All stars aligning; valuation re-rating on cards
We recently interacted with the management of Indo Count Industries (ICNT) to get a sense of its growth plans and the dynamics in the home textile market. It is currently largest exporter of bed linens which undertook a forward integration in 2007 which enabled it to foray into the home textile market. It boasts of marquee global clients like Walmart, JCPenney, and Bed Bath & Beyond. Multiple expansions in the past and acquisition of GHCL’s textile unit have taken capacity to 153mn metres. Around 95% of revenue accrues from exports (74% to the US). ICNT has diversified its product mix to fashion, utility, and institutional segments from bed linen.
With a strong clientele, expanding product bouquet, entry into new export markets, shift in the product mix towards premium products, and cumulative capex of INR1,000cr by FY24-end, ICNT aims to double revenue over the next three-to-four years with margin expansion. We upgrade our TP to INR430 from INR350 earlier, driven by: i) market share gains in the US, ii) potential signing of FTAs with the UK and EU, iii) adequate capacity to meet incremental demand, iv) margin expansion driven by operating leverage, and v) greater contribution from the fashion utility and value-added segments. We introduce our FY26 estimates and roll over at 16x FY26E earnings from 15x FY25 earnings. We maintain ‘BUY’ with an upgraded TP of INR430 (at 16x FY26E P/E).
Aggressive capex leads to healthy revenue potential
In the last couple of years, ICNT has expanded capacity to 153mn metres from 90mn metres. It competed brownfield expansion of 18mn metres in FY23 and acquired the textile unit of GHCL (45mn metres). The management aims to double revenue in the next three-to-four years on optimum capacity utilisation without incurring additional material capex. ICNT gains from the rising share of Indian home textile players in the US market driven by the China+1 theme, which is due to the US ban on cotton from the Xinjiang region, China’s focus on its domestic market, and higher cost of manufacturing in China. We expect 17% volume CAGR over FY23–26 on market share gains in the US and healthy replacement demand. We think that average realisations have bottomed out (12% degrowth in FY24) and 4% CAGR in average realisation over FY24–26. This will result in a FY24–26 revenue CAGR of 15%.
Value added segment to drive margin; cash flows and margin to result in superior return ratios
ICNT is boosting the contribution from value added segments by promoting fashion, utility, and institutional bedding products, whose contribution rose to 19% in FY23 from 7% in FY18. It has invested INR70cr with value addition in focus. It aims to raise contribution to 30% over the next threeto-four years which will result in margin expansion. Premium products offer higher realisation (~20%) than conventional utility bedding. Capacity utilisation stands at 62%. We expect it to rise to 78% by FY26 which will lead to a positive operating leverage. We see margin expanding by 240bp by FY26E and touch ~18%. We expect ICNT to generate strong operating cash flows. The company has aggressively spent on capex in the last two years. As it will only need minimal maintenance capex, we expect it to be net debt free by FY26.
Valuation and view
We expect ICNT to grow its revenue, EBITDA, and PAT, with healthy return ratios and cash. Operational metrices for ICNT are at par with other Indian textile exporters. Despite that, it is trading at a discount to its peers. Hence, we see room for a valuation re-rating. The home textile export market, especially bed linen, has navigated headwinds such as the rise in cotton prices, lower demand (on higher inflation), inventory build-up with US retailers, and supplychain disruptions. Demand is robust despite near term disruptions owing to longer transit times due to the Red Sea crisis. India gained market share in US bedsheet imports (59% in 2023 from 49% in 2022) from the RoW (especially China and Pakistan).
We are positive on the textile export theme in the medium-to-long term given: i) the US ban on cotton imports from China’s Xinjiang region, ii) signing of FTAs with Australia and the UAE and a higher likelihood of an FTA with the EU and the UK, and iii) various government initiatives to aid textile exports. We expect a revenue/EBITDA/PAT CAGR of 15%/20%/24% over FY23–26. We maintain ‘BUY’ with an upgraded TP of INR430 (at 16x FY26E P/E).
Click here to download research report on Indo-Count by Nuvama
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