Nandan Denim Ltd Research Report By Karvy

Largest Organized Player in Denim, Banking on Rising Urbanization

We expect Nandan Denim Ltd’s business to turn around, backed by stabilization in the economy post the structural changes of the last 2 years. There exists huge opportunities for growth in the long term, considering the low penetration of denim in India and increasing urbanization. We value the stock at 9.0x on FY20E EPS of Rs. 18.4, and recommend ‘BUY’, with a target price of Rs. 166, and potential upside of 22%.

Nandan is the largest denim manufacturer in India. It aims to take advantage of the domestic growth in urbanization and continued increase in demand for denim, which has grown at 15% CAGR over FY13-17. Despite a troublesome 2HFY17 and 9MFY18, we expect turnaround due to the following reasons:

– As per IMF, India is expected to witness a turnaround and become the fastest growing major economy, with estimated GDP growth of 7.4% & 7.8% in 2018 & 2019, from 6.7% in 2017. This will increase the rate of urbanization trend and with it the per capita income.

– It favours organized players like Nandan, which, through B2B clientel such as Killer, Being Human, Wrangler and large format stores – Pantaloons, Big Bazaar, Shoppers Stop and Myntra stands to benefit from the urbanization theme, by being a transitional player from the unorganized to branded names.

– India’s per capita purchase of denim currently stands at 0.3 vs 9 in developed nations, thus signalling a significant growth opportunity in the long term.

Estimates and Catalyst: Growth in domestic economy and govt. incentives to boost textile industry can be significant catalyst. We expect demand to recover from FY19E onwards, but given the overcapacity in the industry and subdued demand scenario in the 9MFY18, we expect realizations to be lower and factor revenue growth of 8% over FY17-19E. Operational efficiencies from newly operational backward integration and lower finance costs should further boost bottomline. We factor PAT growth of 16% CAGR over the same period.

Valuation & Risks

Given the good growth rate in the industry and continuous good performance in the last 3 years, the stock has re-rated. We value the stock 9.0x, (a premium to the 3 year average valuation of 8.3x) on FY20E EPS of Rs.18.4 and arrive at a target price of Rs.166, and recommend ‘BUY’. Key risks are change in demand trends & longer period of subdued growth.