vardhman_textiles_initiatingcoverage

ICICI Securities Limited
Initiating Coverage
March 22, 2011
Rating Matrix
Rating : Add Vardhman Textiles (MAHSPI)
Target : | 267
Target Period : 12-15 months | 257
Potential Upside : 4%

YoY Growth (%)
Set to cash in on increased demand…
(YoY Growth) FY09 FY10E FY11E FY12E Vardhman Textiles, an integrated textile conglomerate, is in a sweet
Net Sales 24.2 13.0 21.8 9.3 spot to benefit from the revival in the textile industry. With the largest
EBITDA 18.6 55.8 30.4 8.8 domestic spindlage, Vardhman is well poised to benefit from the
Net Profit (45.2) 286.3 26.6 6.3 increasing spreads between yarn and cotton prices. A crunch in global
supply of cotton is an added positive. Also, it has incurred majority of
Current & target multiple its capex during FY06-10 and is now ready to reap the benefits thereof.
FY09 FY10 FY11E FY12E We are initiating coverage on Vardhman Textiles with an ADD rating.
PE 5.7 3.0 4.2 3.9 Global supply crunch, increasing spreads augur well for Vardhman
Target PE 19.3 5.0 4.4 4.1
A decline in global cotton output by 6% in cotton season (CS) 2009-10
EV/EBITDA 5.8 4.7 4.7 4.8
(October to September) has led to an increased demand for Indian yarn
Target EV/EBITDA 9.7 6.5 5.4 5.3
(as India is a cotton surplus nation). The spread between cotton and
Price/BV 0.3 0.6 0.8 0.7
cotton yarn prices has increased from | 59/kg in CS08-09 to | 72/kg in
December 2010. Hence, operating margins of Vardhman’s spinning
Stock Data
segment recorded a marked improvement from 14.4% in FY09 to 24.8%
Bloomberg/Reuters code VTEX IN/ VART.BO
as on December 2010. Opening up of a fresh export quota in April 2011
Sensex 17,988
will allow companies to resume yarn exports. We expect Vardhman to
Average volume 30,959 enjoy the benefits at least up to Q1FY12 (post which global prices may
Market Capitalisation 1,633 correct in anticipation of fresh stocks). However, since utilisation rates are
EV 3,315 at decadal highs of greater than 90% the chance of a significant price
52 week H/L 377 / 228 correction in cotton yarn is bleak (refer Exhibit 18).
Equity capital | 63.65 crore
Face value | 10 Key positives: Well poised to cater to demand, comfortably leveraged
Promoter's stake (%) 61.01 Vardhman has incurred a capex of ~| 2,300 crore during FY06-10. While
spinning capacity has increased 1.8x to 8,70,000 spindles, Vardhman has
Comparative return matrix (%) more than doubled its weaving capacity from 432 looms (FY06) to 900
Returns (%) 1m 3m 6m 12m looms currently. Vardhman is, therefore, well poised to capture the
Vardhman Textiles (5.2) (12.4) (17.1) 13.0 increased demand. On the debt front also, Vardhman’s debt to EBITDA
Alok Industries (9.6) (20.4) (3.6) (12.7) levels stand at 3.7x (FY10) being the lowest among its peers.
Arvind (10.0) (18.6) 19.9 50.9
RSWM (12.3) (20.0) (8.0) 36.0
Valuations
Considering swell yarn realisations, a robust demand outlook, the
Price movement
downside risks like marginally softer yarn realisations and lower than
6500 400 estimated offtake in demand, we have arrived at our target price based on
an average reached at by assigning a multiple of 0.65x FY12E book value
6000 350
of | 349 and 4.7x FY12E EPS of | 65.1. We are initiating coverage on the
5500 300 stock with an ADD rating with a target price of | 267.
5000 250 Exhibit 1: Valuation Metrics
FY08 FY09 FY10 FY11E FY12E
4500 200
Net Sales (| crore) 2,387.7 2,965.4 3,350.7 4,081.4 4,460.7
Mar-10 Jun-10 Sep-10 Dec-10
EBITDA (| crore) 381.6 452.4 705.1 919.2 1,000.0
NIFTY Vardhman Textiles Ltd
PBT (| crore) 187.2 129.6 411.3 546.9 581.6
Analyst’s name Net Profit (| crore) 143.0 78.3 302.4 382.9 407.1
Bharat Chhoda EPS (|) 25.2 13.8 53.4 61.2 65.1
bharat.chhoda@icicisecurities.com PE (x) 6.1 5.7 3.0 4.2 3.9

Dhvani Modi PBV (x) 0.7 0.3 0.6 0.8 0.7
dhvani.bavishi@icicisecurities.com@icicisecurities.com EV/EBITDA (x) 8.5 5.8 4.7 4.7 4.8
ROCE (%) 6.6 5.5 11.0 14.1 13.2
RONW (%) 11.8 5.9 20.2 21.8 19.9
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research


Shareholding pattern (Q3FY11) Company background
Shareholder Holding (%) Vardhman Textiles Ltd (Vardhman) (earlier known as Mahavir Spinning) is
Promoters 61.0 part of the Vardhman Group, a large textile conglomerate with a presence
Institutional Investors 23.1 across the textile value chain. Vardhman has evolved through history
General Public 15.9 from a small beginning in 1965 into a modern textile major under the
dynamic leadership of its chairman SP Oswal.
FII & DII holding trend (%)
The Vardhman Group has a turnover of over $800 million and a workforce
80
of 25,000 employees. The group has over 24 manufacturing facilities
67 67 67
61 spread across five states in India. The group has one of the largest
60
spinning capacity in India (8,70,000 spindles) and is among the largest
40 domestic yarn producers with a market share of 3.5%.
23
20 13 12 11

0
Q3FY11 Q2FY11 Q1FY11 Q4FY10

Promoters Institutional investors

Exhibit 2: Group structure

Vardhman Holdings
Ltd (VHL)

0.75% stake 26.66% stake

Vardhman Textiles Ltd
(VTEX)

Business: Yarn, Fabric,
Steel

Vardhman Yarns & Vardhman Acrylics Vardhman Spinning VTL Investments Ltd
Threads Ltd Ltd Co Ltd

Stake: 51% Stake: 59% Stake: 73% Stake: 100%

Business: RMG/ Business: Acrylic Business: 100% Business: NBFC
Industrial/ Speciality Staple Fibre cotton yarn
Threads


Page 2


Product profile
Vardhman, a fully integrated textile player, is present across the textile
value chain ranging from yarns, threads, fibre to fabrics and garments.
Vardhman, a company with the largest domestic Exhibit 3: Product mix
spindlage, derives a major portion of its revenues from the
spinning segment 3,500
185
3,000 114 255
288 385
2,500 7
344
326 811
2,000 302

| crore
322 687
312
1,500 450
413
1,000
1,532 1,695
1,126 1,281
500
-
FY07 FY08 FY09 FY10

Yarn Fabric Sewing Thread Steel Fibre


Yarns
From a humble beginning of 14,000 spindles, Vardhman today has the
largest domestic spinning capacity of over 8,70,000 spindles. The
company has technical tie-ups with world leaders from Japan and Korea.
Vardhman is one of the largest cotton yarn exporters from India and
accounts for ~5% of the total cotton yarn exported. Vardhman offers the
widest range of specialised greige and dyed yarns in cotton, polyester,
acrylic and varieties of blends. It also offers value-added products like
organic cotton, melange, lycra, ultra yarns (contamination controlled),
gassed mercerised, super fine yarns and fancy yarns for hand knitting.

