Nandan Denim (NDL) reported decent numbers in the quarter gone by despite marginal decline in its margins. Our view on the stock has been positive on account of some fundamentally strong factors that were elaborated in our coverage initiation article. We reiterate our stance, notwithstanding some minor hiccups in the latest earnings report.
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 operating margins. Conclusion of the capex resulted in higher depreciation and finance costs too, eventually taking a toll on the final profit margin.
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, thereby 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 has improved substantially. In the worst case scenario of supply declining, the Government has an option to resort to cotton imports too. Therefore, going forward, the company doesn’t expect margin compression attributable to raw material costs.
We have not revised our estimates post the earnings. We feel the stock, at 8.3x FY19 projected earnings, looks reasonably valued. Investors with a long-term investment horizon should consider accumulation.