Stock Review: Vardhman Textiles

 

Cheap valuations, yarn realisations, a consistent dividend-paying record and a low debt weave in big bucks for Vardhman Textiles

 

VARDHMAN Textiles offers favourable investment opportunity at its current market price of 253 as attractive valuations, increasing contribution of fabric business, growth in Indian textile industry, and rising demand are the major positives.

BUSINESS:

Vardhman Textiles is an integrated textile producer that is involved in spinning yarns, sewing threads, and making fabric. The company has recently forayed into garment manufacturing and has entered into a joint venture with Japan's Nisshinbo Textile for it. Yarn business contributes over 60% to Vardhman's total revenue, followed by fabric and thread manufacturing. The company currently has a capacity of over 800,000 spindles.

GROWTH DRIVERS:

The recovery in the Indian textiles industry and capacity expansion undertaken by most textiles companies will boost demand for yarn and fabrics and drive growth for Vardhman. The company will also benefit from rise in demand for Indian yarn after Chinese yarn prices have moved up. Also, the rise in spread between cotton and cotton yarn is likely to boost growth for the company, going forward. The spread between cotton and cotton yarn is currently at 70 per kg, which was 59 per kg during the cotton season 2008-09 (October-September).

   Increasing revenue from fabric division amid rise in disposable incomes with the Indian middle-class is also likely to boost growth for Vardhman in coming months. The fabric division is seen contributing over 10% to the company's margins in the coming quarter compared with 7% currently.

   Another factor that is seen working in favour of Vardhman is its proven ability to pay off debt better than its peers. Its debtto-EBDITA ratio as of FY10 was 3.7, compared with Arvind Ltd's 4.6 and Alok Industries' 6.6.

FINANCIALS:

In October-December quarter, the company posted net profit of
135 crore, a growth of 183% year-onyear. Its net sales grew 42% year-on-year to 996 crore.

   The company's operating profit margin has improved to 22% in FY10 from 18% in FY06. As of FY10, the company had consolidated debt of 2,643 crore. It has a debt to equity ratio of 1.48.

VALUATION:

On the valuation front, the company is trading at a price-to-earnings multiple of four times. This is better than its immediate peers such as Arvind Limited and Alok Industries, which are trading at price-to-earnings multiples of 10 and 12 times, respectively. Investors should buy into the company's stock at current price of 253.