nandan exim research report

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Nandan Exim Limited (Nandan) is one of the largest denim manufacturers in

India, with a capacity of approximately 70.0 mn metres per annum (p.a.). The

company has clocked a strong sales growth of 21.2% CAGR over FY2007-13.

We expect this CAGR to increase even further, to 24.9% over FY2013-15, on the

back of higher capacity and strong domestic and export orders. At current levels,

the stock is trading at 0.6x its FY2014E and 0.5x its FY2015E Book Values. We

recommend a Buy on the stock with a Target Price of Rs 55, valuing the business

at 1.0x its FY2015E BV.

Industry poised for tremendous opportunities at a global level: The denim

industry in India is well poised to exploit the opportunities offered by the global

developments. China has witnessed a cut in the national capacity from around 3

bn metres to 2.5 bn metres last year, due to a number of headwinds, marking

the beginning of a big opportunity for Indian players. Nandan Exim stands to be

foremost at reaping this opportunity, having a long experience in the denim

exports market, backed by a focused and dedicated management. The company

has a number of global brands, like Ralph Lauren, Calvin Klein, Tommy Hilfiger

and GAP amongst its clients, indicating the high global standards that it meets.

High capacity expansion to back growth: The company has planned out a capital

expenditure of Rs 260 cr, which is 50% of the entire gross block at the end of

FY2013. Post this expansion, the denim manufacturing capacity would increase

to 111.0 mn metres p.a., a CAGR of 25.9% over FY2013-15. The increase in the

capacity is targeted at reaping the benefits of the unique opportunity.

Extension of state and central funding schemes to reduce finance cost: The

company will get the benefits of the Technology Upgradation Funds Scheme and

the Gujarat Textile Policy of 2012. The total interest subsidy that the company

would earn would be 12% for spinning machinery and 10% for the other

machinery.

Outlook and valuation: We are very positive on the outlook of Nandan Exim Ltd,

primarily owing to the strong sales growth that is expected due to opportunities in

the global denim industry and its own capacity expansion. Coupled with the

assistance of various government schemes, strong demand in domestic and

global markets augur well for Nandan.

Key financials

Y/E March (Rs cr) FY2012 FY2013 FY2014E FY2015E

Net sales 574 703 897 1,097

% chg 13.1 22.5 27.6 22.3

Net profit 19 31 38 50

% chg 8.3 65.2 23.4 30.5

EPS (Rs) 4.1 6.8 8.4 11.0

EBITDA margin (%) 14.7 15.2 15.0 15.0

P/E (x) 6.7 4.1 3.3 2.5

P/BV (x) 0.8 0.7 0.6 0.5

RoE (%) 11.8 16.8 17.8 19.7

Source: Company Reports, Research

BUY CMP Rs 28.95 Target Price Rs 55.00

Investment Period 12 Months

Stock Info

Sector

Nifty

Shareholding Pattern (%)

Promoters 58.0

MF / Banks / Indian Fls 0.0

FII / NRIs / OCBs 4.2

Indian Public / Others 37.8

Face Value (Rs)

BSE Sensex

Textiles

Traded Value (Rs lacs)

Market Cap (Rs cr)

52 Week High / Low

10

19,177

5,808

131

33/20

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Analyst: Krunal Dayma

Tel: +91-9687589993 [email protected]

Nandan Exim Capitalising on growth November 30,

June 14, 2013

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Investment Arguments

Industry poised for tremendous opportunities at a global level

The denim industry in India is well poised to exploit the opportunities offered by the

global developments. Historically, even though India has been one of the largest

manufacturers of denim, the industry has been dominated by the Chinese players.

The denim manufacturing capacity in China is around 3-4 times that of India.

However, recently, the Chinese denim industry has been facing a number of

headwinds. First, the input costs, China’s long term advantage over the rest of the

world, have risen significantly in the country. Coupled with an impending rise in

the value of the renminbi, this is a huge negative for the denim exporters.

Moreover, the Chinese policy suggests that they now intend to move into higher

value-add areas from the traditional low-skill, low-value areas like denim

manufacturing. Accordingly, China has witnessed a cut in the national denim

capacity from around 3.0 bn metres to 2.5bn metres last year. The

aforementioned factors seem to suggest that this might be an indicator of the

general trend, rather than an aberration.

Last year, the US also reduced its production capacity. In fact, that has been the

general tendency observed in that country for quite some time now. All these

developments augur well for the Indian denim manufacturers, who are gearing up

to make the most of the situation. However, India is not expected to be the sole

beneficiary of the cut in denim production capacities in China and US. The

production from these countries would be shifted to a number of countries like

Pakistan, Bangladesh and some of the South East Asian nations. However, even a

small slice of this capacity would constitute a big opportunity for Indian players.

India has added roughly 100 mn metres of capacity in the same time period

during which China and US reduced their capacities. A depreciated rupee will also

favour the Indian denim players. The Indian manufacturers’ order books are

reported to have risen by around 10-15% in the past one year, as per the industry

estimates.

