Buy Nitin Spinners; target of Rs 304: Emkay Global Financial

Emkay Global Financial's research report on Nitin Spinners

We recently interacted with Mr. Dinesh Nolkha (MD) of Nitin Spinners. Following are the key highlights regarding the textile sector at a macro level and update at the company level: Cotton prices easing: Cotton prices (Shankar 6) have corrected from their peak levels of Rs1.1lakh/candy to Rs61,000/candy (implying Rs170/kg), upon arrival of the new crop and lower demand environment. The 10% import duty continues on cotton imports. Cotton-yarn spread normalizing: In contrast to FY22 (~Rs103/kg), spinning mills experienced significantly lower cotton yarn spread in the early part of FY23. In Q3FY23, cotton-yarn spread (~Rs90/kg) has improved compared with H1FY23 (~Rs75/kg), but it continues to hover around ~Rs80/kg in Q4FY23.The current cotton yarn spread (Rs80-90/kg) has reached 2019 levels on absolute basis, albeit margin % is lower, given higher cotton prices. Spinners have a desirable spread of Rs105/kg, given higher project cost and increased cost levels from earlier times. Indian cotton prices vs. international prices: Indian cotton price premium over international cotton slid from ~36% in Q2FY23 to ~24% in Q3FY23. The premium, which had dwindled to almost a single digit in early part of Q4FY23, has inched up, with international cotton prices having further corrected. For Q4FY23, the average premium stands at ~16%.Domestic news, indicating hoarding by farmers to rake in higher profit from cotton, had led to further pricecorrection halting. A higher premium of Indian cotton prices has been hurting spinners, as it makes them less competitive globally. Cotton arrivals in March witnessed an improvement; eventually prices are expected to fall and align with international cotton prices.

Outlook

We maintain our BUY rating with Dec-23 TP of Rs304, based on 8x P/E. We believe the cost pressure with respect to high raw-material cost, freight cost, and differential of Indian cotton over international cotton have turned positive, though (especially international) it remains a major concern.

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