Stock Pick from Textiles

LOW PRICE SCRIP

Here Is Why

• Largest denim manufacturer in India.

• Revenue grew at a CAGR of 24 per cent (FY10-14) as against industry average of 15 per cent.

• Return ratios have improved over the last five years driven by improving asset turnover.

Our recommendation of Nandan Denim Limited is based on the fact that not only is it the largest denim manufacturer in India but also has in place a growth strategy which will take it ahead of the industry curve

Nandan Denim Ltd.: DOING WELL WITH DENIM

This time we are focusing on a company which is engaged in the denim business and had around 10 per cent market share of the Indian denim fabric market at the end of FY14. Its revenue grew at a CAGR of 24 per cent as compared to industry growth of 12-15 per cent over the last five years ending FY14. Its EBITDA and PAT were at Rs 132.7 crore and Rs 39.3 crore for FY14, having grown at five-year CAGR of 23 and 36 per cent respectively, while maintaining stable EBITDA margins of around 14-15 per cent. Its return ratios have improved over the last five years, driven by improving asset turnover while RoCE improved from 9.0 per cent to 14.1 per cent and RoE improved from 9.5 per cent to 19.6 per cent in the last five years.

The company we are talking about is Nandan Denim (NDL), one of the leading players in the denim fabric manufacturing industry for over the last two decades. Denim fabric contributed 93 per cent of the total revenues of the company with the domestic market constituting 91 per cent and the remaining through export at the end of FY14. Its sales volume increased from 35 to 56 million meter per annum (mmpa). Apart from denim fabric, it sells blended cotton fabric, cotton piece dyed fabric, and khakis. NDL has become the largest denim manufacturer in India in terms of installed capacity, ahead of Arvind (108 mmpa) and Aarvee (85 mmpa) after added capacity by 39 to 110 mmpa, most of which was commissioned in Q4 FY14.

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The company plans to undergo backward integration by expanding its spinning capacity from 64 TPD (tonnes per day) to 124 TPD in FY15-16, so as to result in higher operating margins and improved return ratios. During 9M FY15, NDL reported revenue growth by 24.9 per cent to Rs 818.2 crore, its EBITDA grew by 19.1 per cent to Rs 127.9 crore, and PAT grew by 34 per cent to Rs 36.1 crore. The growth in revenue is on account of strengthening its overseas distribution network, which has aided robust export growth in the past couple of quarters (export sales were Rs 114.6 crore in 9M FY15 - more than double of 9M FY14). Additionally, NDL entered the shirting fabric business in January 2014, which has also started contributing to revenues in FY15 to the extent of Rs 98.2 crore in 9M FY15.

The promoters have increased their stake from 58.32 per cent as on March 2014 to 64.94 per cent at the end of March 2015. Meanwhile, the promoters had released 89.5 lakh equity shares representing 19.65 per cent of the total equity that were pledged during the same period. Recently the company has approved the issue of convertible warrants of an amount of Rs 100 crore on a preferential basis for future expansion plans. On the valuation front, NDL is trading at TTM PE ratio of 7.2x with EPS of Rs 10.64. We recommend taking an exposure in the stock with expectation of 25-30 per cent upside in the next one year.