Ltd. Nitin Spinners Spinning growth on capacity expansion
STOCK INFO Co. Name Nitin Spinners Ltd BSE 532698 NSE NITINSPIN Bloomberg NSPL IN Reuters NISP.BO Sector Textiles Index S&P BSE SmallCap Face Value (Rs) 10 Equity Capital (Rs mn) 458 Mkt Cap (Rs mn) 2,933 52w H/L (Rs) (Adj.) 107/26 3m Avg Daily Volume (BSE + NSE) 288,969 SHAREHOLDING PATTERN (as on Sept. 2015) Promoters FIIs DIIs Public & Others
Key Investment Rationale: Raw material scenario favorable: World cotton production is expected to decline 10% while consumption is likely to increase ~2% yoy in 2015‐16 (August to July period), as per USDA. World ending stocks are expected to be lower by 4% yoy in cotton season 2015. With declining ending stocks, we opine that the prices can start rising at a gradual pace over a period of time, which would be beneficial for the entire textile chain, especially for yarn manufacturers.
%
Focus on value added products: Specialty yarns constitute 15% of total sales of NSL. It is
64.0 0.0 0.0 36.0
expanding into finer count yarns which provides better margin than basic yarn. It has forward integrated into knitted fabrics which use 100% in‐house yarn that enhances the margins of the company. Going forward, it plans to move further into value added products which includes dyed and mélange yarns.
Source: BSE
STOCK PER. (%) Nitin Spinners Sensex
1m 2 ‐5
3m 17 ‐2
12m 120 ‐8
Self sufficiency in power and strategic location: NSL has secured low power cost (spinning is a power intensive process) through coal based captive power of 10.5 MW and tie‐up with IEX and SEBs. It is strategically located with proximity to customers and raw material sources.
Source: Capitaline, IndiaNivesh Research
Almost trebling capacity over FY14‐FY18E: NSL doubled its spinning capacity to 150,096
Nitin Spinners Ltd. v/s SENSEX
spindles in FY15 from 77,616 spindles in FY14. Going forward, it is adding 73000 spindles which would be commencing operations from March 2017. This would imply almost trebling of capacity over FY14 to FY18E. We expect sales CAGR of 21.6% over FY15‐FY18E driven by volume growth of 18.5% CAGR.
400 350 300 250 200 150 100 50
Nitin Spinners
Source: Capitaline, IndiaNivesh Research
Dec/2015
Oct/2015
Sensex
Nov/2015
Sep/2015
Jul/2015
Aug/2015
Jun/2015
Apr/2015
May/2015
Mar/2015
0
Daljeet S. Kohli Head of Research Tel: +91 22 66188826
[email protected] Prerna Jhunjhunwala Research Analyst Tel: +91 22 66188848
[email protected]
IndiaNivesh Research
December 14, 2015
Jan/2015
Initiating Coverage
Nitin Spinners Ltd (NSL) is aggressively expanding its capacities to capitalise on the expected demand revival in textile sector. Catering to diversified textile segments including apparel, made‐ups, denim, intimate wear, among others, the company is well poised to take advantage of any improvement in demand world‐wide. We expect sales of the company to grow at 21.6% CAGR over FY15‐FY18E period. We expect the return ratios of the company to improve further post completion of capacity expansion plans. We initiate coverage on NSL with BUY rating and target price of Rs 112 with long term horizon.
Previous Rating : NR Target : Rs. NR
Feb/2015
Current CMP : Rs. 64 Rating : BUY Target : Rs.112
Dec/2014
ROE healthy at 24.5%: Post FY12, return ratios of NSL increased significantly on improved profitability and no capex till FY14. ROCE / ROE of the company increased to 22.6% / 26.4% in FY14 from 6.3% / 0.3% in FY12. The company embarked on expansion plans from FY15 followed by another expansion in FY18E, which would be impacting ROCE. However, we expect an improvement in return ratios post the completion of the capacity addition in FY17E. We expect ROCE/ ROE to decline to 19.2% / 23.7% in FY18E respectively.
Valuation: At CMP of Rs 64, the stock trades at PER of 6.2x, 5.9x and 3.8x its FY16E, FY17E and FY18E EPS of Rs 10.3, Rs 10.8 and Rs 16.8 respectively. The company has traded at average one year forward PE of 8.8x since FY10. Currently, peers are trading at average PE multiple of 7.5x FY17E earnings. However, this valuation is likely to improve going forward with demand improvement and stability in raw material scenario. We value Nitin Spinners Ltd at 6.7x (discount of 10% to peers due to high debt and lower PAT growth) its FY18E earnings arriving at target price of Rs 112 per share. FY18E is likely to be a game changing year for the company due to new capacities coming into operations. We recommend BUY rating on the stock with long term horizon.
Key Risk: Volatility in cotton prices, Rupee appreciation, High debt equity, Economic slowdown Financial Performance YE March (Rs Mn) Net Sales FY14 4883 FY15 6165 FY16E 7710 FY17E 8295 FY18E 11080
EBITDA 939 992 1414 1574 2165
PAT 348 410 474 496 770
EPS(Rs) RoCE(%) 7.6 22.6 8.9 14.0 10.3 18.4 10.8 14.4 16.8 19.2
RoE(%) Adj. P/E(x) EV/EBITDA(x) 26.4 8.4 5.0 24.5 7.2 6.8 22.7 6.2 4.6 19.6 5.9 5.5 23.7 3.8 3.6
Source: Company, IndiaNivesh, Research
IndiaNivesh Securities Limited|Research Analyst SEBI Registration No. INH000000511 601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007. Tel: (022) 66188800 IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva INDNIV.
