Krishna Karwa Moneycontrol Research
Textile major Trident reported a disappointing set of numbers for the September quarter, as can be seen from the table below:-
A flat sales growth quarter-on-quarter (QoQ) and year-on-year (YoY), coupled with weak gross margins, dented Trident’s operating profits and bottom-line for the quarter.
Underperformance of the textile segment (that constitutes 80-85 percent of the company’s revenue) was the key cause for the decline, as the segment’s margins shrunk due to adverse exchange rate movements and narrowing spreads in yarn.
The paper and chemicals segment, however, reported healthy earnings before interest and taxes (EBIT) margins despite a degrowth in turnover.
Furthermore, the company repaid Rs 343 crore of debt during the quarter, thereby trimming finance costs.
Future plans
Going forward, Trident’s operational turnaround will be predominantly driven by the extent and pace with which capacity utilisations at its plants scale up. The company’s plans on this front are as under:-
To capitalise on the margin-accretive potential of the ‘Copier’ branded papers, Trident, the only wheat straw-based paper manufacturer in India and the largest across the globe, intends to increase the contribution of the same to the paper segment’s total revenues (from the current level of approximately 60 percent). This will be undertaken gradually through higher capacity allocations (to the tune of 250 – 275 tons per day) and efforts to seek better realisations.
The company is expected to retire high-cost long-term debt of Rs 108 crore in H2FY18 in a bid to reduce its debt-equity ratio from the present level of 0.82x, consequently leading to better earnings visibility.
A few roadblocks
Though Trident's growth prospects seem good, the company's cash flows from the US market (its biggest top-line contributor) are likely to remain volatile because of rupee’s appreciation and yuan depreciation vis-à-vis the US dollar in recent times, financial weaknesses observed in case of some American retailers, and a high degree of competitive intensity in the region.
Fluctuations in cotton prices, geographical concentration risks (mainly in connection with North America), and low pricing power in traditional product categories are some of the other risks that warrant attention.
Valuation
With the conclusion of expansion capex cycle and backward integration (yarn) processes, going forward, a considerable degree of Trident’s success will hinge on the company’s ability to make its bed linen segment EBITDA positive by the end of this fiscal. Introduction of value-added product variants (by virtue of a higher/finer yarn count), which fetch more realisations per unit without requiring supplementary investments, will have a pivotal role to play in this regard.
An uptick in utilisation levels at the bath linen manufacturing facility could aid the company’s top-line growth, too, while simultaneously being advantageous in terms of operating leverage benefits (since the yarn will be entirely sourced captively).
At 9.3x FY19 projected earnings, the stock's pricing appears to offer some valuation comfort to investors.
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