Exhibit 4: Vardhman’s spinning capacity Exhibit 5: India’s organised spinning capacity

1.00 0.87 50.0
0.74 38.3
0.68 0.68 34.0 33.1 32.0 34.7 36.6 36.8
0.80 40.0 31.2 31.2 31.1 33.3
0.54
0.47 0.48
In m illion

In m illion

0.60 30.0
0.31 0.31
0.40 0.21 0.21 0.21 0.24 20.0
0.20 10.0
- -
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

Spindles (nos) Spindles (nos)

Source: Company, ICICIdirect.com Research Source: Textile Commissioner’s Office, ICICIdirect.com Research

Over the years, Vardhman has continuously added spinning capacities to
meet the increasing demand. It has more than doubled the spinning
capacity from FY05 to FY10. In years of a slowdown also, the company
has invested in capacity expansion to cater to the demand in the years to
come.

Page 3


In this segment, the company has launched quite a few variants and also
offers specialised and value-added yarn, which fetches higher
realisations. Some of its latest product offerings include organic cotton
and contamination free yarn.

Fabrics
Taking a further step towards forward integration, the company entered
the fabric business in 1992 and started manufacturing greige
(unprocessed) fabric. It further graduated to manufacture processed fabric
in 1999. Vardhman currently operates with a capacity of 900 looms and 90
million metres of processed fabric.
Vardhman makes fabrics for both tops (shirting) and bottoms
(trousers/pants). Apart from this, it also makes specialised fabrics like yarn
dyed, special white and also finishes fabrics with effect like
teflon/nanocare (which is basically an oil and water repellent). Vardhman
supplies fabrics to leading apparel makers like Tommy Hilfiger, Esprit,
Gap, Louis Philippe, Arrow and the like.

Exhibit 6: Segment-wise fabric sales Exhibit 7: Process-wise sales mix

100
100 4 6 4 7
80 80
41 39 42 38 60
68 65 63
60 60
%

%

40 35 30 31 35 40
20 19 17 19 14 12
14 16 13
6 7 7 4 20 9 15
- 10 11
9 12 10 9
FY07 FY08 FY09 FY10 -
FY07 FY08 FY09 FY10
Brands RMG Exports Distributors
Full Bleached Ready for Dyeing Yarn Dyed Piece Dyed
Buying Houses Other Exports

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Sewing thread
Vardhman entered the sewing thread business in 1982 as a forward
integration to its yarn business. It is the second largest brand of
specialised threads in the country. Vardhman’s product offerings in this
segment include apparel sewing threads, specialty threads, textile craft,
embroidery threads, kite flying threads, tea bags, cosmetic threads and
industrial threads. It currently has four plants in Punjab, Tamil Nadu and
Himachal Pradesh with a total capacity of 33 TPD. In 2002, it entered into
a strategic alliance as a licensee with American & Efird, Inc. US (A&E) for
manufacturing and distribution of A&E branded sewing threads in India. In
2008, it spun off the threads business into a new company (Vardhman
Yarns & Threads Ltd) and entered into a 51:49 joint venture with A&E.

Fibre
In 1999, Vardhman commenced manufacturing of acrylic staple fibre used
in manufacturing of hand knitted yarns, blankets, jerseys, sweaters, saris,
carpets, upholstery, etc. The company’s plants are located in Gujarat with
world class wet spun technology and highly automated, microprocessor
controlled systems with an annual capacity of 18,000 tonnes. The
company’s products are marketed under the brand name Varlan.

Page 4


Steel
In 1972, as part of its diversification strategy Vardhman entered the steel
business and commenced operations with capacity of 35,000 TPA.
Currently, Vardhman has a 1,00,000 TPA of steel melting capacity and a
80,000 TPA rolling mill capacity. Vardhman’s products find usage in
automotive components, forging, ball bearings, piston pins, engineering
applications, railways, defence, etc. Vardhman takes pride in being a
preferred OE supplier to leading OEMs like Tata Motors, Ashok Leyland,
Maruti, Hindustan Motors, Toyota, M&M and Escorts among others.
Vardhman has received shareholders’ and creditors’ approval for the
demerger of the steel business of Vardhman into Vardhman Special
Steels Ltd (VSSL), a wholly owned subsidiary of the company with effect
from January 1, 2011. Further, the Board has also approved the share
entitlement ratio of one fully paid equity share in VSSL for every five
shares held by the shareholder. The record date for the same has been
fixed as March 30, 2011.

Garments
Vardhman has entered into a joint venture with Nisshinbo Textile Inc. to
enter the last leg of the value chain – garment manufacturing. Vardhman
owns 51% in the venture. The company has incurred a capex of | 37
crore funded through equity of | 14 crore and debt of | 23 crore.
The initial capacity is expected to be ~1.2 million pieces and the company
plans to scale this up to 1.8 million pieces by the end of FY12. The unit
has started operations in December 2010 but will be completely
operational by H1FY12. As this segment is still at a nascent stage, we
have not factored the same into our revenue estimates, thus far.

Page 5


Investment Rationale
Indian cotton textile industry well placed versus peers
Due to a bumper cotton crop in India, Indian textile players are in a sweet
spot vis-à-vis their global peers that are required to import cotton from
India. China (the largest cotton producer) is facing issues like high raw
material and labour costs. Also, the appreciation of the Chinese yuan has
made their products relatively expensive. Pakistan also had weather
issues, which have led to a lower cotton output of 2,112 million kg in
CS09-10 as compared to a consumption of 2,400 million kg.

China is not planning to add spinning capacity as costs in China are
increasing and it is becoming increasingly feasible for Chinese players to
gradually move up the textile value chain. As a result, India is likely to be
the largest beneficiary where the number of spindles is likely to increase
from 36.8 million in CS09-10 to 44.3 million in CS14-15E.