Initiating Coverage (contd...)
Investment Rationale Robust industry scenario to support aggressive capex Indian spinning industry – cost efficient globally India is amongst the most competitive countries for spinning yarns in the world, as evident from the production cost comparison 2014 report of International Textile Manufacturers Federation. The competitiveness of the process lies in the cheap labour cost and abundant raw material availability as compared to other countries like China, Korea, Turkey and USA. Labour cost of China is ~3x higher than India, while Indonesian labour cost is higher by ~1.6x over India. India is the largest producer of cotton in the world and abundant availability of raw material provides an economic moat to Indian spinning industry. Indonesia and USA are marginally cheaper than India in totality due to lower power and interest cost. However, relatively large spinning capacities and abundant raw material availability in India provides a competitive advantage to India over Indonesia and USA. Total Manufacturing cost for Spinning
Comparative Labour cost – India cheapest
5.00
0.50
4.51
4.00 3.33
3.51
0.40
3.68
3.52
0.35
USD per kg
USD per kg
3.50
0.45
0.45
4.50
3.00 2.50 2.00
0.30 0.25 0.20
1.50
0.15
1.00
0.10
0.50
0.05
0.17 0.10 0.05
0.03
0.00
0.00 Indonesia
USA
India
Turkey
Indonesia
China
USA
India
Turkey
China
Source: ITMF‐International Production Cost Comparison 2014, IndiaNivesh Research
Source: ITMF‐International Production Cost Comparison 2014, IndiaNivesh Research
Comparative Power cost – USA cheapest
Comparative Raw Material cost – USA cheapest
0.45
2.86
3.00
0.42
0.40
2.50
0.35 0.26
2.00
0.26
0.25 0.20
2.06
2.04
0.29
USD per kg
USD per kg
0.30
0.16
0.15
2.21
1.81
1.50 1.00
0.10
0.50
0.05 0.00
0.00 Indonesia
USA
India
Turkey
China
Indonesia
USA
India
Turkey
China
Source: ITMF‐International Production Cost Comparison 2014, IndiaNivesh Research
Source: ITMF‐International Production Cost Comparison 2014, IndiaNivesh Research
Global spinning capacity – India higher capacity than Indonesia and USA Spinning capacity (million) Spindles % of world Rotors % of world China 110.0 45.0 2.7 32.6 India 49.5 20.2 0.8 9.8 Indonesia 11.8 4.8 0.1 1.5 USA 0.7 0.3 0.3 3.6 Source: ITMF – International Cotton Industry Statistics 2013, IndiaNivesh Research
Nitin Spinners Ltd. (contd...)
December 14, 2015 | 2
Initiating Coverage (contd...)
Indian textile industry poised for growth Global textile and apparel sector is likely to reach USD 1300 bn by 2023 from USD 773 bn in 2013, as per Technopak analysis (September 2014 report). Indian textile and apparel industry is estimated to reach USD 237 bn in 2023 from USD 99 bn in 2013, signifying CAGR of 9.1% over the period. This includes domestic as well as exports segment. Domestic industry worth USD 59 bn in 2013 is likely to grow at a CAGR of 9.2% over 2013‐2023 to reach USD 142 bn by 2023. This is on account of higher economic growth, rising consumer purchasing power and favorable demographic profile. Indian textile and apparel exports, worth USD 40 bn in 2013, are likely to reach USD 95 bn by 2023 bn, signifying growth of 9% CAGR. This is on account of increasing competitiveness against other exporting countries. Rising Chinese domestic consumption, labour issues in China and Bangladesh, increasing power cost and depreciating Rupee vis‐a‐vis other exporting countries are turning favorable for Indian exports. Global Trade in Textiles and Apparel
Indian textile and apparel sector to grow at CAGR of 9.5%
1400
237
250
1300
1200
200
1000
USD Bn
1000
600 400
650 428
580
99
87
100
362
205
288
2003
2008 Apparel
2013
2018(P)
2023(P)
95
33
40
2012
2013
0
0
Textiles
Exports
Source: Technopak, IndiaNivesh Research
90
59
54
50
530
420
345
142
150
428
223
200
150
770
773
800
60 2018(P)
2023 (P)
Domestic
Source: Technopak, IndiaNivesh Research
Raw material scenario – cotton ‐ favorable for the industry Cotton prices have been range bound over the last one year (Shankar‐6 prices in the range of Rs 80‐100 per kg). World cotton production is expected to decline 10% while consumption is likely to increase ~2% yoy in marketing year 2015‐16 (August to July period), as per US Department of Agriculture (USDA). World ending stocks are expected to be lower by 4% yoy at 107 mn bales against 112 mn bales in cotton season 2015. With declining ending stocks, we expect that the cotton prices are not likely to show steep decline in prices. We opine that the prices can start rising at a gradual pace over a period of time, which would be beneficial for the entire textile chain, especially for yarn manufacturers. Cotton Prices (Shankar‐6) 140 120
Rs per kg
100 80 60 40
Oct‐2015
Aug‐…
Jun‐2015
Apr‐2015
Feb‐2015
Dec‐2014
Oct‐2014
Jun‐2014
Apr‐2014
0
Aug‐…
20
Source: Bloomberg, IndiaNivesh Research
Nitin Spinners Ltd. (contd...)
December 14, 2015 | 3
Initiating Coverage (contd...)
