Buy Vardhman Textiles - Motilal Oswal

• Mkt Cap USD0.4b
• CMP Rs295
• Buy

- Results better than expected: Vardhman Textiles' 1QFY11 results are better than we had expected. Revenues are up 31% YoY to Rs8.1b (in line). Reported PAT is up ~174% YoY to Rs787m. Adjusted for forex gains of ~Rs23m, PAT stands at Rs764m (v/s our estimate Rs611m). The variance was primarily due to lower interest and depreciation cost. EBITDA stood at Rs1.8b (v/s our estimate of Rs1.75b). EBITDA margin is broadly in line at 22.1%, up 4.4pp YoY.

- Conference call highlights: (1) The global textiles industry is exiting the deflationary period due to macro factors such as irreversible higher cost structure in China and appreciating Chinese currency. Current yarn prices are close to 15-year historic highs. (2) The management expects current high yarn margins to sustain in 2QFY11. (3) The company expects RoCE to jump from FY12 onwards due change in depreciation policy under IFRS. (4) Capex outlay of Rs8.5b is planned over the next two years. (5) Dividend payout commitment of 15% of standalone profits.

- Yarn margins up sharply: During 1QFY11, yarn revenues grew 28% YoY to Rs6.2b. EBIT margin in the yarn segment expanded 7pp YoY to 16.3% due to favourable domestic raw material situation and strong international yarn demand. EBIT margin for the fabric division dropped 2pp YoY to 4.8%. Fabric revenues grew 34% YoY to Rs2.4b, primarily due to improved capacity utilization at its new plant in Madhya Pradesh. Steel revenues increased 62% YoY to Rs866m. EBIT margin also improved from 10.2% in 1QFY10 to 12.1% in 1QFY11.

- Valuation and view: We are upgrading our EPS estimates by 15.8% for FY11 to Rs46.8 and by 5% for FY12 to Rs48.2, to account for better than expected cotton margins in FY11 due to sustained domestic raw material advantage and strong international yarn demand. The stock trades at 6.3x FY11E and 6.1x FY12E EPS, and 0.8x FY12E BV of Rs368. We maintain Buy with a price target of Rs368 (1x FY12E BV).

Source : Equity Bulls

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