Emkay Sees A Massive Potential Jump Of Upto 50% Returns From This Textile Midcap Stock

Emkay Global Financial Services recommends investors to 'buy' stock of Vardhman Textiles in its latest analyst coverage report. It has mentioned a potential upside of upto 53%.

As per the Emkay Global Financial Services' report, the textile industry is in troubled waters, but there are green shoots of improvement. "We believe while the textile sector is going through tough times, there are signs of improvement in the sector. While demand from US and UK remains a key concern, correction in domestic cotton price, expanding yarn-cotton spread, initiation of demand from some retailers, better demand from China, and lowering of premium of domestic cotton over international cotton price are key positives in our view."

37% drop in margins which are expected to improve

Along with most other textile industry players Vardhman Textiles also took a sharp hit to its gross margins, due to correction in yarn prices in the third quarter. This impact would reduce and margins would improve further, as per the analyst report. "Gross margin declined to 37% from 52% YoY and 43% QoQ because of the sharp drop in yarn prices along with inventory of high-cost cotton. As companies had high-cost cotton inventory at the end of Q2FY23 and yarn prices corrected sharply in Q3FY23, margin for most players took a sharp hit. This impact is expected to be marginal going forward and, hence, margin is expected to improve from hereon."

The yarn-cotton spread averaged out in the quarter and were still below levels of Rs80-100/kg, which shows an improvement. Also, the Indian cotton price premium over international cotton corrected, was stated in the report. "Yarn-cotton spread, which had touched a low of Rs30-40/kg in Q2FY23, averaged Rs60-70/kg in Q3FY23. Given subdued global demand, despite the correction in cotton price, spreads are still below Rs80-100/kg levels. With the recent correction in Indian cotton prices, the premium over international cotton has corrected from Q2FY23 levels. Q2FY23/Q3FY23 premium stood at 37%/24%, which now stands at 12%. This is still higher than the historical average of 5-6%. Management indicated hoarding of cotton by farmers is mostly keeping prices at current levels, else it would have gone even lower."

Buy stock of Vardhman Textiles with a price target of Rs 440

The analyst has asked investors to buy the Vardhman Textiles with a target price of Rs 440 per share. The current market price of per share is Rs 298.70, with an intraday growth of 3.86%. Buying now at the current market price will fetch you potential gains of 47.3% returns.

Vardhman's 52-week high is quoted at Rs 564.59 per share and 52-week low at Rs 245.50 per share respectively. The share price declined by 37.76% and 3.41% in over 1-year and 6-months respectively.

According to the Emkay Global Financial Services analyst coverage report, "We maintain our BUY recommendation with Dec-23 target price of Rs440 (from Rs 455 earlier), as we believe earnings have bottomed and there are clear signs of improvement with lower cotton price and improving yarn-cotton spread."

Disclaimer

The stock has been picked from the brokerage report of Emkay Global Financial Services Ltd, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.