Strong business model of NSL Strategic location NSL is about 16 kilometers away from Bhilwara District, which is one of the textile hubs of the country. This proximity ensures availability of skilled & unskilled labour. Further, the basic raw material i.e. cotton is available in the surrounding areas viz., Bhilwara, Bijaynagar, Asind and other adjoining areas like Nagaur, Merta City, Sumerpur and Beawar within Rajasthan state itself. Proximity to raw material sources provide advantages like better quality raw material availability in smallest time providing opportunity to keep inventory levels low. With better availability of cotton around the year and focus on reducing working capital, the company has been able to reduce its inventory levels to 53 days in FY15 from 73 days in FY11. Reducing inventory days 80
73 66
70
67
No. of Days
60
53
56
FY14
FY15
55
55
54
50 40 30 20 10 0 FY11
FY12
FY13
FY16E FY17E FY18E
Source: Company, IndiaNivesh Research
Focus on value added products NSL manufactures yarn for variety of end applications including shirting, home furnishing, carpets, denims, medical textiles, terry towels, intimate wear and others. Specialty yarns constitute 15% of the total turnover of the company. The company also manufactures value added yarns including slub and compact yarn which command premium over basic cotton yarn. It is expanding into finer count yarns which provides better margin than basic yarn. It has forward integrated into knitted fabrics which use 100% in‐house yarn that enhances the margins of the company. Going forward, NSL plans to move further into value added products which includes dyed and mélange yarns. It’s up gradation to higher quality products are visible from average realization which has been increasing over FY07‐FY14. In FY15, average realization fell by 5.9% yoy due to continuous decline in cotton prices by ~22.8% yoy.
Captive Power of 10.5 MW Spinning is a power intensive process. Generally, the power requirement is 2.5‐4 units per kg of production. Power efficiency is one of the key success factors of any spinning company. NSL has coal‐based captive power plant of 10.5 MW. The company has availed coal linkage from Coal India which ensures timely availability of feed at reasonable cost. NSL also avails power from IEX and SEB in case of additional requirement. The power cost as percentage to sales decreased to 8.3% in FY15 from its peak of 13.5% in FY08. In our opinion, this decline is reasonable to compete in domestic and international market.
Nitin Spinners Ltd. (contd...)
December 14, 2015 | 4
Initiating Coverage (contd...)
Power cost as % to sales 13.5 13.3
14.0 13.0 12.0
% of sales
11.0
10.4
10.3 10.2
10.0 8.6
9.0
9.0
8.6
8.0
8.3 8.4 8.2
8.0
7.2
7.0
FY18E
FY17E
FY16E
FY15
FY14
FY13
FY12
FY11
FY10
FY9
FY8
FY7
FY6
6.0
Source: Company, IndiaNivesh Research
Diversify geographical risk NSL is following change in strategy by focusing on domestic markets too. NSL has been an exporter from inception. It was registered as a 100% EOU earlier, which was later converted to DTA (domestic unit) in FY09. This provided the company with flexibility to sell in domestic and export market. Currently, 64% of company revenues come from exports while domestic contributes 36% to topline. The management plans to increase the share of domestic revenues to 45% to de‐risk its business from the fluctuations of foreign exchange risk and diversify client base. A diversified geographical mix would enable the company to mitigate global risk and focus on Indian market would enable the company to capitalize on the domestic growth. Increasing share of domestic revenues 90
81.2
80
77.5 71.1
68.8
%
68.6
64.4
70 60
71.3
63.6
51.1
50 48.9
40 30 10
35.6
31.2
20
28.9
31.4
28.7
36.4
22.5
18.8
0 FY07
FY08
FY09
FY10 Exports
FY11
FY12 Domestic
FY13
FY14
FY15
Source: Company, IndiaNivesh Research
Exit from CDR in shortest time signifies strong business model NSL entered into Corporate Debt Restructuring (CDR) mechanism in FY09 due to forex losses and adverse business scenario in FY08. NSL had captive furnace oil based power plant before FY10. In FY09 when oil prices reached levels of USD 150, the power cost of the company peaked to 13.3% of sales. High cotton prices and high power cost coupled with foreign exchange loss resulted in loss at EBITDA level in FY09. However, with the adoption of sound forex policies, change in business strategies and improvement in business scenario, the company exited CDR in FY14. As per the management, NSL’s exit from CDR is the shortest turnaround in the history of CDR mechanism. The exit from CDR would provide the company with operational and financial flexibility and enable it to pursue capex plans.
Nitin Spinners Ltd. (contd...)
December 14, 2015 | 5
Initiating Coverage (contd...)
