Why are FIIs buying shares of Nandan Denim at 57% premium to the CMP? …
One aspect that has perplexed novice investors like you and me is as to why elite FIIs are aggressively buying warrants of Nandan Denim where the conversion into equity shares is at a price much higher than the prevailing market price.
We saw this phenomenon first when Polus Global Fund, a FII with a stellar track record for finding multibagger stocks, scooped up a chunk of 2.5 million convertible warrants of Nandan Denim where the shares were to be issued at Rs. 200 each even though the then prevailing price was only Rs. 115.
Later, more elite FIIs such as LTS Investment Fund Ltd and LGOF Global Opportunities Ltd have queued up for convertible warrants of Nandan Denim. The FIIs have pumped in Rs. 100 crore to acquire 5 million convertible warrants.
The astonishing aspect is that the conversion price of Rs. 200 per share represents a premium of over 57 per cent to the present stock price of about Rs 127.
…. Because the Company is at an “inflection point” & is all set to gain from “operating leverage“
The wizards of Sunidhi have laid bare the entire rationale as to why the FIIs are so excited about Nandan Denim. The rationale is as follows:
Best proxy play on high growth Indian Denim market: Industry estimates suggest Denim wear market in India is expected to register a Retail Value figure of Rs. 361 bn by CY 20 from the level of ₹177 bn in CY15 i.e CAGR of 15%. Nandan Denim Ltd, currently the second largest manufacturer of Denim fabric in India with installed capacity of 99MMPA should be a major beneficiary of this secular demand surge.
Higher Topline and better margin- dual benefit post capex: Nandan Denim initiated an ambitious capital expenditure project in FY14 with planned capital outlay of Rs. 6.12bn to increase the denim manufacturing capacity to 110MMPA from 71MMPA, spinning capacity to 124TPD from 54TPD and installing Yarn dyed shirting capacity of 10 MMPA. Post this capex, company is expected to register topline growth of 29% between FY16-FY18E while EBITDA margin should expand by 120bps during the same period to reach a level of 17.8%.
Change in Product mix should help improve Realization: Capex based topline growth has its limitations and hence value addition is the only sustainable growth driver. Currently company derives around 10% of revenue from Value Added products (VADP) which it plans to grow to 33% over next 2-3 years period. We expect, Average Denim realization of the company to improve to Rs. 149/ meter by FY18E from Rs. 133/ Meter in FY15 helped mainly by growing contribution of Value added products in company’s Topline.
Incentives under Gujrat Textile Policy- Icing on the cake: Gujrat Textile Policy offers VAT reimbursement to textile companies for 8 years on procurement of raw material from Gujarat from the date of commissioning of spinning & weaving plant. VAT reimbursement benefit is a contingent benefit depending upon quantum of Cotton/ cotton yarn/Other inputs procured from state of Gujarat. VAT reimbursement benefits should start accruing to company from FY18 onwards and upper limit of this benefit could be close to Rs. 300mn for FY18E.
Buy with Price target of Rs. 219
At the current price of Rs. 126, Nandan Denim is trading at 8.0x FY17E and 6.1X FY18E Earnings, while in terms of EV/EBITDA it is quoting at 5.2x FY17E and 4.3x FY18 EBITDA respectively. Valuation looks attractive compared to peers like Arvind, Indo Count, Vardhman Textiles and Trident Ltd when compared on parameters like PAT CAGR, ROE and Dividend yield. Post completion of Capex by Q3FY17, Nadan should be able to do ROE of above 20% in a sustained manner and hence we believe 6x FY18E EBITDA is a fair value for the company, which gives us fair value of company’s Equity at Rs. 219. At the fair value of ₹219, stock is valued at 13.9xFY17E PE and 10.6xFY18E PE and offers upside potential of 74%.
Dolly Khanna has also increased her stake in Nandan Denim
It is an indisputable proposition that Dolly Khanna knows more about stocks than the elite FIIs. Dolly’s aggressive ramp up of holding in Nandan Denim implies that the FIIs are on the right track.
When I first reported on the matter, Dolly’s holding (as of 31st March 2015) was 5,06,754 shares. By 31st December 2015, the holding had gone up to 5,12,218 shares. As of 31st March 2016, the holding had gone up further to 5,58,373 shares. As at 30th September 2016, the holding has gone up further to 6,56,121 shares.
It is crystal clear from Dolly’s conduct that she regards Nandan Denim as being highly undervalued and as having the potential to give mega gains.
Sunidhi’s first recommendation to buy Nandan Denim yielded promised returns
It is evident that Sunidhi has a deep understanding of the mechanics of Nandan Denim. Sunidhi first recommended a buy of Nandan in May 2015 when the stock was languishing at Rs. 73 and confidently predicted a target price of Rs. 110.
The target price of Rs. 110 was not only effortlessly breached by Nandan but it also surged to an all-time high of Rs. 174 on 4th August 2016. Thereafter, the stock has been on a downward trajectory and is presently resting at Rs. 130.
Conclusion
Prima facie, the unanimous bullishness of Dolly Khanna, the elite FIIs and the expert analysts’ augers well for Nandan Denim. It does look like the stock has the necessary wherewithal to deliver mega gains and delight the believers!
Vardhman textiles is undisputed leader in textiles, and RSWM, ARVIND are distant second and third. Looking beyond that is pure speculation,forget about FII investment as they have got cheap money to lose.In my view of late Dolly khanna has taken substantial exposure in Vardhman and RSWM.
can you tell what is the exposure of dolly in vardhaman and rswm ?
@kharb,
Vardhman textiles is undisputed leader in textiles, and RSWM is distant second is an age old repetitive statement from you but NOT ONCE you have been to pen your rationale explaining why Vardhman Textiles is UNDISPUTED LEADER
Can you do this now…. and if you can’t please could you refrain from unsubstantiated assertions
Looking at your cutting insights into Vardhaman Textiles
thanks
If Nandan Denim is the second largest, who is the largest manufacturer of Denim fabric in India ?
Arvind
The promoters of Nandan have pledged their shares. Arjun, it is irresponsible of you not to mention this when talking up the stock.
look at Trident….. good from long term perspective. I made good short term money in it too
Stock looks good at the CMP of 130 from a 2-3 years period. Impressive profit growth of 29% over the last 5 years. Concern is the debt equity of 1.7 which is rather high. Would the DE ever come down below 1? Promoters have pledged around 27% of their shareholding.
I don’t get this. If the FIIs are bullish on the stock, why can’t they just buy it at the CMP of Rs. 125, instead of buying convertible warrants for Rs. 200? What am I missing?
liquidity … 200 Cr if they put on the open market to buy it stock will zoom to 300-400 that why Rs 200 is a decent deal.
But what if they buy let say is small amount of 50cr or 60cr is deployed between CMP and below 200. Rest they can use the liquidity of Warrants.
@Dhruva – There must be something else to the story.
nandan denim have got a few analysts which are interested parties.otherwise would not have missed important point ,having two listed cos. on bse namely Vishal fabrics and Cil nova.
when i tried to buy vishal ‘s share i was told to buy a minimum quantity in ten s of thousands.