Of the three largest global producers of cotton, India is the Exhibit 8: India to benefit from bumper crop in CS09-10E
only country that had a cotton surplus in CS09-10
12,000
9,705
10,000

8,000 6,800
million kg

6,000 4,963
4,252
4,000
2,112 2,400
2,000

0
China India Pakistan

Production Consumption

Source: International Cotton Advisory Committee, ICICIdirect.com Research

Global cotton production has been on a decline for three
Exhibit 9: World cotton production at six year low
years now and has reached the lowest level in six years

9,000 26,791 28,000
26,293 26,049
25,676
7,500 26,000
23,415
million kg
million k g

6,000 24,000
22,084
4,500 20,732 22,000

3,000 20,000

1,500 18,000
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 E

China India USA Pakistan Others Total (RHS)


Global cotton production has been declining for the last three years.
However, rising global cotton prices have resulted in higher area under
cotton production in several major cotton producing countries. In India
alone, the area under cotton cultivation is expected to increase from 10.31
million hectares in CS09-10 to 11.06 million hectares in CS10-11. Also,

Page 6


due to better climatic conditions the yield per hectare is likely to increase
from 467 kg per hectare in CS09-10 to 506 kg per hectare in CS10-11.

Apparel being a discretionary spending item took a beating Exhibit 10: World cotton consumption exceeds production by ~2,300 million kg
during the global economic slowdown. Consequently,
demand for cotton was on a downtrend during that period.
26,450 26,385 30,000
However, with a revival in global economies demand for 24,995 24,378
9,700 23,526 23,410
cotton is projected to increase, going forward. 21,780 25,000
8,200
20,000

million kg
6,700

million kg
15,000
5,200
10,000
3,700
2,200 5,000

700 0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 E

China India USA Pakistan Others Total (RHS)


The recession had eroded demand for textiles and clothing, as global
cotton use fell from 26,450 million kg in CS06-07 to 23,410 million kg in
CS08-09. Global cotton consumption is expected to pick up in CS09-10 on
the back of economic recovery to reach 24,378 million kg. China and India
(accounting for ~60% of the global consumption) are expected to
account for a large part of the increase in world cotton mill use in CS10-
11.
While total global cotton consumption is expected to increase by 4% in
CS09-10 to 24,378 million kg, the growth in Indian cotton consumption is
expected to increase by 6% to 9,705 million kg (from 9,156 million kg in
CS08-09). China is expected to outpace the global and Indian cotton
consumption growth and increase its cotton consumption by 10% to
4,252 million kg in CS09-10.

Global cotton prices touched an all-time high of Exhibit 11: Global cotton prices at all-time high
$2.44/pound in March 2011
Global cotton prices at
3.00
an all time high of
2.50 $2.44 per pound

2.00
$/pound

1.50

1.00

0.50

-
Jun-93
Jun-94
Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10

Source: Bloomberg, ICICIdirect.com Research

In September 2010, global cotton prices crossed the $1/pound mark for
the first time after June 1995 on the back of weak cotton output.
According to The International Cotton Advisory Committee, the increase

Page 7


in output in the current cotton season is likely to be absorbed by the mills.
This has led to a steep increase in cotton prices and they have crossed $2
per pound in March 2011 to touch an all-time high of $2.44 per pound.

Indian textile industry to more than double by 2020
The main drivers of growth are increasing population, Exhibit 12: Indian textile industry
increasing income levels, rapid urbanisation, improving
demographics, higher organised players and increasing
penetration of retailer in small cities

376

| '000 crore 212

122 656
108
72 419
219 246
139

2005 2009 2010 (E) 2015 (E) 2020 (E)
Domestic Exports

Source: Technopak, ICICIdirect.com Research

The domestic textile industry is projected to grow from | 2,46,000 crore in
2010 to | 6,56,000 crore by 2020, translating to a CAGR of 10.5%. The
exports market is expected to be worth | 3,76,000 crore from the current
| 1,22,000 crore, growing at a CAGR of 12%, faster than the domestic
markets. The strong growth in exports is expected on the back of
increased sourcing shift from developed countries to Asia.
The global textile market is reviving after the recent global recession with
increasing consumer demand. In the last five years, the Indian textile
industry has grown by ~10% annually and is expected to grow at a faster
rate driven by domestic consumption.

Cotton balance sheet indicates cotton prices will remain firm
Exhibit 13: Cotton Balance Sheet
In mn bales 2009-10 2010-11
Supply
Opening Stock 7.15 4.05
Crop 29.50 31.20
Imports 0.70 0.50
Total Supply 37.35 35.75
Demand
Mill Consumptin 20.70 23.50
SSI Consumption 2.30 2.00
Non-mill Consumption 2.00 2.00
Exports 8.30 5.50
Total Off-take 33.30 33.00
Carry-over Stock 4.05 2.75

Source: Cotton Association of India, ICICIdirect.com Research

Unlike world cotton production, India witnessed a 2.4% increase in cotton
production in CS09-10. The cotton association expects production in
CS10-11 to increase to 31.2 million bales (1 bale = 170 kg). Due to cotton
prices reaching record highs, the acreage (10.3 million hectare) under

Page 8


cotton cultivation has increased significantly. Despite record production,
inventories are likely to be at a five year low in CS10-11. Also, the quota
for exports in CS10-11 is likely to be lower due to robust domestic
demand. Considering this scenario, the chances of a steep correction in
cotton prices are very bleak.

Rising cotton-yarn spreads
It has been witnessed in the past that spreads in the Exhibit 14: Cotton-yarn spreads - yearly
domestic market have increased in a year where global
consumption is more than production. CS2009-10 has
160 68 80
been one such year. Hence, the chances of significant 63
140 59 59 70
softening of cotton and yarn prices are bleak. 55 55
120 52 60
48
44
| per kg 100 50

| per kg
80 40
135
60 110 121 115 110 120 30
106 103 109
40 76 20
58 66 66 61
47 47 51 54
20 10
0 0
CS-02 CS-03 CS-04 CS-05 CS-06 CS-07 CS-08 CS-09 CS-10

Cotton Prices Yarn Prices Spread (RHS)


Global yarn prices have increased ~60% in the last 18-20 months while
cotton prices have increased only ~20% in the same period. This had a
spiralling effect on the EBITDA margin of yarn manufacturers. Owing to
an extended monsoon, lower output in Pakistan, increased demand from
China and depletion of inventory levels for two consecutive years, cotton
yarn prices are likely to remain firm in CS 2010-11 as well.

Spreads in December have been the highest for this Exhibit 15: Cotton-yarn spreads – monthly
financial year
200 70 71 69 72 80
68
180 62 64
70
160 56 54
60
140
120 50
| per kg

| per kg
100 188 188 40
80 162 170
147 150 154 152 154 30
60 116 124 117
92 106 20
40 79 81 83 83
20 10
- -
Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10

Cotton Prices Yarn Prices Spread (RHS)


Page 9


The average spread for the nine months of the current Exhibit 16: Spreads increase in year following one where consumption exceeds production
fiscal is | 65/kg, thereby reinstating the fact that spreads
increase in a year following one where consumption
30,000 70
exceeds production 68
25,000 65

20,000 59 59 60

million k g

| / kg
15,000 55 52 55 55

10,000 50

5,000 44 45

- 40
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 E

Global Cotton Production Global Cotton Consumption Spreads (RHS)


It has been witnessed in the past that spreads in the domestic market
have increased in a year following the year in which global consumption
is more than the production. As witnessed in 2004-05, spreads increased
from | 55/kg in the previous year to | 68/kg as global cotton consumption
exceeded the production in 2003-04. Similarly, spreads increased in 2008-
09 also. The year 2009-10 too has been one such year and the trend
seems to be continuing. Spreads for December 2010 have touched a high
of | 72/kg. This was evident in the December quarter results for all
spinning companies.
Indian yarn prices are 5-10% lower than international yarn prices.
However, the government has imposed a ban on cotton yarn export
beyond the stipulated 720 million kg and domestic yarn manufacturers
are unable to book fresh orders for yarn exports. Still, companies like
Vardhman have holding capacity and will hold yarn inventories till fresh
quotas are opened in April 2011. This will ensure that margins are
protected, going forward.

