Nandan Demin Research Report By Ventura Securities

Nandan Denim Ltd (NDL) is likely to report higher profits till FY19 due to increased denim manufacturing capacity and backward integration in spinning. Central and state government incentives will improve profitability further. Denim fabric accounted for 93% of revenues in FY17.

We are optimistic about NDL’s prospects given that:

– NDL is the largest denim fabric manufacturer with 110MMPA (Million Meters Per Annum) capacity in India and is 4th largest in the world. It would be serving the increasing demand of Indian and international denim market. Exports would likely account for 30% of sales in next two-three years.

– Better market response, efficient capacity utilization and cost savings on backward integration in yarn manufacturing would result in EBITDA margin improvement from 15.6% in FY17 to 18.8% in FY19.

– NDL will be eligible for interest subsidy of 5% as an integrated Spinning facility (2% for standalone facility) from Central Government. Gujarat’s reimbursement of state taxes on cotton helps improve profitability and lower finance cost.

– NDL has finished major capex programme in FY17 and benefits from these assets begins from FY18. This will increase ROCE to 20.1% in FY19 from 13.8% in FY17.

We launch coverage with a BUY rating and a price target of Rs. 175, arrived at by applying 7X multiple to its EPS Rs. 24.6 for FY19. We believe that the phase of flat PAT for FY16-17 is now over and expect to see 64% growth in FY18 followed by 27% in FY19. This will lead to a re-rating to 7X from the current 5X. Our target price suggests a return of 32.6% from the current market price of Rs 132 over the next 12 months.”