Hold Vardhman Textiles; target of Rs 990: ICICI Direct
ICICI Direct’s research report on Vardhman Textiles
Revenues for the quarter declined 2.9% YoY to Rs 1650.4 crore (I-direct estimate: Rs 1742.3 crore). On the segmental front, revenue from the textile division declined 2.2% YoY to Rs 1589.6 crore whereas revenue from acrylic fibre de-grew 13.2% YoY to Rs 86.3 crore. Gross margins improved 114 bps YoY to 47.8%. However, higher employee expenses (up 11% YoY to Rs 146.3 crore) and power expenses (up 16% YoY to Rs 189.9 crore) impacted EBITDA growth. Subsequently, EBITDA margins declined 200 bps YoY to 15.2% (I-direct estimate: 15.4%, Q4FY19: 14.9%). Higher depreciation expense (up 22.7% YoY to Rs 76 crore) and finance cost (up 10.5% YoY to Rs 37.3 crore) further impacted profitability. Hence, PAT de-grew 27% YoY to Rs 116.1 crore (I-direct estimate: Rs 144.8 crore). The Board of Directors has approved the scheme of amalgamation among the company and its subsidiaries VMT Spinning Company Ltd, Vardhman Acrylics Ltd, VTL Investments Ltd and Vardhman Nisshinbo Garments Company Ltd. The appointed date for the scheme will be April 1, 2020.
The management’s focus would be on converting more yarn to fabric, which would lend better stability to EBITDA margin. We expect the EBITDA margin to be range bound at 16-17% for FY20E, FY21E. We have a HOLD rating on the stock with a target price of Rs 990 (PE of 8x FY21 EPS).
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