Krishna KarwaMoneycontrol Research
For Nitin Spinners Ltd (NSL), a Bhilwara-based textile company, growth prospects look bright on the back of capacity additions and sale of high-value products. It manufactures cotton yarn and knitted cotton fabric. Barring a few major players, the USD 108 billion Indian textile industry is made up of numerous small and mid-size companies, NSL being one of them.
Although NSL doesn’t have a unique product line or process, what puts it on the map for investors is its performance potential for the forthcoming years.
Capacity expansion completion
NSL added 72,960 spindles in February 2017 to take its overall spinning capacity from 150,096 (at the start of FY17) to 223,056. As a result, the company’s cotton yarn manufacturing capacity increased from 38,000 tonnes per annum (TPA) at the end of FY16 to 58,500 TPA (including 8,500 TPA allocated to the knitted fabric segment) at the end of the recently concluded fiscal year. This is expected to result in top-line volume growth of 30-40 percent over FY17's annual turnover.
The utilization rate for cotton yarn, which stands at roughly 90 percent at the moment for the company, will scale up gradually to nearly 100 percent by the end of FY18. On the other hand, for knitted fabric, the utilization will remain at 80-85 percent in FY18, similar to the existing level.
Prospective Tailwinds
NSL stands to benefit on the margin front with additional capacity coming on steam. Its per-unit sale price is likely to be higher on the back of management’s emphasis on value-added products like finer count, dyed and melange yarn variants.
These products, which typically contributed no more than 30 percent to the company’s revenues, will bring in over 40 percent of the revenue starting this fiscal.
Consequently, FY18’s peak sales and operating margin are estimated to be in the range of Rs 1100-1200 crore and 16-18 percent, respectively. In FY17, the corresponding figures were Rs 934 crore and 14.3 percent, respectively.
NSL spent Rs 290 crore for upgrading its spinning plant in FY17, of which Rs 215 crore was funded through long-term borrowings under the Technology Upgradation Fund (TUF) Scheme. Under this scheme, the company is eligible to avail cheaper loans at an effective interest rate of about 5-6 percent.
We anticipate the company’s interest coverage to go up from 4.25x in FY17 to 6.3x in FY18. The company aims to repay Rs 70 crore worth of debt this year. This, along with increased savings in finance costs, is likely to improve the profit after tax (PAT) margin of the company from 6.1 percent in the previous fiscal to 7.5 percent in FY18.
As a result, the overall return on net worth could also marginally trek up from 22.3 percent to 23 percent.
Valuation
At 6.7 times FY18 projected earnings, NSL is a good value proposition, given its operational efficiency and profit trajectory.
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