Krishna Karwa
Moneycontrol Research
Highlights: - Trident trades at reasonable valuations - Q3 numbers were good across segments - Home textile capacity utilisation is the key monitorable - Cotton costs and currency fluctuations are the main risks
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Trident (stock price: Rs 70.85, market cap: Rs 3,610.48 crore) reported good top-line traction and margin accretion in Q3 FY19. Higher capacity utilisation rates, long-term debt repayment, growing demand for paper products and an undemanding valuation make the stock a worthy pick.
Q3 analysis
Positives
- Sales grew across all segments owing to healthy demand. Bed/bath linen grew 41.7/10.1 percent YoY, respectively
- Overall gross margins expanded mainly due to a good product mix
- Long-term debt reduced from Rs 1,688 crore as on FY18-end to Rs 1,428 crore as on end- Q3FY19
- Higher other income led to improved net profit margins
Negatives - Employee costs and other expenses rose substantially year-on-year (YoY). This caused EBITDA margins to remain flat YoY
Observations
Revenue drivers
- In home textiles, the proximity of branding-cum-distribution teams to the US should aid volume growth
- Innovative value-added products will be launched in the branded bed and bath linen categories
- Paper prices have been on an uptrend because of supply constraints, which should help fetch higher realisations
- Global and domestic prospects in the home textiles market appear promising
Margin drivers
- Net debt (ie. debt minus cash) is likely to reduce further from Rs 2,197 crore as on December 31, 2018
- The management aims to scale up utilisation levels at the bed and bath linen manufacturing facilities to 60-70 percent over the next 2-3 years
- Higher captive utilisation of yarn output for home textiles will reduce dependence on external supplies
- The product mix is shifting gradually in favour of private label brands
- The contribution of high-value ‘Copier’ paper to the paper segment’s sales, which stood at 49 percent in 9MFY19, will increase in due course
Risks
- Adverse currency fluctuations and steep raw material (cotton) prices may impact exports/gross margins, respectively
- Order cancellations or delay in executions thereof (in home textiles) would cause utilisation rates to remain low, thus resulting in lower profitability
- Heavy capex by paper players to add new capacities could lead to moderation in margins because of lower realisations
Outlook
The stock, despite a sharp 34 percent rally from its 52-week low, trades at 8 times its FY21 projected earnings.
Therefore, one shouldn’t overlook this investment opportunity.
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