Buy This Multibagger Textile Stock For A Target Price of Rs 3030 In 2 QTRs

Vardhman Textiles Ltd is a mid-cap textile firm with a market capitalization of Rs 14,868.02 crore. With businesses in textile goods such as fiber (acrylic), yarn, and fabrics, the firm is a major textile manufacturer in India. The company's stock rose from Rs 1140.45 on February 22, 2021 to Rs 2,575.00 on February 21, 2022, 3:30 pm IST on the NSE, resulting in a multibagger return of +1,434.55 (125.79 percent) in a year. On a year-to-date (YTD) basis the stock has surged by +84.80 (3.41%) and +918.25 (55.42%) in the past 6 months. Following the release of the company's Q3FY22 earnings, brokerage firm HDFC Securities issued a buy call on the stock with a target price of Rs 3030.

Q3FY22 result of Vardhman Textiles Ltd (VTL)

The brokerage has highlighted that "VTL reported strong performance in Q3FY22 with revenues increasing by 49% YoY to an all-time high level of Rs 2,603cr driven by higher yarn and fabric realisation and improved capacity utilisation. The Fabrics division, which has been a laggard in the last few quarters, reported 100% utilisation for the first time. Yarn sales volume declined by 5/5% QoQ/YoY to 58,232 MT while grey fabrics sales volume rose 5.4/7.7% QoQ/YoY, and processed fabrics sales volume increased 23.3/41.8% QoQ/YoY. Gross margin improved 400bps YoY to 52.4% due to higher cotton-yarn spread but compressed 350bps sequentially due to low-cost inventory benefit in Q2FY22."

As per HDFC Securities "EBITDA more than doubled YoY to Rs 619cr and EBITDA margin expanded 898bps to 23.8% due to operating leverage. PAT increased 151% YoY to Rs 429cr driven by higher EBITDA, other income and lower interest cost. The management expects EBITDA to remain at the upper end of 18-22% range. PAT increased by 153% to Rs 431cr driven by higher other income and lower interest cost. The company's board of directors has approved a 1:5 stock split from the face value of Rs 10 per share to Rs 2 per share, subject to the approval of the shareholders."

Investment rationale for Vardhman Textiles Ltd

The brokerage has said that "In December 2021, the U.S. President signed into law legislation that bans imports from China's Xinjiang region over concerns about forced labour. As Xinjiang constitutes ~20% of the global cotton market, this led to a supply crunch in yarn and the supply readjustment on account of this ban has led to more demand for Indian Cotton and Cotton yarn. Countries like Bangladesh, Vietnam, Cambodia have now become net importers of yarn, leading to a shortage of Yarn in the global market. Indian cotton exports have skyrocketed in the past eight months as a result. The demand for cotton yarn and fabrics is likely to remain strong for the coming few quarters as producing countries enhance their capacities to meet the disruption caused by the ban."

"The company has announced CAPEX plans of ~Rs 3,000cr over the next three years to expand its yarn capacity, funded through a mix of debt and equity. It might also consider expanding its fabric capacity if the demand continues to remain strong" added the brokerage.

Buy for a target price of Rs 3030

HDFC Securities has claimed that "We are positive on the future earnings growth trajectory of VTL. We expect Revenue/EBITDA/PAT growth of 20/40/53% over FY21-FY24 driven by strong demand and increased capacities gradually coming on stream. EBITDA margins are likely to compress from the current unsustainable levels but would remain at the upper end of the 18-22% guidance given by the management. We believe investors could buy the stock in Rs 2580-2620 band and add on dips to Rs 2230-2270 band (8.5x Dec-23E EPS) for a base case fair value of Rs 2770 (10.5x Dec-23E EPS) and bull case fair value of Rs 3030 (11.5x Dec-23E EPS) over the next 2 quarters."

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.