Nitin Spinners: A good buy despite a disappointing Q1 performance

Krishna Karwa Moneycontrol Research

Nitin Spinners, a cotton yarn and cotton knitted fabric manufacturer, reported disappointing numbers for the first quarter of this fiscal. Though the recently concluded capacity expansion enabled the company’s sales to grow well, it didn’t quite translate to better earnings.

A healthy turnover growth rate of 50 percent in Q1 FY18 compared to the year-ago period is attributable to the operationalisation of the expanded cotton yarn (basic and knitted) and knitted fabric capacities in March 2017. Concurrently, raw material (cotton) procurement/processing costs and overheads increased. The spike in costs led to a decline in the EBITDA margins. This, however, should normalise as the operations stabilise.

Post-expansion, the addition to gross block of fixed assets caused a surge in depreciation. Since the Rs 290-crore plan was largely funded through debt (to the extent of nearly 75 percent), there was a rise in finance costs, too. A higher tax rate resulted in profitability compression.

In accordance with the previously stated investment rationale, despite the softness in the quarter gone by, we reiterate our bullish rating on the stock, which is trading at 9.5x trailing twelve months earnings. Our optimism stems from the following reasons :-

• For the new facilities, the capacity utilization rate is typically low at the time of commissioning. It will gain steam gradually in the coming quarters, before scaling up to the levels at which the pre-expansion manufacturing units operate. Higher sale volumes, coupled with greater emphasis on value-added yarn products (which fetch better realisations vis-à-vis traditional cotton yarn), should boost revenue growth going forward. For the company’s overall financials to change noticeably, it is imperative that operating leverage kicks in as soon as possible.


• Repayment of debt amounting to Rs 70 crore during FY18 will reduce the strain on the company’s profit margins in due course. The benefit of lower interest rates under the Amended Technology Upgradation Fund Scheme (ATUFS) will also continue to be available.


• Inspite of the additional short-term working capital requirements, GST will be a game-changer for organised players like Nitin Spinners in the long-run, particularly because of a sizeable presence of unorganised units at the lower end (yarn manufacturing) of the textile value chain.


• Cotton prices are expected to ease in the current fiscal because of higher acreage across India.


• Presently, GST rates are disadvantageous to synthetic yarn manufacturers as opposed to their cotton yarn counterparts. Perhaps, this may trigger a shift towards the latter, at least for a while.

Weakness owing to the uninspiring performance this time around can, therefore, provide investors a long-term accumulation opportunity.