Cotton Price Volatility – Pre and Post 2010
Oil Prices 160
200 180 160 140 120 100 80 60 40 20 0
140
USD / Barrel
120 100 80 60 40
May‐…
Source: Bloomberg, IndiaNivesh Research
Jul/2015
Jul/2014
Jan/2015
Jul/2013
Jan/2014
Jul/2012
Jan/2013
Jul/2011
Jan/2012
Jul/2010
Jan/2011
Jul/2009
Jan/2010
Jul/2008
Jan/2009
Jul/2007
Jan/2008
Jul/2006
Jan/2007
0 Jan/2006
Oct‐2014
Mar‐2014
Jan‐2013
Aug‐2013
Jun‐2012
Apr‐2011
Nov‐2011
Sep‐2010
Jul‐2009
Feb‐2010
May‐…
Dec‐2008
Oct‐2007
Mar‐2007
Jan‐2006
20
Aug‐2006
Rs/kg
Source: Bloomberg, IndiaNivesh Research
Foreign Exchange (INR vs. U.S. Dollar)
70 65 INR/USD
60 55 50 45 40 Oct‐2014
May‐2015
Aug‐2013
Mar‐2014
Jan‐2013
Jun‐2012
Nov‐2011
Apr‐2011
Sep‐2010
Feb‐2010
Jul‐2009
Dec‐2008
Oct‐2007
May‐2008
Mar‐2007
Aug‐2006
Jan‐2006
35
Source: Bloomberg, IndiaNivesh Research
Aggressive Capex to drive growth Capacity to almost treble over FY14‐FY18E NSL doubled its spinning capacity in FY15 to 150,096 spindles from 77,616 spindles in FY14. Earlier, it had expanded its capacity by 50,400 spindles to 77616 spindles in FY08. Over FY09‐ FY14 period, the company had no expansions due to stressed financial position and weak industry demand conditions. Going forward, it is adding 73000 spindles to its capacity to reach 223096 spindles. This capacity addition would entail capex cost of Rs 3 bn which would be financed through debt of Rs 2.2 bn and balance through internal accruals. Additional capacity would be commencing operations from March 2017. This would imply capacity almost trebling of capacity over FY14‐FY18E. The company is not expanding its fabric capacities as they are yet to reach optimum utilization. Yarn Capacity
Fabric Capacity FY18E
8600
150096
FY17E
8600
FY16E
150096
FY16E
8600
FY15
150096
FY15
FY18E
223096
FY17E
FY14
77616
FY14
FY13
8600 3900
77616
FY13
3900
FY12
77616
FY12
3900
FY11
77616
FY11
3900
0
50000
100000
150000
200000
250000
0
2000
Spindles
4000
6000
8000
10000
Tons per annum
Source: Company, IndiaNivesh Research
Source: Company, IndiaNivesh Research
Nitin Spinners Ltd. (contd...)
December 14, 2015 | 6
Initiating Coverage (contd...)
Capacity utilization above 90% even in weak demand scenarios Over FY09‐FY14 period, the company had no expansions due to stressed financial position and weak industry demand conditions. However, it had been operating at optimal levels of above 90% over the period (even at times of weak demand). This signifies that the company has strong client base and its products are preferred by the clients. Also, the ability to manufacture wide variety of yarns including slub and compact for segments like denim, terry towel, intimate wear, etc. provides cushion against demand weakness in one or two segments of the industry. Optimal capacity utilization of Yarn (%)
Fabric Capacity yet to reach optimal utilization (%) 90
New capacity added in Q4FY15 100 90 80 70 60 50 40 30 20 10 0
96.7
95.0
92.0
95.5
93.0
80
96.0
95.0
80.0
80.0
FY17E
FY18E
75.0
70.5
69.4
69.4
70
59.1
60
76.4
45.4
50 40 30 20 10 0
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY11
FY18E
Source: Company, IndiaNivesh Research
FY12
FY13
FY14
FY15
FY16E
Source: Company, IndiaNivesh Research
Increase in cotton yarn import from China – positive for NSL NSL is an export driven company with 65% of revenues accruing from exports. China / Hong Kong are major destinations of the company’s exports constituting ~25% of exports. Other countries forming major part of exports include Bangladesh, Sri Lanka and Germany. It has been observed that Chinese import of raw cotton has declined considerably while that of cotton yarn (a value added product) has increased in the same period. In H1FY16, Chinese raw cotton imports have declined by 42.6% yoy in H1FY16 while cotton yarn imports have increased by 29.2% yoy. This is beneficial for NSL as China is one of the major export destinations for the company. Exports revenue mix
Increasing China cotton yarn Imports
300
Rest of the world, 26%
250
China / Hong Kong, 25%
Italy, 4% USA, 5%
'000 Tons
200 150 100 50
Mauritius, 6%
Source: Company, IndiaNivesh Research
Apr‐2015
Aug‐2015
Dec‐2014
Apr‐2014
Aug‐2014
Dec‐2013
Apr‐2013
Aug‐2013
Dec‐2012
Apr‐2012
Aug‐2012
Dec‐2011
Apr‐2011
Aug‐2011
Dec‐2010
Bangladesh, 12 %
Apr‐2010
Sri Lanka , 11%
Aug‐2010
0
Germany, 11%
Source: Bloomberg, IndiaNivesh Research
Nitin Spinners Ltd. (contd...)
December 14, 2015 | 7
Initiating Coverage (contd...)
