Nandan Denim Research Report By Sunidhi Securities

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%.