Small Midcap Mantra | Fresh entry opportunity in Vardhman Textiles that doubled money in 1 year

Market Outlook

The stock is expected to move higher and gradually head towards Rs 1,532 in the coming months, say experts.

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Vardhman Textiles Ltd, which has almost doubled since June 2020, gained by about 10 percent in May and about 20 percent in 2021. The stock is 6 percent away from its 52-week high of Rs 1,384 recorded on May 25, 2021.

Vardhman, which has a market capitalisation of more than Rs 7,500 crore, is on track to hit a fresh 52-week high and go past 1,500 in the coming months, an upside of about 18 percent from June 3 closing.

The flagship company of the Vardhman Group, Vardhman Textiles is an integrated textile manufacturer that makes cotton yarn, synthetic yarn, woven fabric, sewing thread, acrylic fiber, tow and garments.

The textile sector is regaining momentum after a couple of months. In the textile space, ICICI Direct remains constructive on Vardhman Textiles as it is forming a higher base above its 50-day exponential moving average (EMA).

“The 50-days EMA has been held since July 2020, and coincides with the multi-year breakout area of Rs 1,150, highlighting inherent strength in the stock. Hence, it offers a fresh entry opportunity,” Dharmesh Shah, Head – Technical, ICICI Direct, said.

The stock has been seeing a faster pace of retracement over the past four quarters. It retraced 80 percent of the preceding 10 quarters decline, highlighting structural improvement. A faster pace of retracement signifies a robust price structure that augurs well for the next leg of the upmove

The upmove since September 2020 has been captured in a well-defined upward sloping channel, indicating elevated buying demand.

“We expect the stock to resolve higher and gradually head towards the upper band of rising channel at Rs 1,532 in the coming months,” Shah said.

The weekly-14 period RSI has generated a buy signal, thus validating positive bias.

Vardhman Textiles

Fundamental View

Vardhman Textiles has one of the largest spinning capacities in India and is among the largest domestic yarn producers, with a significant presence in the export market

It reported a strong financial performance in Q4FY21, with a significant improvement in revenues and profitability.

Vardhman Textiles revenues for Q4FY21 grew 22% YoY to Rs 1947 crore. It also witnessed gross margin expansion of 459 bps YoY to 53.1 percent, which enabled an EBITDA margin expansion of 610 bps to 20.2 percent. PAT grew by 72 percent YoY to Rs 250 crore.

“In spite of the tough demand scenario owing to the pandemic, VTL’s yarn business volumes exited FY21 with a recovery rate of around 98 percent of pre-Covid levels,” ICICI Direct said in a note.

The fabric business, which was a laggard in H1FY21 due to subdued demand in the domestic market, began to see strong demand and picked up pace in Q4FY21, with fabric volume growth returning to positive territory with a 12 percent YoY growth, the note said.

The profitability in the yarn business has improved due to higher yarn spreads and improved utilisation of fabric capacity, which would further aid in EBITDA margin.

Vardhman is among the few textile companies to maintain the debt-equity ratio below one despite continuous capacity addition, the brokerage firm said.

“We expect VTL to capitalise on the emerging demand scenario owing to its strong balance sheet and long standing relationship with marquee clients,” it said.

Due to its strong balance sheet (FY21 debt/equity of ~ 0.3x), the company is better placed than peers to capture the growth opportunity arising from the higher demand for textiles in domestic and global markets.

SMC Global Securities maintains a “buy” rating on the stock with a target of Rs 1,487. The company plans to expand its yarn capacity by 1 lakh spindles with a capex of Rs 700 crore.

“It has indicated that the new capacity would be in Madhya Pradesh. Moreover, the management of the company expects to complete the project in the next 12 months. It has in place a strong, capable and experienced management team delivering results that drive the company ahead,” the report added.

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