>VARDHMAN TEXTILES LIMITED (TECHNO RESEARCH)

KEY INVESTMENT HIGHLIGHTS: Vardhman Textiles is totally integrated play on textiles with 669000 spindles increasing by 50000 further and 92mn mtrs gray and 51mn mtrs processed fabric capacity increasing by 2mn mtrs further. Presence in entire textile value chain benefits the firm to capture growing domestic and international market. We expect volume improvement with increasing realization to improve bottomline at a CAGR of 21% over next two years.

■ Evolution through consolidation: Vardhman Textiles to be major beneficiary of strong consolidation witnessed in the spinning industry. Wherein, total spinning capacity has increased at a CAGR of 1% over a decade Vardhman was able to increase its capacity at 3.5% CAGR. Capacity expansion of 50000 spindles and 2 mn meters fabric will improve volume
further.

■ Healthy demand to absorb high yarn prices: Improving textile demand outlook, rising raw material cost and reduced yarn inventory levels (3%) in the international market will maintain at current high level. However, healthy demand will be able to absorb high prices. Domestic textile demand growth is expected at 7%. Vardhman to improve its margins in such scenario as yarn contributes 55% of its total sales.

■ Export demand adding spice: We expect Vardhman’s internationalbusiness to increase, which currently contributes around 25%. With China’s cotton production expected to reduce by 9% for 2009-10, we expect increased yarn imports from China and even from neighboring countries like Bangladesh. India is well positioned to cash on this as India’s cotton production is expected to increase 5% in 2009-10.

■ Forward integration to benefit: With forward integration into gray and processed fabric with total capacity of 91mn mtrs and 40mn mtrs respectively increasing by 2mn mtrs Vardhman dominates its presence in entire textile value chain. We expect this business to contribute around 32% to total revenue.

■ Improving profitability and reducing leverage: Improving volume and reducing interest saddle with reducing debt is expected to improve profitability of the company. We expect topline and bottomline to grow at 15% and 21% respectively over FY09-FY11E. The firm holds consolidated debt of Rs2200 cr with Rs450cr cash and Rs250 cr capex plan ahead. Strong free cash flow expected at Rs500cr next year would be able tofulfill capex requirement and bring down debt level at Rs2000cr by FY11E.

CONCERNS:

• Higher than expected increase in raw material prices could dampen the margins of the company.

• Lower than expected demand could dampen growth volume growth of the company.

VALUATION: Vardhman is consistent dividend paying company with positive ROE. With improving profitability’ ROE of the firm is expected to improve further to 15% by FY11E. All the positives are offered at very discount, which makes re-rating of the stock evident. Currently stock is trading at 4.9xFY11E earnings and 4.3xFY11E EBIDTA. We recommend
“BUY” with price target of Rs310.

To read the full report: VARDHMAN TEXTILES