Vardhman Textiles Q3 Review - Soft Raw Material, Better Capacity Utilisation Drive Profitability: Systematix

Systematix Report

Vardhman Textiles Ltd.'s Q3 FY24 revenue fell 1.7% YoY and 2.8% QoQ to Rs 23.3 billion (6% lower than our estimate). Sale volumes of Yarn/Grey/Processed fabric grew 17%/12%/13% YoY, respectively, on a low base and improving demand momentum.

Gross margin expanded 586 basis point YoY and 320 bps QoQ to 42.9% due to lower raw material prices. Ebitda margin expanded 295 bps YoY and 192 bps QoQ to 10.5% (our estimate 9%), supported by higher utilisation in value-added products such as melanges.

Ebitda increased 37% YoY and 19% QoQ to Rs 2.4 billion, 9% above our estimate of Rs 2.2 billion. Reported profit after tax grew 58.5% YoY and 18.2% QoQ to Rs 1.5 billion, versus our estimate of Rs 1.4 billion.

Management indicated that lower capacity utilisation in the spinning segment is only 75-80% as against normal utilization levels of greater then 90% would continue to stifle margins. The company would be able to achieve topline growth only if yarn prices improve.

We have factored in weak 9MFY24 performance and cut our FY24 earnings by 4%, but have raised FY25E earning per share by 6%, as we expect margins to improve on the back of soft cotton prices and better capacity utilisation in fabric.

We roll forward our valuations to FY26E and revise our rating to 'Buy' from HOLD. Our target price of Rs 469 (Rs 360 earlier) is based on 10 times FY26E price earning (unchanged). Key risks:

1. slower-than-anticipated demand recovery in India and the US,

2. lower availability of cotton and

3. lower realisations in yarn.

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