Trident Ltd: Q3FY18 Result Update By Edelweiss

We had expected a 5-7% topline growth in FY18 alongwith slight margin improvement (expected to be backended in H2FY18). However Q3FY18 was also subdued in line with H1FY18 as the textile sector continues to be hit by mulitple headwinds such as higher cotton prices, appreicating rupee, lower government incentives and uneven vendor procurement cycle on account of de-stocking in terry towels. Sales at INR 1137cr grew 1% y-o-y and slightly below estimates of a 4% y-o-y growth in revenues. EBITDA at INR 200cr de-grew by 11% from INR 225 Cr in Q3FY17 and this was below our estimates of a 7% de-growth. EBITDA margin at 17.6% in Q3FY18 were 250 bps lower than Q3FY17 margins and slightly below our estimates of 18% margins. Reported PAT of INR 73 Cr was 7% lower than Q3FY17 PAT of INR 79 Cr on account of higher tax expense. Therefore while the home textile industry continues to face headwinds (especially terry towels), paper continues to outperform. We have cut our margin expectation for FY18E and FY19E while retaining our topline growth expectation. Undemanding valuation provide margin of safety and we re-iterate “BUY” with a revised price target of INR 110 (earlier 118) as we roll forward to FY20E.

Muted performance from home textiles; Recovery delayed

Home Textiles revenues grew 3% in this quarter from INR 920 Cr in Q3FY17 to INR 945 Cr in Q3FY18 led by higher utilization in bed sheets which increased from 29% in FY17 to 42% in 9MFY18 (our full year estimate is 44% and Trident should surpass that). Terry towel utilization fell further in this quarter from 50% in FY17 to 45% in 9MFY18 due to high base and uneven vendor procurement cycle. However domestic home textile business continues its healthy growth. Adjusting other income, margins slightly improved but are still lower on a 9M basis with 9MFY18 margins at 14.6% as against 17.7% margins in 9MFY17. This was due to lower utilization in terry towel along with high prices for good quality cotton and inspite of manpower rationalization undertaken by the company. Yarn utilization increased further to 95% with lower captive consumption leading to higher yarn sales which also impacted margins negatively.

Paper continues to outperform; Debt repayment on track

Paper utilization was maintained at 89% in Q3FY18 and revenues are almost flat on a y-o-y basis for the 9M period. However cheaper raw material and stronger realizations have led to margins improving from 37% in Q3FY17 to 39% in Q3FY18. On a 9M basis, margins have improved from 34% in 9MFY17 to 43% in 9MFY18. Copier sales were softer in Q3FY18 at 48% vs. 52% in Q2FY18 which led to lower paper margins than the previous quarter. Company has repaid debt of INR 466 Cr in 9MFY18 and thus long term debt stands at INR INR 1,660 Cr. This debt repayment has helped reduced interest outgo.

Outlook and valuations: Positive; Re-iterate BUY

While top line growth will be muted due to higher captive yarn consumption, the bottom line can catapult 30% over FY18-20E as financial leverage plays out. At an inexpensive valuation of 8x FY20E P/E, and the ability to generate free cash flows in excess of INR600cr every year provides a margin of safety. We value Trident at 11x FY20E P/E and re-iterate our Buy rating.