Page 10


Demand for cotton yarn to grow, albeit at a slower pace
After declining by 1.7% in 2008-09, the total cotton yarn demand grew by
6% to 3,073 million kg in 2009-10. The growth in 2009-10 was primarily
led by strong domestic demand. Going forward also, demand for cotton
yarn will continue to grow backed by strong domestic demand. The Office
of Textile Commissioner expects the demand for cotton yarn to grow at a
CAGR of 5.1% during 2010-15E.

Continued demand from major export destinations such as Exhibit 17: Cotton yarn demand
China, Bangladesh, Korea and Turkey will drive demand for
Indian cotton yarn 2,500

2,000

1,500
million kg

1,000

500

-
2007-08 2008-09 2009-10E 2010-11E 2011-12E 2012-13E 2013-14E 2014-15E

Domestic Demand Derived Demand Direct yarn exports

Source: Office of Textile Commissioner, ICICIdirect.com Research

Exhibit 18: Demand growth

12 10
9
10 8 8 8
8 6
5 5
6
4 6 6
%

5 5 5
2 4 4

-
(2) 2007-08 2008-09 2009-10(E) 2010-11(E) 2011-12(E) 2012-13(E) 2013-14(E) 2014-15(E)

(4) (2)

Cotton yarn demand growth PFY demand growth


The ratio of cotton yarn price and polyester filament yarn (PFY) price has
been in the range of 1.4-1.6x during 2002-09. The same has gone up to a
historical high of 2.3x in September 2010. Consequently, the demand for
blended yarn will continue to increase at a more rapid pace.

Page 11


Domestic demand for cotton yarn is expected to grow at a Exhibit 19: Cotton yarn demand mix
CAGR of 6.2% during 2010-15E while that of derived and
direct yarn exports is likely to grow at 3.2% and 2.6%,
100
respectively 19 18 17 17
90 20 19 19 17
80
70 22 22 21 21 20 20
25 25
60
50

%
40
30 55 59 60 61 61 62 62
56
20
10
0
2007-08 2008-09 2009-10(E) 2010-11(E) 2011-12(E) 2012-13(E) 2013-14(E) 2014-15(E)

Domestic Demand Derived Demand Direct yarn exports


Utilisation rates to be at decadal high levels
Demand growth and decadal high utilisation levels would Exhibit 20: Spinning capacity addition in India
minimise the pressure on spreads despite the prevailing
42.8 44.3
high cotton prices 45 39.8 41.3 100
40 36.6 36.8 38.3
34.0 33.1 34.7 95
35 32.0 31.2 31.2 31.1 33.3
96
30 94 90
85 92 93
91 92 90 91
In million

25
89 85

%
20 82
15 80
10
78 75
5
74 74 76
0 70
FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

FY13E

FY14E

FY15E
Spindles Capacity Utilisation (RHS)


Considering that the Indian textile industry is likely to double by 2020 and
following demand from the apparels industry, the Indian spinning sector
is likely to increase its capacity from 36.8 million spindles in FY10 to 44.3
million spindles by FY15E. Also, the capacity utilisation rates are likely to
be at decadal high levels at greater than 90%. This augurs well for
spinning companies as in an increasing utilisation rate and growing
demand scenario, pressure on operating margin is likely to be minimal.
In order to meet the future demand the Indian spinning industry would
need an additional ~7.5 million spindles requiring an investment of
| 18,700 crore till FY15E. Also, another | 9,500 crore would be required
for replacement of ~7.5 million old spindles during FY11E-15E.

Page 12


Vardhman - well equipped to capitalise on opportunities
Capacity addition to boost topline growth
Vardhman has incurred a capex of ~| 2,300 crore during FY06-10 and
expanded its spinning capacity by 1.8x to the current 8,70,000 spindles
from 4,77,920 spindles in FY06. On the back of this, revenues from the
spinning segment have increased at a CAGR of 15% during FY06-10. It
has also more than doubled its weaving capacity from 432 looms (FY06)
to 900 looms currently. We expect Vardhman’s spinning segment to
maintain its share in the revenue pie and earn an incremental revenue of
~| 780 crore over FY11-12E, thereby growing at a CAGR of 22% during
FY10-12E. The company has a planned capex of | 1,500 crore over the
next three years. It plans to add another 1,80,000 spindles and 400–600
looms by FY13E. We believe that with the largest domestic spindlage
Vardhman is well poised to further tap the opportunities that lie ahead.

Exhibit 21: Vardhman’s spinning capacity

1.00 106 107 106 110
103 102
0.90 101 100
0.80 96 100
0.70
91
0.60
In million

0.50 90

%
84
0.40 82 81
0.30 78
76 80
0.20
0.10
- 70
FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E
Spindles (nos) Capacity Utilisation (RHS)


We expect Vardhman to garner incremental revenue from Exhibit 22: Spinning segment to drive growth, going forward
the spinning segment to the tune of | 780 crore (during
FY11E and FY12E). Considering that EBITDA margins from
3,000 250
the spinning segment are also on an uptrend, the capacity 210
200
addition will be earnings accretive 2,500 200
153 162
153 149
2,000
150
| crore

| / kg

1,500
2,540 100
2,283
1,000
1,532 1,695
1,126 1,281 50
500

- -
FY07 FY08 FY09 FY10 FY11E FY12E

Spinning Segment Revenues Yarn Realisations (RHS)


Page 13


The margins of the spinning segment have risen Exhibit 23: EBITDA margin of yarn segment
considerably on the back of increasing spreads between
cotton and cotton yarn prices 28 75
70
26
70
24 65
62 63
65
22
59

| / kg
20 60

%
18 54
50 52 55
16
50
14
18.1 16.5 14.4 20.2 22.5 24.8 26.6 24.8
12 45
FY07 FY08 FY09 FY10 Q1FY11 Q2FY11 Q3FY11 9MFY11

Yarn Segment EBITDA Margin Spreads (RHS)


Increasing spreads between cotton and yarn prices have aided the
EBITDA margin expansion for spinners. Vardhman was no exception and
we saw EBITDA margins spiralling from 14.4% in FY09 to 24.8% for the
nine months ended December 2010. The current scenario with widening
spreads will augur well for Vardhman as EBITDA margins from the yarn
segment will improve. We expect the spinning segment to clock an
EBITDA margin of 25.0% in FY11E and a marginal decline in FY12E at
~24%. Vardhman is well poised to capitalise on this margin expansion
through its expanded spinning capacities.
Exhibit 24: Yarn segment - EBITDA/ tonne