Financial Performance Volumes to drive 21.6% sales CAGR Net sales of the company stood at Rs 6165 mn in FY15 against Rs 4110 mn in FY11, signifying CAGR of 10.7% over FY11‐FY15. This was led by volume growth of 8.7% CAGR in yarn and 20.1% CAGR in fabric. Volume growth of the company was driven by capacity addition in Q4FY15. Average realization of yarn increased at 2.75% CAGR over the period aided by rupee depreciation (rupee depreciated 8.6% CAGR while cotton prices declined 15.1% CAGR over FY11‐FY15). Going forward, we expect the company sales to grow at 21.6% CAGR over FY15‐FY18E to reach Rs 11080 mn in FY18E from Rs 6165 mn in FY15. This would be driven by higher volumes on back of capacity additions in FY15 and FY18E. We expect volume / average realization to grow at 18.5% / 5% CAGR over FY15‐FY18E respectively. Sales growth driven by capacity addition
Volume to grow at 18.5% CAGR
12000
45000
11080
10000
35000
8295
4883
4461
4283
Tons
4109
182
194
187
214
224
250 200
30000
6165 6000
177
203
4000
150
25000 20000
39480
15000 10000
2000
18996 19580 19550 18674
23714
100
Rs per Kg
7710
8000 Rs Mn
209
40000
29082 29408 50
5000 0
0 FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
0 FY11
FY12
FY13
Yarn Volume (LHS)
FY14
FY15
FY16E FY17E FY18E
Average Realisation (Yarn) (RHS)
Source: Company, IndiaNivesh Research
Source: Company, IndiaNivesh Research
Value added products to improve EBITDA margin Though cotton price is a large determinant of average realisation of cotton yarn manufacturing companies, value added products can aide companies in getting better average realisation. NSL has been focusing on improving the product mix and increasing the revenue share of value added products like compact yarn, finer count yarns among others. EBITDA of the company increased at 6.9% CAGR to reach Rs 992 mn in FY15 from Rs 758 mn in FY11. EBITDA margin of the company fluctuates with change in raw material prices. Going forward, we expect EBITDA of the company to grow at 29.7% CAGR to reach Rs 2165 mn in FY18E due to change in revenue mix. EBITDA margin is likely to reach 19.5% in FY18E from 18.3% in FY15, an improvement of 346 bps over the period. EBITDA to grow at 29.7% CAGR
Cost structure
2500 2000
100
25 19.6
18.4
19.2
18.3
19.0
19.5
90 80
20
1500
15 10.5 2165
1000 1414 500
758
872
939
992
FY13
FY14
FY15
10
1574
% to sales
70 %
Rs Mn
16.1
450 FY12
EBITDA (LHS)
FY16E
FY17E
8.2 4.5 8.6
7.6 5.0 7.2
7.8 5.6 8.3
7.7 5.5 8.4
7.5 5.5 8.2
7.5 5.5 8.0
40 61.4
69.3
59.2
61.0
62.2
60.1
59.8
59.5
20 10
0 FY11
7.3 3.9 9.0
50 30
5
0
60
8.0 3.6 8.6
0
FY18E
FY11 FY12 Raw Material
EBITDA Margin (RHS)
FY13 FY14 FY15 FY16E Power and Fuel Employee
FY17E FY18E Others
Source: Company, IndiaNivesh Research
Source: Company, IndiaNivesh Research
Nitin Spinners Ltd. (contd...)
December 14, 2015 | 8
Initiating Coverage (contd...)
PAT margin to be impacted in near term on higher tax rate and interest cost Reported PAT of the company increased at a CAGR of 57% over FY11‐FY15 to reach Rs 410 mn in FY15 against Rs 67 mn in FY11. However, adjusting for exceptional items in FY11 (for excess depreciation charged on change in accounting norms), PAT increased at 15.2% CAGR over the same period. Adjusted PAT margin increased from 5.7% in FY11 to 6.6% in FY15 on higher other income. PAT margin of the company has largely been moving in‐line with EBITDA margin. Despite EBITDA growth of 29.7% CAGR, PAT is likely to grow at 23.4% CAGR over FY15‐18E. We expect PAT of the company to reach Rs 770 mn in FY18E with margin of 7.0%. This is due to higher effective tax rate, higher depreciation and interest cost due to ongoing capex. The company is likely to pay full tax rate of 34.3% from FY16E against 23.8% rate paid in FY15. Depreciation and interest are likely to grow at 29.4% and 20.5% CAGR over FY15‐18E, lowering the bottom‐line growth. PAT to grow at 23.4% CAGR 900
9 7.1
800 5.7
700
6.6
5.4
7.0 6.1
7
6.0
5
500
3
400
%
Rs Mn
600
770 0.1
300 200
348
241
233
100
410
474
1
496
‐1
3
0
‐3 FY11
FY12
FY13
FY14
Adj. PAT (LHS)
FY15
FY16E
FY17E
Adj. PAT Margin (RHS)
Source: Company, IndiaNivesh Research
Return ratios healthy despite lower PAT margin Post FY12, the return ratios of the company increased significantly on improved profitability and no capex till FY14. ROCE / ROE of the company increased to 22.6% / 26.4% in FY14 from 6.3% / 0.3% in FY12. The company embarked on expansion plans from FY15 followed by another expansion in FY18E, which would be impacting ROCE due to higher capital work in progress till FY17E. Also, higher effective tax rate and lower PAT margin would impact the return ratios of the company. However, we expect an improvement in return ratios post the completion of the capacity addition in FY17E and report improved performance from FY18E. We expect ROCE/ ROE to reach 19.2% / 23.7% in FY18E respectively. ROE of 23.7% in FY18E 30.0 26.4 25.0 20.5
24.5
22.6
19.6
20.0 15.0 10.0
23.7
22.7 18.4
14.0 7.8
14.0
14.0
19.2
14.4
Capex period ‐ capacity WIP
6.3
5.0 0.3 0.0 FY11
FY12
FY13
FY14 ROCE
FY15 ROE
FY16E
FY17E
FY18E
Source: Company, IndiaNivesh Research
Nitin Spinners Ltd. (contd...)
December 14, 2015 | 9
Initiating Coverage (contd...)
Key risks Cotton price volatility may impact profitability NSL is a cotton yarn manufacturing company with raw material cost forming ~60% of its sales. Key raw material of the company is cotton, which fluctuates depending on the demand and supply scenario in global as well as domestic markets. Though value added yarn and presence of fabrics provides some cushion to this risk, NSL cannot mitigate this risk completely. Steep volatility in cotton prices could impact the performance of the company on short term basis at any particular time. As per our analysis, 100 bps movement in raw material cost as percentage to sales could impact EPS by 10.8% in FY16E, 11% in FY17E and 9.5% in FY18E.
