Nandan Denim eyes 6-7% volume growth in FY17

Nandan Denim is in the midst of expanding its capacity -- from 99 million metre per annum (mmpa) to 110 -- which would come on stream in the next three months, the company's president Govind Sharda says.CNBC-TV18 spoke to Sharda after brokerage SBI Capital Markets initiated coverage on the stock, saying that it expects volumes of the company to grow by 8.7 percent CAGR over FY16-FY18e.In the interview, Sharda said the company expects volume to grow at 6-7 percent in FY17. "The company will see higher realisation due to more value added products. The current share of the value added products is expected to be less than 10 percent and realisation is around Rs 135-136 per metre for the denim fabric," said Sharda.Below is the verbatim transcript of Govind Sharda's interview to Reema Tendulkar and Nigel D'Souza on CNBC-TV18.Nigel: SBICAP has come out with a note and they are expecting your volumes to grow by around 8-8.5 percent for the next few years. Could you give us a few details, what is your current operational capacity, when will your adding capacity come on stream because it was due in June and it has been delayed a bit?A: Currently we are operating with a capacity of 99 million meter and another three months we will be operating at 110 million meter. We are also working on building up the spinning capacities for our backward integration. So we expect all this to happen by August and September 2016.As far as denim manufacturing is concerned, yes, you are right we were originally targeting June but we were having some bit of ambitious calculations but now the revised target is that by September end we will be having 110 million capacity. We hope in the current year because the benefit should be available for half of the year, we could be looking at around minimum 5 percent growth in the volume.Reema: Is this 5 percent increase in volumes additional on account of increased our capacity or is that your consolidated FY17 expectations?A: This is because of the addition in the capacity.Reema: So what will be the total volume growth?A: 5 percent due to this additional capacity and there is always scope of around 2-3 percent for the enhanced capacity utilisation. So we can look at around 6-7 percent volume growth. Finally we are working on two strong strategies to have a higher share of a value added fabric and also to have the customer diversity through the export market. Any increase in that would be resulting in a better realisation for the product.Nigel: We wanted to ask you about your value added product as well. Out of your total product mix, how much exactly comes in from your value added products and also you could give us a sense about what is your realisation per meter, what is you are looking like going ahead as well?A: The current share of the value added fabric will be less than 10 percent. The current realisation is hovering around Rs 135-136 a meter for denim fabric and for the shirting fabric because right now we are selling that as unprocessed fabric, the realisation is hovering around Rs 100 a meter.Nigel: So for your value added product, what is the current realisation?A: For the value added fabric, the realisation depends on the demand/supply situation, which could be as low as Rs 100 a meter and as high as Rs 300 a meter. So it is difficult to assign any particular number because it will depend upon the type of the concession that we have with the fabric.Reema: You also spoke about some backward integration should we assume margin expansion for the company in FY17 and if yes, what are the kind of margins you are targeting for the full year?A: Assigning any particular number would be a challenge for me but currently we are sourcing around 45 percent of our yarn requirement from the market and if the entire sourcing happens in-house, the margins which are available is available for the spinners would get shifted to Nandan.Typically every spinner is operating at around 15 percent margin at the EBITDA level. So 15 percent for around 40 percent additional sourcing in-house translates to around 5-6 percent of the additional EBITDA. This is the way I calculated as the back of envelope calculation.Reema: That is the best case if you are able to source all your yarn requirements in-house, realistically what could be the amount you will be able to do with FY17 as well as FY18?A: For FY17, it could typically be around 70 percent and from FY18, it would always be anywhere between 80 percent and 85 percent.Nigel: Wanted to ask you about the export market as well, is it looking bleak, is it improving as of now and also what is the viability, what is the realisation per meter for exports, what is your realisation per meter of domestic?A: From Nandan, we have not been a very regular exporter. So our realisation in the export market would be almost comparable with the domestic market. The market is hot and is picking up at least as far as Nandan goes, we are fighting internally to increase our efficiency and the utilisation percentage so that we can cater to the larger customer base that we have got.Reema: What percentage of your revenues comes from exports?A: Last time we recorded around 14 percent.Reema: What is the kind of growth that you are seeing in the export market?A: We would definitely be looking at almost doubling up the export volume in the current year.