Dolly Khanna is invested in Nitin Spinners. ICICI Direct has recommended a buy for the target price of Rs 290 (41% upside)

Augmenting capacity to leverage long term opportunity

About the stock: Nitin Spinners (NSL) has graduated from a small pure spinning company to a company with a sizeable presence in India’s yarn market (3 lakh+ spindles). Forward integration into knitted and finished woven fabrics (~ 25% of revenues) in its product portfolio, which yields more superior margins than spinning has fortified its presence across the textile value chain.

 NSL invested in capacity building over the last decade, more than quadrupled its spinning capacities and forward integrated with the addition of fabric capacities. The company has been able to sweat its assets effectively and has maintained average utilisation of 85%+

Historical Financial Performance: NSL’s revenues have grown at a CAGR of 20% over FY12-22. The quality of revenue growth is balanced with volumes increasing at a CAGR of 13% while realisation has grown by 7% over the period

 Exports, which contribute 65-70% of revenues, have grown 6.5x (21% CAGR) during FY12-22. The yarn segment mainly caters to exports whereas the fabrics division is more inclined towards the domestic market

 Vertically integrated business model with 95%+ of yarn requirement for fabric division being met in-house. Captive consumption of yarn increased from 8% in FY12 to 24% in FY22. Yarn segment recorded 18% revenue CAGR in FY12-22 whereas fabric division reported robust growth of 31% (on a favourable base) during the same period

 Over the last decade, NSL maintained EBITDA margins in range of 15-17%

What should investors do? Consistent improvement in financial performance of NSL in spite of cyclical nature of textile industry signifies NSL’s ability of optimum asset utilisation leading to sustainable profit growth. In line with its superior fundamental performance, the stock price has grown at 15% CAGR over last five years. We believe that NSL, with its presence across textile value chain (yarn to fabric) is well poised to capture the export opportunity in global textile trade.

 We initiate coverage under I-Direct Nano format with a BUY rating

Target Price and Valuation: We value NSL at Rs 290 i.e. 6.5x FY24E EPS of Rs 44.5

Key triggers for future price performance:

 The company has demonstrated ability to effectively sweat its assets and maintain average asset utilisation of 85%+, which has led to outperformance in terms of revenue growth over the last decade

 Capacity expansion across segments to drive revenue growth. NSL’s planned capex of Rs 900 crore can generate incremental revenue of ~ Rs 1100 crore (peak revenue of Rs 3500 crore)

 Government initiatives like signing of FTAs with multiple countries, stability in export incentive policy to provide opportunity for Indian exporters across textile value chain to gain market share in global textile trade

 We expect NSL to generate superior RoCE of ~16% in FY25E (vs. average RoCE: 10-12%) and, in turn, lead to higher EVA creation

What’s the story?

One of the fastest growing players over the last decade; capturing growth across textile value chain

Nitin Spinners, over the last decade, has shown a resilient performance with yarn volumes (production) increasing at a CAGR of 13% during FY12-22. Focus on stringent quality control has resulted in the company having a material presence in global markets (exporting to more than 50 countries) with 60-70% revenue coming from exports. The robust dominance is visible with export revenue improving by 6.5x during FY12-22 while overall India’s yarn exports during the same period grew ~2.8x (resulting in consistent market share gains). NSL has been gradually enhancing focus on value added yarn with capability to produce superfine compact premium cotton yarns and also blended yarn. NSL has embedded future readiness by building capacity over the years. It has expanded its yarn spindles ~4x from 77616 spindles (21000 tonnes) in FY12 to 307344 spindles (75000 tonnes) as on FY22. In tandem with increased capacity, operational utilisation for spindles over the last decade has been 85%+ resulting in swifter new capacity absorption. Apart from being pioneers in the yarn segment, NSL has forward integrated into knitted and woven (greige and finished) fabric production, which yields superior margins (400-500 bps higher than yarn division). While the knitted segment is more than a decade old, NSL in FY18 had established a greenfield integrated textile complex park (from fibre to finished fabric), which included facilities of weaving, dyeing, finishing and printing of woven fabrics (capacity: 30 million metre). The plant was commissioned in FY20 while the capacity utilisation for the same has already reached 90%+. This proves the testimony of the business model to sweat its assets effectively. As on FY22, yarn segment commands a lion’s share of 70% (FY12: 85%) whereas fabrics contributed 25% to revenue (FY12: 10%).

