Nandan Denim – Long-term value drivers intact

Mumbai: Nandan Denim (NDL) reported decent numbers in the quarter gone by despite a marginal reduction in its margins. Our view on the stock has been positive on account of some fundamentally strong factors that were elaborated in the coverage initiation article. We reiterate our stance, notwithstanding some minor hiccups in the latest earnings report.

Result Performance

Quarter at a glance

From a year-on-year (YoY) perspective, completion of capacity expansions at the denim fabric, shirting fabric, and yarn manufacturing units in FY17 led to a significant increase in NDL s top-line, gross profit, and EBITDA during the quarter ended June 2017. However, an uptick in average realisation per metre (from Rs 131.6 in FY17 to nearly Rs 140 in Q1FY18) was offset by higher cotton procurement costs and a rise in operating expenses, thereby impacting the company s margins. Conclusion of the capex resulted in higher depreciation and finance costs too, eventually taking a toll on the final profit margin.

Outlook

NDL is likely to reduce its Rs 475-crore debt (as on June 30, 2017) by Rs 55-60 crore every year from its regular cash flows. The capacity utilisation rate at the company s denim manufacturing facility is expected to scale up from 85 percent in the recently-concluded quarter to 90 percent by FY18-end, thus supporting higher volume-driven sales growth in the long-run.

Though headwinds such as Gujarat floods and pink bollworm attack on cotton fields in the state may lead to higher raw material prices, NDL’s management didn t sound too worried. The company has 47-60 days of cotton inventory and is reasonably confident of adequate supplies as the pan-India cotton acreage improves substantially. In the worst case scenario of a decline in supply, the Government has an option to resort to cotton imports too. Therefore, in the near future, raw material cost fluctuations are unlikely to affect the company’s operating margins considerably.

Valuation

Model

No revisions have been made to our earlier estimates at this point. The stock, at 8.3x FY19 projected earnings, looks reasonably valued. Investors with a long-term investment horizon should consider accumulation.