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.
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!