Sensitivity of raw material cost to EPS 100 bps↓ Raw Material / EPS FY16E 59.1 10.8 % Change in EPS FY17E 58.8 % Change in EPS 11.0 FY18E 58.5 % Change in EPS 9.5
50 bps↓ Base Case 59.6 60.1 5.4 0.0 59.3 59.8 5.5 0.0 59.0 59.5 4.8 0.0
50 bps ↑ 100 bps ↑ 60.6 61.1 ‐5.4 ‐10.8 60.3 60.8 ‐5.5 ‐11.0 60.0 60.5 ‐4.8 ‐9.5
Source: IndiaNivesh Research
Rupee appreciation Exports constitute 65% of the company’s sales. Rupee has been depreciating since 2008 and has reached Rs 66 / USD currently from Rs 40 / USD in 2008. This implies a depreciation of 65% over the period. In our opinion, the company has benefitted from this scenario as the average realization of the company has either been increasing or stable, irrespective of cotton prices. Significant rupee appreciation could have an adverse impact on the average realization. Volatile cotton prices
Source: Bloomberg, IndiaNivesh Research
209 177
Rs/kg
150 100 100
113
123
182
187
194
Jul‐2015
Jan‐2015
Jul‐2013
Jul‐2014
Jan‐2014
Jul‐2012
Jan‐2012
Source: Bloomberg, IndiaNivesh Research
Jan‐2013
Jul‐2010
Jul‐2011
Jan‐2010
Jan‐2011
50 Jul‐2008
Jul‐2015
Jul‐2014
Jan‐2015
Jul‐2013
Jan‐2014
Jul‐2012
Jan‐2013
Jul‐2011
Jan‐2012
Jul‐2010
Jan‐2011
Jul‐2009
Jan‐2010
Jul‐2008
Jan‐2009
Jul‐2007
Jan‐2008
Jul‐2006
Jan‐2007
Jan‐2006
35
Jul‐2009
40
Jan‐2008
45
250 200
Jan‐2009
50
Jan‐2006
55
Rs/kg
INR/USD
60
Increasing average realization of yarn
200 180 160 140 120 100 80 60 40 20 0
Jul‐2006
65
Jul‐2007
70
Jan‐2007
Depreciating Rupee
0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Source: Company, IndiaNivesh Research
High debt NSL, operating in capital intensive spinning industry, has been exposed to high debt. However, post exit from CDR, the company has been conscious of reducing the debt levels. We expect the debt to equity of the company to reduce to 1.5x in FY18E from 2.3x in FY15, post completion of capacity expansion. Taking into consideration other spinning companies, the debt of the company would still remain high as other companies have consciously reworked their strategies to reduce debt. High debt could be one of the major risks in event of demand slowdown.
Nitin Spinners Ltd. (contd...)
December 14, 2015 | 10
Initiating Coverage (contd...)
Peer Debt to equity (FY15) 3.1
3.5
NSL debt to equity 3.5
3.0
3.3
3.0
2.5
2.9
2.5
2.3
1.5
0.9
1.0
2.3 1.7
1.5
1.2
1.5
1.3
1.0
0.6
0.5
2.3
2.1
2.0
2.0
0.5
0.2
0.0
0.0 Nitin Spinners
RSWM
Ambika Cotton
Sutlej Textiles
Vardhman Textiles
FY11
KPR Mills
Source: Bloomberg, IndiaNivesh Research
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
Source: Company, IndiaNivesh Research
Valuation NSL has a strong business model with products being supplied to variety of textile segments to diversified client base across more than 30 countries. With vertical integration till fabric level, focus on value added products and establishment of captive power plant the margins are likely to be protected to some extent. It doubled its capacity in FY15; the full impact would be visible in FY16E. It is further adding capacities in FY17E which would lead to sales growth of 21.6% CAGR over FY15‐FY18E. We expect EBITDA margin to improve by 346 bps over FY15‐18E due to focus on value added products and stable raw material scenario. At CMP of Rs 64, the stock trades at PER of 6.2x, 5.9x and 3.8x its FY16E, FY17E and FY18E EPS of Rs 10.3, Rs 10.8 and Rs 16.8 respectively. Historically, the company has traded at average one
year forward PE of 8.8x since FY10. Recently the valuation of the sector has reduced as the there has been correction in equity markets and companies have been reporting disappointing results. Currently, peers are trading at average PE multiple of 7.5x FY17E earnings. However, this valuation is likely to improve going forward with demand improvement and stability in raw material scenario. We value Nitin Spinners Ltd at 6.7x (discount of 10% to peers due to high debt and lower PAT growth) its FY18E earnings arriving at target price of Rs 112 per share. FY18E is likely to be a game changing year for the company due to new capacities coming into operations. We recommend BUY rating on the stock with long term horizon.
Peer Comparison Companies Ambika Cotton* Vardhman Textiles* KPR Mills Average Nitin spinners
Growth CAGR (FY15‐17E) EBITDA Margin(%) PAT Margin (%) ROE (%) Debt to Equity Sales EBITDA PAT FY16E FY17E FY16E FY17E FY17E FY15 15.3 16.3 20.0 20.7 21.1 11.0 11.5 19.1 0.2 5.1 16.0 35.1 19.8 20.1 8.9 9.7 16.6 0.6 15.8 25.2 38.2 15.8 16.9 8.4 9.9 26.4 0.9 12.1 19.2 31.1 18.7 19.4 9.4 10.4 20.7 0.6 21.6 29.7 23.4 18.3 19.0 6.1 6.0 19.6 2.3
Source: Company, Bloomberg, IndiaNivesh Research
Note: *‐ Bloomberg consensus
PE (x) EV/EBITDA (x) FY17E FY17E 6.5 4.0 7.0 3.8 8.9 5.5 7.5 4.4 5.9 5.5
One‐year forward PE Chart
One‐year forward EV/EBITDA chart
300
5x
10x
Source: Capitaline, IndiaNivesh Research
20x
25x
EV/EBITDA
Mean
Apr‐2015
Aug‐2015
Dec‐2014
Apr‐2014
Aug‐2014
Dec‐2013
Apr‐2013
Aug‐2013
Dec‐2012
Apr‐2012
Aug‐2012
Dec‐2011
Apr‐2011
Aug‐2011
Apr‐2015
Aug‐2015
Dec‐2014
Apr‐2014
Aug‐2014
Dec‐2013
Apr‐2013
15x
Aug‐2013
Dec‐2012
Apr‐2012
Aug‐2012
Dec‐2011
Apr‐2011
Aug‐2011
Dec‐2010
Apr‐2010
Price
Aug‐2010
Jul‐2009
Dec‐2009
Mar‐2009
0
Dec‐2010
50
Apr‐2010
100
Aug‐2010
150
Jul‐2009
200
Dec‐2009
250
Mar‐2009
10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00
Median
Source: Capitaline, IndiaNivesh Research
Nitin Spinners Ltd. (contd...)
