Strong Q1 led by spike in spreads …
About the stock : Sportking India (SKL) is a leading yarn manufacturer in India with 2 spinning units (3.79 lakh spindle capacity) and 1 dyeing unit in Punjab. The company’s annual total yarn production capacity is ~88000 MT with capacity utilisation of 95-96% across both units.
Q1FY2 7 performance : SKL’s revenues reported 20.1% YoY growth in revenues to Rs.703.7cr driven by ~20-21% YoY growth in realisation and 1% YoY growth in volumes. Gross Profit improved by 463bps YoY to 37.9% driven by improved yarn realisations and cotton yarn spreads. EBITDA margin improved by 693bps YoY to 18.8%. EBITDA grew by 90% YoY to Rs.132.2cr while Adjusted Profit grew by 123% YoY to Rs.76cr in Q1FY27.
Investment Rationale:
• Structural demand tailwinds and capacity expansion to drive growth : SportKing started FY27 on a strong footing with revenues reporting 20% YoY growth to Rs.703.7cr in Q1FY27 largely driven by ~20-21% YoY growth in yarn realisation while volumes reported ~1% YoY growth to 20,492MT during the quarter. The improvement in yarn realisations was led by healthy demand across both domestic and export markets, supported by normalisation of inventories by retailers and increased sourcing from India. Export demand continues to remain robust, particularly from China which has been lagging for the past 4-5 years. Over the recent times, higher domestic cotton prices coupled with lower crop availability in China has led them to import incrementally from countries such as India. Bangladesh, another key textile manufacturing nation has been witnessing challenges in its domestic spinning industry which favours them to import yarn from India. In addition, nation-wide consolidation over the past few years, coupled with India’s improving competitiveness supported by favourable cotton crop availability and recently signed FTAs sustain a healthy demand environment for spinners in the industry. Going ahead, the commissioning of the 150,000 spindle Odisha capacity in is expected to start contributing towards revenues from Q4FY27 (~30-40% of its peak revenues from Q4FY27) and the integration of fabric and garment business is expected to contribute ~8-10% in revenues (~Rs.250cr) from FY28. We expect SKL’s revenues to grow at CAGR of 24% to Rs.3860.2cr in FY28 supported by ~19% CAGR in volumes and ~7% CAGR in realisation over FY26-28E.
• Margins entering a structurally higher trajectory : SKL reported 693bps YoY expansion in EBITDA margins to 18.8% in Q1FY27, driven by higher yarn realizations and favourable cotton costs, resulting in cotton yarn spreads improving to Rs.133/kg (vs. ~Rs.90/kg in Q1FY26 (as per our calculation) and Rs.107/kg in Q4FY26). Management expects margins to remain similar or better in Q2FY27, supported by a healthy order book, disciplined cotton procurement and favourable inventory position, which should sustain healthy yarn spreads in the near term. Over the medium term, annual power cost savings of ~Rs.15cr from the commissioned solar project and 300-400bps higher EBITDA margins from the Odisha facility are expected to structurally improve profitability. Consequently, we expect EBITDA margins to expand by ~550bps over FY26-28E, driving 52%/63% EBITDA/PAT CAGR over the same period.
Rating and Target Price : We recommend BUY with a revised price target of Rs.2 73 valuing the stock at 11 x its FY28E EPS of Rs.2 4.8.
