Trident Ltd Research Report By Edelweiss

Trident is one of the largest integrated home textile manufacturers in the world. Commencing operations as a yarn player, the company has shifted to the higher margin home textile segment. We estimate the company’s operating margin to improve to over 22.0% in FY19 from 19.5% in FY16 due to shift up the value chain with home textile accounting for 71% of revenue in FY19E versus 46% in FY16. Also, with utilisation of terry towel and bed linen improving from the current 49% and 32%, respectively, operating leverage should boost margin further. Additionally, we expect Trident to utilise the free cash flow of INR600cr generated every year over FY17-19E, as its expansion plans have been completed, to pay off debt, resulting in a debt to equity of mere 0.8x in FY19E. We initiate coverage with ‘BUY’ and TP of INR118.

Indian home textile exports: To catapult to USD8.2bn by 2021 spearheaded by inherent advantages

India enjoys significant advantages in manufacture of cotton home textile such as surplus cotton, low labour costs, policy push to boost production and long-term relationships with clients due to strict compliance & quality adherence. India’s market share in US cotton terry towels and bed linen has jumped from 28% and 22% in 2008 to 40% and 49%, respectively, in 2016 as it wrested market share from China due to labour cost advantage. However, it has failed to make a mark in other countries due to duty and tariff disadvantages. But, the government is discussing revised trade agreements and any positive outcome could be a huge kicker.

Multiple levers for margin expansion

We envisage Trident’s EBITDA margin to jump to 22% in FY19E from 19% in FY17 riding multiple levers. First, the company has prudently metamorphosed from a low-margin yarn manufacturer to a higher-margin home textile major (home textile revenue will jump from 46% in FY16 to 70% in FY19E). Second, higher backward integration via rising captive consumption of yarn is bound to boost margin. Third, the paper division continues to report improved margin due to higher share of branded copier paper. Fourth, and most importantly, utilisation of terry towels and bed linen is expected to improve significantly from 49% and 32% currently to 66% and 54% in FY19E, respectively resulting in operating leverage.

Higher free cash flow generation to help prune debt, spur return ratios, PAT

We anticipate Trident to generate INR600cr free cash flow every year over FY17-19 as its capex has been completed and riding estimated improvement in utilisation. A part of this free cash flow is bound to be used to repay debt. Hence, we estimate the company’s debt to equity to improve substantially from 2.0x in FY16 to 0.8x in FY19. Debt repayment coupled with margin expansion is expected to boost PAT, which is estimated to clock 28% CAGR over FY17-19E. Higher utilisation will spur asset turnover and margin, which will result in RoE and RoCE expanding from 8% and 14% in FY16 to 16% and 22% in FY19E, respectively.

Outlook and valuations:

Spinning a growth story; initiate with ‘BUY’ While top line growth will be muted due to higher captive yarn consumption, the bottom line can catapult 30% over FY17-19E as operating and financial leverage play out. At an inexpensive valuation of 8x FY19E P/E, increasing RoCE (from 8% in FY16 to 15% plus in FY19E) and the ability to generate free cash flows in excess of INR600cr every year provides a high margin of safety. We initiate coverage on Trident with a price target of INR118 (40% upside from current level), valuing it at 11x FY19E P/E.