Volume (MT) 67,266 74,928 86,567 90,928 103,008 120,488
Growth (%) 3.4 11.4 15.5 5.0 13.3 17.0
Realisation (|/MT) 152,935 148,852 153,028 162,436 210,000 200,000
Growth (%) 7.4 (2.7) 2.8 6.1 29.3 (4.8)
Avg Ind Rate (|/MT) 109,000 110,000 120,000 135,000 180,000 175,000
Premium/ (Discount) (%) 40.3 35.3 27.5 20.3 16.7 14.3
Segment EBITDA (%) 18.1 16.5 14.4 20.2 25.0 24.0
EBITDA/Tonne (|) 39,576 37,381 32,284 48,982 55,473 50,587

Source: Company, Office of Textile Commissioner, ICICIdirect.com Research

Vardhman’s yarn has consistently enjoyed a premium over the average
industry realisations. However, in our assumptions we have been
conservative and assumed a lower premium to the expected yarn prices
in FY11E and FY12E. Going forward, if Vardhman’s yarn continues to
command a similar premium to average industry rates then the earnings
will be positively impacted by | 4.6 and | 8.9 per share in FY11E and
FY12E, respectively.
Exhibit 25: Sensitivity Analysis: If yarn realisations are higher than assumed

FY11E FY12E
Premium to market price assumed originally (%) 17 14
Premium enjoyed in FY10 (%) 20
Original EPS (|) 61.2 65.1
EPS assuming premium at 20% (|) 65.8 74.1

Page 14


Integrated model mitigates risk and also enhances profitability
Considering that Vardhman is present across the value Exhibit 26: Textile value chain
chain, a downturn in a particular segment will mitigate the
downside risk to earnings. If yarn prices correct
significantly, Vardhman can reduce the direct sales of yarn
and sell the product at a higher level in the value chain.
Also, when prices are in an uptrend, Vardhman will benefit
from the captive capacities

Source: Technopak, ICICIdirect.com Research

Vardhman is already present in the fibre to yarn segment and has recently
entered the garments business, which will boost profitability. As one goes
higher in the textile value chain, the margins continue to increase. Also, if
a particular segment faces a downturn in demand or witnesses a price
correction, Vardhman can use the same as an input and sell the products
at the higher end of the value chain.

Page 15


Risk & concerns
Commodity nature of business
Vardhman operates in an industry where demand supply forces and
government regulations govern input and end-product prices. Any
adverse movement in prices can affect the financial performance of the
company.

Sensitivity to cotton prices
Exhibit 27: Cotton prices weigh on EBITDA margin
FY07 FY08 FY09 FY10
Cotton Price (|/ kg) 54 66 61 76
Yarn Realization (|/ kg) 153 149 153 162
Yarn Segment EBITDA margin (%) 18.1 16.5 14.4 20.2

Though in the current demand supply scenario Vardhman has been able
to pass on the impact of increased cotton prices, any inability to do the
same can weigh on the EBITDA margin of the company. It is evident in
the table above that operating margins shrank from 18.1% in FY07 to
16.5% and 14.4% in FY08 and FY09 (years where demand was affected
due to global slowdown) due to an increase in cotton prices. Also, during
the same period yarn prices did not improve and actually declined in
FY08 to further put pressure on the operating margin.

Cotton yarn may face substitution from PFY

Exhibit 28: Price differential between cotton and polyester yarn
160
135
140 121 120
115 110
109
120 103
100
|/kg

80
60 74 75 75
70 70 71 70
40
20
0
CS-04

CS-05

CS-06

CS-07

CS-08

CS-09

CS-10

PFY Prices Cotton Yarn Prices


The ratio of cotton yarn price and polyester filament yarn (PFY) price has
been in the range of 1.4-1.6x during 2002-09. The same has gone up to a
historical high of 2.3x in September 2010. Consequently, the demand for
blended yarn will continue to increase, thereby dampening the demand
for cotton yarn.

Page 16


Lower than assumed yarn realisations
Vardhman’s yarn has always enjoyed a 20-30% premium over industry
realisations. Nonetheless, we have been conservative and assumed lower
premiums of 17% and 14% in FY11E and FY12E, respectively. On the
other hand, if Vardhman’s realisations get aligned with industry
realisations and the premium enjoyed becomes zero then the earnings
will be ~35% lower than our estimates.

Exhibit 29: Downside risk to earnings assuming lower yarn realizations
FY11E FY12E
Originally assumed realisations (|/ kg) 210 200
Industry expectation of yarn realisation (|/kg) 180 175
Original EPS (|) 61.2 65.1
EPS assuming NIL premium (|) 38.3 42.8

Global or domestic slowdown
Vardhman derives 25-30% of its revenues from exports. Any slowdown in
the global economies will adversely impact Vardhman’s revenues.
Domestic textile players, including Vardhman, are bullish on the domestic
consumption led demand. A slowdown in domestic offtake will also
adversely affect the company and lead to under utilisation of the
expanded capacities, thereby impacting the return ratios.

Page 17


Financials
Topline to grow at a 14% CAGR during FY10-12E
Exhibit 30: Product Mix

120

100 4 6 5 5
14 14 10 8 7 7
80 12 11 10 9
14 13
23 22 22
60 19 19 24

%
40
52 54 52 51 56 57
20

-



We expect Vardhman to post a CAGR of 14% in topline during FY10-12E
lead by strong growth in the yarn segment. Though the revenues of the
yarn segment have grown at 15% CAGR during FY07-10, we expect the
same to grow at a CAGR of 21% during FY10-12E. We expect yarn, fabric,
steel and fibre sales to grow at a CAGR of 21%, 9%, 7% and 9%,
respectively, during FY10-12E.

During FY11E and FY12E, we expect incremental revenues Exhibit 31: Topline growth trend
to the tune of | 845 crore from the spinning segment alone
5,000
4,500 221
4,000 210 291
3,500 279 415
185 398
3,000 114 255 976
2,500 7 288 385 897
326 344
2,000 -
302 811
322 687
1,500 312
413 450
1,000 2,283 2,540
1,532 1,695
500 1,126 1,281
-



Vardhman’s yarn has consistently enjoyed a premium over We expect the spinning segment (on a consolidated basis) to grow from |
average industry realisations. Conservatively, we have 1,695 crore in FY10 to | 2,540 crore in FY12E, growing by | 845 crore in a
assumed a lower premium to the industry, going forward. span of two years. We expect the realisation to increase from | 162/ kg in
If it continues to enjoy the same premium then the upside FY10 to | 210/ kg in FY11E and marginally soften to | 200/kg in FY12E. On
to the earnings can be significant the back of increased spindlage, we expect volumes in the spinning
segment to grow from 90,928 MT in FY10 to 1,20,488 MT in FY12E.