December 14, 2015 | 11
Initiating Coverage (contd...)
Company Background Nitin Spinners Ltd, incorporated in 1993, is engaged in the production of cotton yarns and knitted fabrics. Cotton yarns manufactured by the company are used in diversified segment including knitted fabrics, woven fabrics, industrial fabrics, denims, furnishings, terry towels and carpets among others. Knitted fabrics are used in apparel industry. Headquartered in Bhilwara (Rajasthan), the company’s manufacturing capacity of yarn is 37800 tons per annum (150,000 spindles) and that of fabrics is 8600 tons per annum (49 circular knitting machines). With 65% of its sales accruing from exports, the company is exporting products to more than 40 countries including European, US and Asia‐Pacific countries. The company is an approved vendor for HNM, C&A and IKEA stores. Client profile of NSL Home Furnishing, 10%
Revenue Mix
Denim, 10%
100% 90%
3.0 14.5
4.0 10.3
3.5 9.9
3.0 14.2
82.5
85.7
86.6
82.8
FY11
FY12
FY13
FY14
Yarns
Fabrics
80%
3.1
4.2
3.0
3.2
19.1
20.0
21.1
16.7
74.8
76.9
75.9
80.1
FY15
FY16E
FY17E
FY18E
70% 60% 50% 40% 30% 20% 10%
Woven Fabrics, 20%
0%
Knitwear , 55% Terry Towels, 5%
Source: Company, IndiaNivesh Research
Source: Company, IndiaNivesh Research
Others
Nitin Spinners Ltd. (contd...)
December 14, 2015 | 12
Initiating Coverage (contd...)
Standalone Financial Statements Income statement Y E March (Rs m) Net sales Growth % Expenditure Raw Material Power and Fuel Employee Others EBITDA Growth % EBITDA Margin % Other Income Depreciation and amortisation EBIT EBIT Margin % Interest Exceptional/Extraordinary item PBT PBT Margin % Tax Effective tax rate % PAT Adj. PAT Growth% Adj. PAT Margin %
FY 14 4883 9.5 3944 2979 350 246 370 939 7.7 19.2 3 249 694 14.2 175 0 520 10.6 172 33.1 348 348 44.7 7.1
FY 15 6165 26.2 5173 3837 513 343 480 992 5.6 16.1 51 279 764 12.4 226 0 537 8.7 128 23.8 410 410 17.6 6.6
FY 16E 7710 25.1 6296 4635 644 424 594 1414 42.6 18.3 7 376 1045 13.6 324 0 721 9.3 247 34.3 474 474 15.6 6.1
FY 17E 8295 7.6 6721 4961 682 456 622 1574 11.3 19.0 7 398 1183 14.3 428 0 755 9.1 259 34.3 496 496 4.8 6.0
FY 18E 11080 33.6 8914 6591 883 609 831 2165 37.6 19.5 8 605 1568 14.2 395 0 1173 10.6 402 34.3 770 770 55.2 7.0
FY 14 520
FY 15 537
FY 16E 721
FY 17E FY 18E 755 1173
249 175 1 35 ‐112 866 ‐389 478 0 ‐389 ‐175 ‐305
279 226 8 ‐495 ‐111 445 ‐2194 ‐1749 0 ‐2194 ‐226 2022
376 324 0 ‐356 ‐247 817 ‐260 557 0 ‐260 ‐324 ‐178
398 428 0 ‐96 ‐259 1227 ‐2845 ‐1618 0 ‐2845 ‐428 2100
605 395 0 ‐560 ‐402 1211 5 1216 0 5 ‐395 ‐763
0 0
0 ‐40
0 ‐55
0 ‐55
0 ‐55
‐480 ‐2 3 1
1756 6 1 7
‐558 0 7 7
1617 ‐2 7 5
‐1214 2 5 7
Balance sheet Y E March (Rs m) Equity Share Capital Reserves & Surplus Net Worth Total debt Net defered tax liability Total Liabilities Gross Fixed Assets Less Depreciation Capital Work in Progress Net Fixed Assets Investments Current Assets Inventories Sundry Debtors Cash & Bank Balance Loans & advances Other Current assets Current Liabilities & provisions Net Current Assets Mis Exp not written off Total assets
FY 14 458 857 1316 1761 211 3288 3787 1875 212 2124 0 1416 707 249 1 347 113 252 1164 0 3288
Key ratios Y E March Adj. EPS (Rs) Cash EPS (Rs) BVPS DPS (Rs)
FY 14 FY 15 FY 16E FY 17E FY 18E 7.6 8.9 10.3 10.8 16.8 13.0 15.0 18.5 19.5 30.0 28.7 36.4 45.6 55.2 70.8 0.8 1.0 1.0 1.0 1.0
FY 15 FY 16E FY 17E FY 18E 458 458 458 458 1212 1630 2071 2786 1670 2088 2529 3245 3783 3605 5704 4941 339 339 339 339 5792 6032 8573 8525 6211 6261 9261 9311 2044 2420 2818 3423 0 210 55 0 4167 4052 6498 5888 0 0 0 0 1932 2344 2494 3160 942 1164 1244 1640 404 493 506 659 7 7 5 7 311 386 415 499 268 294 324 356 307 363 419 523 1625 1981 2075 2637 0 0 0 0 5792 6032 8573 8525
Cash Flow Y E March (Rs m) PBT Adjustment for: Depreciation Net interest Paid Others Changes in working capital Tax expenses Cash flow from operations Capital expenditure Free Cash Flow Others Cash flow from investments Interest Loans availed or (repaid) Proceeds from Issue of shares (incl share premium) Dividend paid (incl tax) Cash flow from Financing Net change in cash Cash at the beginning of the year Cash at the end of the year
Source: Company, IndiaNivesh Research
Adj. P/E (x) P/CEPS (x) P/BV (x) EV/EBITDA(x) M cap/sales (x)
8.4 4.9 2.2 5.0 0.6
7.2 4.3 1.8 6.8 0.5
6.2 3.5 1.4 4.6 0.4
5.9 3.3 1.2 5.5 0.4
3.8 2.1 0.9 3.6 0.3
ROCE ROE
22.6 26.4
14.0 24.5
18.4 22.7
14.4 19.6
19.2 23.7
Inventory (days) Debtors (days) Trade Payables (days)
52.8 18.6 8.0
55.8 23.9 5.5
55.1 23.4 5.8
54.8 22.3 6.6
54.0 21.7 7.3
Total Asset Turnover (x) Fixed Asset Turnover (x)
1.4 2.6
1.0 1.5
1.2 2.0
0.9 1.3
1.2 1.9
Debt/equity (x) Debt/ebitda (x) Interest Coverage (x) Dividend Yield %
1.3 1.9 4.0 1.2
2.3 3.8 3.4 1.6
1.7 2.5 3.2 1.6
