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Vardhman Textile – Review

March 9, 2010

MF Global Securities has initiated Coverage on Vardhman Textile Ltd [VTXL] with a BUY Rating. The investment Rationale behind the call is the deficient cotton production & increase in consumption, will keep cotton price at higher levels & as India has excess production Indian miller who have pricing power can pass on the increasing raw material price to Yarn & Fabric consumer. The rise in production is because of rebound seen in yarn and textile demand. Global yarn inventories are down by 3% in Q2FY10 as compared to previous one. Therefore, we expect yarn prices to remain high at current levels.

Disparity due to consolidation in domestic Spinning capacity and increase in world consumption: We expect this disparity to gradually enable strong players to gain pricing power and consequently margins. VTXL will be one of the biggest beneficiary.

Improved cash flow to deleverage balance sheet:: The current debt on the books is around Rs20bn, which is at a cost of 5% being under TUF scheme. We believe that the VTXL will generate good cash flow, which will enable the company to deleverage its balance sheet. The FCCB issued by company is expected to mature in Feb 2011 the conversion price is Rs 426, we believe that the internal accrual would be sufficient in case of pay off situation, as on march’09 the book value of FCCB stood at Rs 3000mn

Valuation – Conservatively expect sales to grow at CAGR of 7% over FY10E to FY12E and bottom-line by 16% over the same period. At the CMP of Rs 220 the stock is available at 5.3xFY11E earnings and 4.2xFY12E EV/EBIDTA & 6.4xFY11E & 5.5xFY12E Standalone EPS. Over a period of time the other group companies which are getting traction will add value, we have conservatively values the other subsidiary companies at Rs 10-15 per share to VTXL. On that basis, we recommend Buy rating with price target of Rs312

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