>VARDHMAN TEXTILES

Vardhman Textiles’ (Vardhman) Q1FY13 numbers were a mixed bag – revenues came in marginally lower than our expectation but EBITDA and PAT surprised positively. The company reported a robust expansion in operating margins (both sequentially and YoY) led by healthy improvement in realisations (sequentially) and substantial reduction in input costs YoY. The company is on track with expansion plans and is also going ahead with the expansion of 55,000 spindles that it had put on hold. Even in a bleak economic situation, the company is going ahead with the expansion plans as it is unable to cater to the customer demands completely and has, hence, laid out a capital expenditure of | 1,800 crore during FY12-14E. Considering the uncertainty over the profitability scenario in H2FY13E we have not revised our estimates. During FY12- 14E, we expect sales, EBITDA and PAT to grow at a CAGR of 16.0%, 18.4% and 30.0%, respectively. However, the current valuations do not provide comfort. Therefore, we maintain our HOLD rating on the stock.


Operating margins – a positive surprise…
Vardhman’s Q1FY13 revenues remained flat both YoY and QoQ, at | 939.6 crore as against our estimate of | 1,008.2 crore. The yarn segment de-grew 4.6% to | 804.5 crore while the fabric segment grew marginally (up 2.0% YoY) to | 314.8 crore. Operating margins were up 1424 bps YoY to 18.1% as the company had taken a one-time inventory write-off in the corresponding quarter last year.


…but an uncertain H2FY13 prevents change in estimates
Even though the company has positively surprised us on the operating profit front we have not increased our earnings estimates as we are apprehensive about the profitability situation in H2FY13E. With a lower cotton crop expected in cotton season 2012-13, prices of cotton are likely to remain firm or trend upwards, thereby pressuring the profitability.


Uncertain times and a weak past lead to discomfort with valuations 
Vardhman is recovering well from a painful FY11 with demand picking up and also an improvement in margins (due to favourable realisations and input prices). However, we feel the current stock prices factor in the positives and see limited upside from current levels. We maintain our HOLD rating with a target price of | 229 (based on an average arrived at by assigning a multiple of 0.7x FY14E book value and 4.5x FY14E EPS).


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