Stock Review: NAHAR MILLS

Ludhiana-based Nahar Spinning Mills is in the business of manufacturing yarn and garments. It also makes and exports woollen/cotton hosiery, knit wear, woollen textiles. and T-shirts Its export markets include Argentina, Brazil, China, Peru and Turkey. More than 88% of the total revenues come from the yarn business, and the rest from garments.

GROWTH DRIVERS

The coming quarters could prove to be quite lucrative for spinning mills. Buyers, including fabrics and garments manufacturers, are holding back orders for now. But consumption is expected to pick up, especially in the third and fourth quarters. Spinning mills companies would also benefit from a bigger cotton crop anticipated this year. Expectations of a further fall in cotton prices due to delay in monsoon should also help. Garments buyers, who have postponed purchases due to high prices and inflation, are unlikely to hold back for long. Currently, cotton (Shankar-6 variety) is trading at 121 per kg, a discount of 28% from a high of 169 per kg in April 2011 It is, therefore, quite likely that by the end of the first half, there is an increase in sales of fabrics and garments as demand pick ups. This is reason enough to buy stocks of spinning mills companies, which are trading at cheaper valuations. Nahar is one of the few spinning mills, which has low debt and attractive valuations. The company has got going on with its expansion plan to install 90,000 spindles this year. It has 40,512 spindles and 360 rotors now. Nahar is thus well-positioned to make big gains from a pick-up in demand.

FINANCIALS

For FY11, the company's net profit more than doubled to 119 crore from 53 crore in the last fiscal. Its net sales grew 25% to 1,391 crore in FY11 against 1,110 crore in FY10. A sharp increase in raw material prices, chiefly cotton which more than doubled in FY11, squeezed earnings.

VALUATIONS

The company trades at a P/E multiple of 2.3 times, while it EPS is at 35. It has a debt to equity ratio of less than 2. This is much better than most of its peers, who have higher debt on their books and are trading at expensive valuations. Most of them have a debt equity ratio of over 2. The company's stock is trading at Rs 82. In the last one year, it has fallen by 17%. Considering these factors, investors can buy the company's stock at its current price.