We expect the fabric segment to grow from the current | 811 crore to
| 976 crore in FY12E, growing at a CAGR of 10% during FY10-12E. We
expect realisations of the unprocessed fabric (~30% of total fabric sales)
to increase from | 52/ metre in FY10 to | 54/ metre in FY12E while that of

Page 18


processed fabric will increase from | 93/metre in FY10 to | 99/ metre in
FY12E. In FY12E, we expect the unprocessed and processed fabric
volumes to increase to 53 million metres and 70 million metres,
respectively, (from 46 million metre and 60 million metre in FY10).

In the steel business, we expect revenues to increase at a CAGR of 7%
during FY10-12E. Also, we expect the billets segment to post a healthy
growth of 21% on a lower base (largely led by 20% volume growth). We
expect the rolled products side of the business to marginally grow from |
273 crore in FY10 to | 286 crore in FY12E led by marginal volume and
realisation growth.

On the subsidiary front, Vardhman’s two leading subsidiaries Vardhman
Acrylics and Vardhman Yarns and Threads are expected to grow at a
CAGR of 9% and 4%, respectively, during FY10-12E.

EBITDA to be maintained with marginal compression
Exhibit 32: Enhanced profitability

24.00 22.52 22.42
21.04
22.00

20.00
17.64
18.00
%

15.98
15.26
16.00

14.00

12.00

EBITDA Margin


On the back of a healthy improvement in spinning margins, we expect an
upward movement in the EBITDA margin for FY11E. However, in FY12E
we expect marginal pressure on the operating margin on the back of
resistance in demand from downstream industries – weaving and
garmenting. Due to this, we expect the margins from the spinning
segment to face marginal pressure. In FY10, spinning margins improved
to 20.2% from 14.4% in FY09 while the fabric segment witnessed margin
expansion from 11.2% in FY09 to 15% in FY10.

Page 19

Exhibit 33: Segmental EBITDA margin

25 16
24
15 15

20 20 14
14
18 13
13
17
14
15 12
12
11 11 11

10 10

Yarn Fabric (RHS)


The yarn segment has seen substantial operating margin expansion on
the back of increased demand from the apparel industry. Going forward,
we expect the operating margin of the yarn segment to increase to 25%
in FY11E and marginally correct to 24% in FY12E on the back of increased
input cost pressure.
On the other hand, in the fabric segment we foresee pressure on the
operating margin due to higher yarn prices. Inability to pass on the impact
of increased yarn prices will pressurise the EBITDA margin. We expect the
margins of the fabric segment to soften to 13% in FY12E.

Lowest debt to EBITDA levels
After incurring a large part of capex also Vardhman is Exhibit 34: Peer comparison of debt to EBITDA levels (FY10)
comfortably leveraged compared to its peers
Debt/EBITDA

7.0 6.6 6.4
6.0
5.0 4.6
3.8 3.7
4.0
x

3.0
2.0
1.0
-
Alok Industries Raymond Arvind Welspun India Vardhman Textiles


Vardhman has the lowest debt to EBITDA levels among its peers. This
gives it comfort to further raise debts to fund its expansion. Also, in a
rising interest rate scenario, Vardhman will be in a very comfortable
position to service its debt.

Page 20


Solvency position
Despite significant capex during FY06-10, Vardhman is Exhibit 35: Debt to peak in FY12E
comfortably leveraged compared to its peers. Historically,
Debt to Equity Ratio FY07 FY08 FY09 FY10 FY11E FY12E
Vardhman has maintained better solvency ratios. We
Vardhman Textiles 1.5 1.9 1.8 1.6 1.5 1.6
expect the same to continue this trend, going forward
Alok Industries 3.3 4.0 3.8 3.2 3.0 3.0
Arvind 1.5 1.6 1.9 2.0 1.5 1.2
RSWM 2.3 3.1 4.0 4.6 6.3 4.8
Average 2.1 2.7 2.8 2.8 3.1 2.7

Interest Coverage Ratio FY07 FY08 FY09 FY10 FY11E FY12E
Vardhman Textiles 6.8 3.1 1.6 3.7 4.0 3.5
Alok Industries 4.6 4.1 2.7 2.3 1.5 1.7
Arvind 1.2 1.2 0.6 1.1 1.8 2.4
RSWM 2.8 1.0 (0.3) 1.8 2.0 2.3
Average 3.8 2.3 1.1 2.2 2.3 2.5

Source: Consensus Estimates, ICICIdirect.com Research

Vardhman, like most textile companies, has witnessed a steep increase in
debt levels over the last few years. This was mainly on account of
expansion activity conducted by the company. A large part of the
repayment for Vardhman will kick in from FY14-15. Hence, we are likely to
see a marked improvement in the return ratios, going forward.
In October 2010, Vardhman raised | 200 crore through a QIP issue of
58,82,352 shares at the rate of | 340 per share. The proceeds of the same
will be used to meet expansion plans and retire the outstanding FCCB.

Return ratios
Exhibit 36: Return ratios to remain healthy

24.0 21.8
22.0 20.2 19.9
20.0
16.5
18.0
16.0
14.0 11.8 14.1
%

13.2
12.0
11.0
10.0
8.9 5.9
8.0
6.0 6.6
5.5
4.0

RoE RoCE


Vardhman’s return ratios have been under pressure in the last few years
owing to the expansion activities of the company. However, as the
expanded capacities are fully utilised and as profitability gets enhanced,
we expect the return ratios for Vardhman to improve significantly, going
forward. We expect the RoCE to improve from 11.0% in FY10 to 13.2% in
FY12E. Also a large part of the debt repayment is scheduled during FY14-
15. Post this one is likely to witness an improvement in the return ratios.

Page 21


Changes in depreciation policy
Vardhman currently depreciates its spinning assets over a 10 year period.
Under IFRS, the management could decide to depreciate the same over
15-20 years as the life of a spinning asset ranges from 17-20 years. If the
management decides to go ahead with this, the savings per share at the
net level could be to the tune of ~| 11 (~17% of FY12E EPS).
Also, the said savings will boost the return ratios for the company. Our
back of the envelope calculations indicate that if IFRS is implemented
w.e.f. FY12, Vardhman’s RoE and RoCE will go up by 189 and 336 bps,
respectively. However, as there is not much clarity on the implementation
of IFRS we have not factored the benefit of the same into our estimates.

Exhibit 37: Incremental earnings and return ratios from changed depreciation policy
(| crore) FY12E
Depreciation assuming asset is depreciated over 10 years 235.75
Depreciation under IFRS (assuming asset is depreciated over 15-20 years) 137.52
Savings 98.23

Incremental EPS (|) 11
Incremental ROCE(bps) 189
Incremental ROE(bps) 336

Page 22


Valuation
Vardhman is trading at a discount to the 5 year P/E and P/BV
Vardhman is currently trading at ~56% discount to its five year median
P/E and a ~34% discount to its five year median P/BV. Considering the
steep increase in yarn realisations and a robust demand outlook, the stock
can comfortably trade above the five year median multiples. However,
bearing in mind the downside risks like marginally softer yarn realisations
and lower than estimated offtake in demand, we believe it should
continue to trade at its median five year multiples. We have arrived at our
target price based on an average of the value received by assigning a
multiple of 0.65x FY12E book value of | 349 and 4.7x FY12E EPS of | 65.1.
We are initiating coverage on the stock with an ADD rating and a target
price of | 267 signifying 4% upside from current levels.

