their full capacities in the coming quarters. Of these, unutilised capacities — 60,000 spindles are anticipated to be functional by March 2010. Over the next few months, the company further plans to consolidate its huge spinning capacities (7.5 lakh spindles) for raising output.

Production through Vardhman's joint venture with Nisshinbo Textile, Japan that will integrate its fabric business into garments is expected to commence by September 2010. The company plans to hold a 51% stake in this proposed subsidiary. While the operating efficiency and large product portfolio make this company a value buy for long term, currently the stock is trading at a P/E of 13.2, well above the average of 8 for the past four years.