2.3 3.6 2.8 1.6
1.5 2.3 4.0 1.6
Nitin Spinners Ltd. (contd...)
December 14, 2015 | 13
Initiating Coverage
Disclaimer: This report has been prepared by IndiaNivesh Securities Limited (“INSL”) and published in accordance with the provisions of Regulation 18 of the Securities and Exchange Board of India (Research Analysts) Regulations, 2014, for use by the recipient as information only and is not for circulation or public distribution. INSL includes subsidiaries, group and associate companies, promoters, directors, employees and affiliates. This report is not to be altered, transmitted, reproduced, copied, redistributed, uploaded, published or made available to others, in any form, in whole or in part, for any purpose without prior written permission from INSL. The projections and the forecasts described in this report are based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections are forecasts were based will not materialize or will vary significantly from actual results and such variations will likely increase over the period of time. All the projections and forecasts described in this report have been prepared solely by authors of this report independently. None of the forecasts were prepared with a view towards compliance with published guidelines or generally accepted accounting principles. This report should not be construed as an offer to sell or the solicitation of an offer to buy, purchase or subscribe to any securities, and neither this report nor anything contained therein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. It does not constitute a personal recommendation or take into account the particular investment objective, financial situation or needs of individual clients. The research analysts of INSL have adhered to the code of conduct under Regulation 24 (2) of the Securities and Exchange Board of India (Research Analysts) Regulations, 2014. The recipients of this report must make their own investment decisions, based on their own investment objectives, financial situation or needs and other factors. The recipients should consider and independently evaluate whether it is suitable for its/ his/ her/their particular circumstances and if necessary, seek professional / financial advice as there is substantial risk of loss. INSL does not take any responsibility thereof. Any such recipient shall be responsible for conducting his/her/its/their own investigation and analysis of the information contained or referred to in this report and of evaluating the merits and risks involved in securities forming the subject matter of this report. The price and value of the investment referred to in this report and income from them may go up as well as down, and investors may realize profit/loss on their investments. Past performance is not a guide for future performance. Actual results may differ materially from those set forth in the projection. Except for the historical information contained herein, statements in this report, which contain words such as ‘will’, ‘would’, etc., and similar expressions or variations of such words may constitute ‘forward‐looking statements’. These forward‐looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward‐looking statements. Forward‐looking statements are not predictions and may be subject to change without notice. INSL undertakes no obligation to update forward‐looking statements to reflect events or circumstances after the date thereof. INSL accepts no liabilities for any loss or damage of any kind arising out of use of this report. This report has been prepared by INSL based upon the information available in the public domain and other public sources believed to be reliable. Though utmost care has been taken to ensure its accuracy and completeness, no representation or warranty, express or implied is made by INSL that such information is accurate or complete and/or is independently verified. The contents of this report represent the assumptions and projections of INSL and INSL does not guarantee the accuracy or reliability of any projection, assurances or advice made herein. Nothing in this report constitutes investment, legal, accounting and/or tax advice or a representation that any investment or strategy is suitable or appropriate to recipients’ specific circumstances. This report is based / focused on fundamentals of the Company and forward‐looking statements as such, may not match with a report on a company’s technical analysis report. This report may not be followed by any specific event update/ follow‐up. Following table contains the disclosure of interest in order to adhere to utmost transparency in the matter;
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Nitin Spinners Ltd.
December 14, 2015 | 14