Exhibit 38: Trading at ~56% discount to five year median P/E

16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
-
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
5 yr Median P/E 1 Year Fwd P/E

Source: ICICIdirect.com Research

Exhibit 39: Trading at ~34% discount to five year median P/BV

1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
-
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10

5 yr Median P/Bv 1 Year Fwd P/Bv

Source: ICICIdirect.com Research

Page 23

Exhibit 40: Peer comparison
EBITDA Debt to
RoE RoCE P/E P/BV
Particulars Margin EBITDA
FY12E FY12E FY12E FY11E FY12E FY11E FY12E FY12E
Unit % % % x x x x x
Vardhman Textiles 22.4 19.9 13.2 4.2 3.9 0.8 0.7 3.4
Alok Industries 28.0 12.3 10.9 5.7 4.0 0.6 0.5 4.3
Arvind 13.6 11.2 11.4 11.1 6.8 0.9 0.8 3.7
RSWM 12.5 29.3 12.2 6.4 4.9 1.6 1.3 4.5

We undertook a rating activity whereby we assigned weights to several
financial parameters and ranked the companies in the peer group to
decipher the company with superior financials. We have assigned a 15%
weightage each to EBITDA margin, return on equity, P/E ratio and P/BV
ratio and a 20% weightage to return on capital employed and debt to
EBITDA ratio. Even based on these parameters, Vardhman stands out as
the best among its peers.

Exhibit 41: Rating Matrix
Company EBITDA Margin RoE RoCE P/E P/BV Debt/EBITDA
Vardhman Textiles 2 2 1 1 2 1
Alok Industries 1 3 4 2 1 3
Arvind 3 4 3 4 3 2
RSWM 4 1 2 3 4 4

Weighted Average Ranking Final Ranking
Vardhman Textiles 1.5 1
Alok Industries 2.5 2
Arvind 3.1 4
RSWM 3.0 3


Page 24


Exhibit 42: Profit and loss account (| crore)
Net Sales 2,162.1 2,387.7 2,965.4 3,350.7 4,081.4 4,460.7
% Growth 10.4 24.2 13.0 21.8 9.3
Other Income 25.4 38.0 52.9 85.2 70.0 95.0
Raw Materials 954.1 1,095.4 1,405.2 1,505.5 1,819.9 1,993.7
Manufacturing Expenses 525.9 587.7 680.2 737.1 861.6 918.5
Employee Expenses 132.5 162.5 200.1 214.9 264.3 292.1
Sell. & Admin. Expenses 171.2 161.5 230.6 188.5 216.3 256.5
Total Exp. 1,784.7 2,007.0 2,513.1 2,645.7 3,162.1 3,460.7
% Growth 12.5 25.2 5.3 19.5 9.4
Operating Profit 381.3 381.6 452.4 705.1 919.2 1,000.0
Depreciation 122.4 162.0 243.4 256.6 285.4 316.3
Interest expense 38.3 70.4 132.4 122.3 156.9 197.1
PBT 246.0 187.2 129.6 411.3 546.9 581.6
Tax 56.0 44.2 51.3 108.9 164.1 174.5
Net Profit 190.0 143.0 78.3 302.4 382.9 407.1
% Growth (24.7) (45.2) 286.3 26.6 6.3
Net Profit (after minority int) 185.6 135.0 171.3 261.5 338.8 356.0
Equity 56.6 56.6 56.6 56.6 62.5 62.5
Dividend % 40.9 40.9 32.3 40.7 51.5 113.9
EPS (from ordinary activities) 33.5 25.2 13.8 53.4 61.2 65.1


Exhibit 43: Balance Sheet (| crore)
Equity Share Capital 56.6 56.6 56.6 56.6 62.5 62.5
Share Application money - - - - - -
Reserves & Surplus. 1,093.8 1,206.4 1,326.6 1,547.5 1,848.7 2,121.4
Secured Loans 1,508.2 2,178.5 2,232.7 2,346.5 2,818.0 3,388.0
Unsecured Loans 263.6 255.4 300.5 296.5 34.0 40.3
Minority Interest 15.8 77.6 228.7 272.0 316.0 367.1
Deferrred Tax 97.3 163.4 208.0 228.7 235.0 260.0
Total Liabilities 3,035.4 3,937.9 4,353.0 4,747.9 5,314.3 6,239.4
Net Block 1,239.9 2,219.2 2,561.4 2,553.3 2,804.4 3,157.6
CWIP 541.5 334.1 69.4 45.3 378.4 407.0
Investments 57.6 5.4 140.1 92.3 125.0 225.0
Goodwill on consolidation - 5.1 5.1 2.9 - -
Inventories 730.3 937.7 739.6 1,297.0 1,285.9 1,417.7
Sundry Debtors 261.9 287.2 345.9 475.8 559.1 672.2
Cash & Bank 222.8 71.9 373.0 262.4 139.7 304.6
Loans & Adv. 260.9 348.9 409.1 348.3 375.0 418.0
Current Assets 1,475.9 1,645.6 1,867.6 2,383.5 2,359.7 2,812.4
CL & Prov. 279.5 271.5 290.5 329.4 353.1 362.8
Net Current Assets 1,196.4 1,374.1 1,577.1 2,054.1 2,006.6 2,449.7
Total Assets 3,035.4 3,937.9 4,353.0 4,747.9 5,314.3 6,239.4

Page 25

Exhibit 44: Cash flow statement (| crore)
Net Profit Before Tax 246.0 187.2 129.6 411.3 546.9 581.6
Depreciation 122.4 162.0 243.4 256.6 285.4 316.3
Interest Expense 39.7 65.6 127.6 116.3 156.9 197.1
Direct Tax Paid (64.7) (32.7) (37.2) (73.6) (164.1) (174.5)
(Income)/ Loss from Assc. (4.0) (0.8) (0.0) (0.1) (0.1) (0.1)
Interest / Dividend Income (19.1) (14.4) (29.4) (38.2) (38.2) (38.2)
Other Non Cash (Inc)/Exp (9.2) (27.1) 45.0 (32.3) (6.3) (25.0)
CF before change in WC 311.1 339.8 478.9 640.1 780.6 857.3
Inc./Dec. in WC (106.9) (295.8) 85.9 (628.8) (122.6) (297.5)
CF from operations 204.2 44.0 564.8 11.3 658.0 559.9
Pur. of Fix Assets (net) (837.7) (795.7) (178.1) (227.1) (797.6) (659.3)
Purchase of Investments (net) 3.2 (4.5) (128.3) 55.3 (32.7) (100.0)
Income from Inv 15.9 15.2 28.5 39.9 39.9 39.9
CF from Investing (818.6) (785.1) (277.8) (131.9) (790.4) (719.4)
Inc./(Dec.) in Debt 656.6 652.8 36.4 144.4 4.2 604.9
Inc./(Dec.) in Net worth - - 130.7 2.6 200.0 -
Others (93.4) (62.6) (153.1) (137.0) (194.5) (280.4)
CF from Financing 563.2 590.1 14.1 10.0 9.7 324.5
Opening Cash balance 274.0 222.8 71.9 373.0 262.4 139.7
Closing Cash balance 222.8 71.9 373.0 262.4 139.7 304.6