Despite near term headwinds, robust macroeconomic opportunities provide larger growth canvas

FY22 was a landmark year for the textile industry as reduced dependency on China and several trade related restrictions (such as ban on Xinjiang cotton region by the US) fuelled India’s yarn and fabric exports. NSL recorded its highest ever revenue and profits driven by historically high yarn realisations and spreads. Revenue grew 66% YoY to Rs 2692 crore whereas EBITDA margins expanded 820 bps YoY to 24.0% in FY22. Yarn spreads for the company were at ~Rs 140/kg in FY22 vs. long term average of Rs 65-70/kg. At an industry level, yarn spreads for a normal 40’s count used to hover in the range of Rs 50-55/kg, whereas in FY22 spreads went to a peak of Rs 120/kg. Owing to robust pent-up demand post relaxation of Covid restrictions and closure of nearly 6-10% spindle capacity in India, cotton yarn players registered their highest ever profitability in FY22. We believe the profitability recorded in FY22 was a decadal phenomenon and replicating the performance would be challenging. However, we expect industry level yarn spreads (for 40’s count) over a longer term to settle at Rs 75-80/kg (25-30% higher than average). This is on the back of the government’s sustained efforts of enlarging global market share for Indian textiles by entering into FTAs with multiple countries and stable export incentive policies, which would create sustainable demand across the textile value chain. After a stupendous performance in FY22, H1FY23 turned out to be a turbulent period for Indian textile value chain owing to spiralling domestic cotton prices and weak global demand (retailers being saddled with excess inventory and inflationary pressure). With cotton prices declining by ~35% and disparity between Indian and global cotton prices gradually diminishing (from 25% to current 10%), we believe most negatives are behind us and the company could witness a gradual improvement from Q3FY23 onwards. We expect NSL to exit FY23E with 75% utilisation rates for its yarn capacity (Q2FY23: 65%), 51% for knitting segment (Q2FY23: 34%) and 85% for the woven segment (Q2FY23: 75%).

Undergoing capex to fuel revenues over next two to three years; higher RoCE to create EVA for the long term

In a bid to capture long term growth opportunities and further strengthen the product range, NSL has embarked on a brownfield expansion and outlined capex worth Rs 900 crore to enhance capacities across segments. It is enhancing yarn capacity by 47% (from 75000 to 110000 tonnes), knitted fabric by 22% (from 9000 to 11000 tonnes) and woven fabric by 33% (from 30 to 40 million meters). At optimum utilisation (at an average yarn realisation of Rs 280/kg), the company could generate incremental revenue of ~ Rs 1100 crore (peak revenue: Rs 3500 crore). Weaving and knitting capacities are expected to be ramped up by Q4FY23 and yarn capacity is expected to be commissioned by Q2FY24. We expect the capex to be funded partially through internal accruals (OCF generation: Rs 430 crore in FY23-24E) and the rest through subsidised long term debt worth Rs 570 crore (average cost: ~4%). We expect peak debt levels at Rs 1260 crore in FY24E and with improved cash flows generation in FY25E we expect debt to reduce by ~Rs 300 crore (D/E: 0.7x). NSL is well geared to capture long term opportunities in the textile segment and garner higher market share from unorganised space. We build in volume CAGR of 13% for yarn segment (76000 tonnes in FY25E, CU: 87%), 13% for woven segment (36 mn meters in FY25E, CU: 90%) and 4% CAGR for knitted segment (9200 tonnes in FY25E, CU: 83%). Efficient asset utilisation (1.3x asset turn) coupled with positive improvement in yarn spreads would enhance profitability. We build in average yarn spreads of Rs 100/kg during FY24-25E and EBITDA margins of 16-17% on account of superior product mix. We expect NSL to generate superior RoCE of ~16% in FY25E (vs. average RoCE: 10-12%) and, in turn, lead to higher EVA creation. With a steady recovery from FY24E onwards, we build in revenue and EBITDA CAGR of 18% and 25%, respectively, in FY23-25E. We value the stock at 6.5x FY25E EPS with a target price of Rs 290 per share (five-year average one year forward P/E: 7x).