Will Dolly Khanna’s Latest Stock Also Be A Dazzling Multi-Bagger

Nandan Denim Ltd is a company that few of us have heard of. It is a micro-cap with a market cap of only Rs. 335 crore. It is engaged in the manufacture of denim, khakhi and other fabrics.

Nandan Denim has now shot into prominence because Dolly Khanna a.k.a. Rajiv Khanna has bought a chunk of 5,06,754 shares in the quarter ended 31st March 2015.

The best way to get a grip on Nandan Denim is to read the succinct research report prepared by CRISIL. The report makes the following salient points:

(i) Nandan Denim has reported good Q3FY15 revenues and earnings. The revenues grew 25.7% y-o-y to ₹2,776 mn driven by healthy growth in denim fabrics and contribution from shirting fabrics (started manufacturing in Q1FY15). The EBITDA margin contracted by 154 bps to 15.7% due to an increase in the cost of raw material;

Nandan Denim – Financial Overview

Nandan Denim – Ratios

(ii) Going forward, increase in contribution from shirting fabrics and steady volume growth in denim fabrics are expected to drive domestic sales. A healthy order book (₹900-1,000 mn) provides near term visibility on export revenues.

(iii) The demand for readymade garments is expected to pick up following gradual recovery in consumer spending which, in turn, should boost fabric demand as well;

(iv) Revenues are expected to grow at a CAGR of 15% over FY15-17;

(v) Margins will expand in FY16 owing to higher captive yarn consumption. In FY17, the EBITDA margin are expected to expand by 180 bps to 15.7%;

(vi) The expansion plan is on track. On completion, the spinning capacity is likely to expand to 124 tonnes per day (TPD) from 64 TPD. Subsequently, the company’s captive consumption of yarn is expected to increase to ~95% of total consumption from ~75% currently, leading to expansion in EBITDA margin.

(vii) The decline in cotton prices is a short-term negative because there may be an inventory loss. However, it is a long-term benefit because cotton is the principal raw material.

A further look at the financials reveals that Nandan Denim has been growing at a fast pace. In the past three years, the sales have grown at a CAGR of 20% while the profit has grown at 33%. The average ROE over the past three years is quite healthy at about 17%. The Company has a bit of debt in its books and the debt:equity ratio as of 31st March 2014 stands at 2.13. The falling interest regime will also benefit Nandan in that sense.

The other notable aspect about Nandan Denim is the fact that the promoters have been aggressively buying the stock.

In the October-December 2014 quarter, Devkinandan Corporation LLP acquired 729,980 equity shares (1.6%) in Nandan Denim. On 31st December 2014, Devkinandan Corporation LLP bought another chunk of 48,494 shares at an average price of Rs 72.83 per share.

The promoters presently hold 60.94% of the equity. A large part (23.14% of the total equity) is encumbered.

Dolly’s logic of investing in Nandan Denim appears quite clear. The company is an ultra micro-cap but is growing at a fast pace. The growth in the economy is boosting consumer spending and this is reflecting in the growth in revenues. The fall in cotton prices is a boon because, if not passed onto customers, it will increase the margins.

Now, whether Nandan Denim is able to match the performance of the other multi-baggers in Dolly Khanna’s portfolio requires to be seen.