Exhibit 45: Key ratios
Expenditure Break-up (%)
Raw Material Expenses 55.1 56.7 56.1 59.2 61.0 60.4
Manufacturing Expenses 29.5 29.3 27.1 27.9 27.2 26.5
Personnel Expenses 7.4 8.1 8.0 8.1 8.4 8.4

Profitability Ratios (%)
EBITDA Margin 17.6 16.0 15.3 21.0 22.5 22.4
PAT Margin 8.8 6.0 2.6 9.0 9.4 9.1

Per Share Data (|)
Revenue per share 381.8 421.6 523.6 591.6 652.8 713.5
EBITDA per share 67.3 67.4 79.9 124.5 147.0 160.0
EV per share 567.2 573.9 462.2 585.3 695.0 760.8
Book Value per share 203.1 223.0 244.2 283.2 305.7 349.3
Cash per share 39.3 12.7 65.9 46.3 22.3 48.7
EPS 33.5 25.2 13.8 53.4 61.2 65.1
Cash EPS 55.2 53.9 56.8 98.7 106.9 115.7
DPS 4.0 4.0 2.0 3.0 5.0 10.0

Return Ratios (%)
RoNW 16.5 11.8 5.9 20.2 21.8 19.9
RoCE 8.9 6.6 5.5 11.0 14.1 13.2
RoIC 7.2 4.0 2.3 7.8 8.5 8.0

Financial Health Ratios
Operating Cash flow (| crore) 204.2 44.0 564.8 11.3 658.0 559.9
Free Cash flow (| crore) (630.1) (773.4) 75.8 (273.1) (191.1) (161.9)
Capital Employed (| crore) 2,922.3 3,697.0 3,916.4 4,247.2 4,763.3 5,612.2
Debt to Equity (x) 1.5 1.9 1.8 1.6 1.5 1.6
Debt to Capital Employed (x) 0.6 0.7 0.6 0.6 0.6 0.6
Interest Coverage (x) 6.8 3.1 1.6 3.7 4.0 3.5
Debt to EBITDA (x) 4.6 6.4 5.6 3.7 3.1 3.4

Page 26


Exhibit 46: DuPont Analysis
DuPont Analysis (x) FY07 FY08 FY09 FY10 FY11E FY12E
PAT / PBT 0.8 0.8 0.6 0.7 0.7 0.7
PBT / EBIT 0.9 0.9 0.6 0.9 0.9 0.9
EBIT / Net Sales 0.1 0.1 0.1 0.1 0.2 0.2
Net Sales / Total Assets 0.7 0.6 0.7 0.7 0.8 0.7
Total Assets / Networth 2.6 3.1 3.1 3.0 2.8 2.9

Exhibit 47: Growth parameters
(YoY Growth %) FY07 FY08 FY09 FY10 FY11E FY12E
Net Sales 10.9 10.4 24.2 13.0 21.8 9.3
EBITDA 5.2 0.1 18.6 55.8 30.4 8.8
Net Profit (7.0) (24.7) (45.2) 286.3 26.6 6.3

Exhibit 48: Turnover ratios
Turnover Ratios FY07 FY08 FY09 FY10 FY11E FY12E
Working Capital / Sales (x) 0.5 0.5 0.4 0.5 0.5 0.5
Inventory turnover (days) 123.3 127.5 103.2 110.9 115.0 116.0
Debtor turnover (days) 44.2 42.0 39.0 44.8 50.0 55.0
Creditor turnover (days) 47.9 39.9 29.1 24.7 28.0 26.0
Current Ratio (x) 5.3 6.1 6.4 7.2 6.7 7.8

Exhibit 49: FCF calculation
Free Cash Flow (| crore) FY07 FY08 FY09 FY10 FY11E FY12E
EBIT (post-tax) 200.0 167.7 126.3 329.7 443.7 478.6
Add: Depreciation 122.4 162.0 243.4 256.6 285.4 316.3
Less: Changes in working capital (106.9) (295.8) 85.9 (628.8) (122.6) (297.5)
Less: Capex (845.6) (807.3) (379.8) (230.6) (797.6) (659.3)
FCF (630.1) (773.4) 75.8 (273.1) (191.1) (161.9)

Exhibit 50: Valuation ratios
Valuation Ratios FY07 FY08 FY09 FY10 FY11E FY12E
Price to earnings ratio (x) 8.6 6.1 5.7 3.0 4.2 3.9
EV / EBITDA (x) 8.4 8.5 5.8 4.7 4.7 4.8
EV / Sales (x) 1.5 1.4 0.9 1.0 1.1 1.1
Dividend Yield (%) 1.4 2.6 2.5 1.9 1.2 2.0
Price / BV (x) 1.4 0.7 0.3 0.6 0.8 0.7

Page 27


RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more;
Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,
ICICI Securities Limited,
7th Floor, Akruti Centre Point,
MIDC Main Road, Marol Naka,
Andheri (East)
Mumbai – 400 0293

research@icicidirect.com

ANALYST CERTIFICATION
We /I, Bharat Chhoda MBA (FINANCE) Dhvani Modi MBA (FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the
views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be
directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities
Inc.

Disclosures:
ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading
underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of
companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities
generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts
cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and
meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without
prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and
employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities
from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities
policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This
report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial
instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their
receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific
circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate
the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any
loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the
risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to
change without notice.

ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received
compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment
banking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of three
months following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific
transaction. It is confirmed that Bharat Chhoda MBA (FINANCE) Dhvani Modi MBA (FINANCE) research analysts and the authors of this report have not received any
compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings
from Investment Banking and other business.

ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the
research report.

It is confirmed that Bharat Chhoda MBA (FINANCE) Dhvani Modi MBA (FINANCE) research analysts and the authors of this report or any of their family members does
not serve as an officer, director or advisory board member of the companies mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use
of information contained in the report prior to the publication thereof.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,
publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities
described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and
to observe such restriction.

Page 28

vardhman_textiles_initiatingcoverage

More Related Content

What's hot (20)

Similar to vardhman_textiles_initiatingcoverage (12)

Recently uploaded (20)

vardhman_textiles_initiatingcoverage