For its part, Nandan Exim stands to be foremost at reaping this opportunity,

having a long experience in the denim exports market, backed by a focused and

dedicated management. The company receives around 10% of its revenues from

exports. However, on the back of favourable global scenario, the company aims to

increase its export revenues from 10% to more than 20% by FY2015. The

company’s ambitious plans are backed by its solid track record and marquee

client list. The clients of the company include some global leaders like Ralph

Lauren, Tommy Hilfiger, Calvin Klein, GAP, Armani Exchange and Walmart,

indicating the high standards that the company’s products meet.

High capacity expansion to back growth

Nandan Exim has grown at a rapid pace in the past, backed by a visionary and

aggressive management, which has responded proactively to increasing

opportunities in the denim industry, both, in India and globally, by rapid capacity

expansion. The denim manufacturing capacity has been raised from 30.4 mn

metres per annum (p.a.) to 70.0 mn metres p.a. over the period FY2006-13. This

is a significant increase in capacity, especially considering that during the time,

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there was the global economic crisis of an unprecedented dimension. The entire

capacity of the company is fully automated, with minimal human intervention.

Going ahead, the management plans to add capacity even more aggressively.

The company has planned out a capital expenditure of Rs 260 cr, which is 50% of

the entire gross block at the end of FY13. Post this expansion, the denim

manufacturing capacity would increase to 111.0 mn metres p.a., a CAGR of

25.9% over FY2013-15. This new capacity is expected to be commissioned in

FY14.

Exhibit 1: Denim capacity set to increase sharply


The increased capacity will make the company one of the biggest not only in India,

but also the world. As an indicator, Arvind Ltd, India’s largest manufacturer of

denim, had a capacity of 110.0 mn metres p.a. at the end of FY2012. The

increase in the capacity is targeted at reaping the benefits of the unique

opportunity that presents itself to Indian denim manufacturers, with the reduction in

Chinese capacity and hopes of the financial crisis abating. The company already

has a sizable presence in exports to Latin American, Middle East, Asia and African

countries and expects the revenues from exports to increase to 20% from 10%

currently, despite a healthy growth in the domestic market. The company will be

able to capitalize on its strengths in the industry to gain from this scenario. The

company has an advantage over most of its peers in terms of cost, which will make

it well poised to utilize its expanded capacity effectively. Besides, the company’s

marketing channels are in place, so as to support the growth that the company

aims to achieve.

Extension of state and central funding schemes to reduce

finance cost

The capacity expansion that the company has planned would be funded by

internal accruals and debt. As for debt, the company will get the benefits of the

Technology Upgradation Funds Scheme that was extended in June 2012 after a

brief period of suspense over whether it would be persisted with anymore. The

company will get an interest reimbursement of 5% on any debt taken for its new

capacity expansion under this scheme. Moreover, the company would also benefit

from the Gujarat Textile Policy of 2012, which is similar to the central TUF scheme

30 36

42 42 42 50 51

70

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FY06

FY07

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)Denim Capacity

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in its impact on the company. The company would get an additional 5% interest

subvention under this state policy. In case of spinning machinery, the interest

subvention would be 7% under this scheme. As such, the total interest subsidy that

the company would earn would be 12% for spinning machinery and 10% for the

other machinery. The interest rate charged by the banks for these loans is ~ 13%.

Consequently, the cost of debt to the company would turn out to be only 1% for

spinning machines and 3% for the remaining ones, making its capacity expansion

a very cheap one. We expect the interest rate to fall from 9.2% in FY2013 to 8.0%

in FY2015, despite the fact that financial leverage is expected to increase in this

period. The interest rate has already fallen from 10.2% in FY2012 to 9.2% in

FY2013. Besides these interest cost based advantages, these schemes also provide

for other benefits. The Gujarat state policy provides for a power tariff subsidy of Rs

1 per unit for a period of 5 years on new capacity of cotton spinning and cotton

weaving units. Moreover, it also provides for a VAT refund on purchases of raw

materials and intermediate goods for a period of 8 years. These added benefits

also add to the attractiveness of the company’s expansion plans.

Exhibit 2: Cost of debt to go down on government subsidy schemes

Source: Company Reports,

Credit-worthiness to hold in good stead

The company also enjoys a good credit-worthiness. The company’s gearing ratio is

around 1.8x, which is well within the industry’s accepted standards of 2.0x.

Recently, the ratings agency, Fitch Ratings, assigned the company a long-term

rating of BBB-(ind) with a stable outlook. Going ahead, with the large capital

expenditure planned, the total gearing ratio is bound to increase. However, we

believe that this ratio would not reach unmanageable proportions and will, in fact,

return to 1.8x in FY2015, after the operations from the expanded capacity

stabilize.

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FY09 FY10 FY11 FY12 FY13 FY14 FY15

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Interest (LHS) Interest cost (RHS)

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Exhibit 3: Financial leverage to remain in manageable proportions

Source: Company Reports,

Financials

Top-line to increase on the back of expanded capacity

We believe that Nandan’s sales would increase from Rs 703 cr in FY2013 to Rs 1,097 cr in FY2015, a strong CAGR of 24.9%. This increase would come mainly on the back of the higher capacity and the opportunities thrown up by the global denim industry developments. The capacity would increase from nearly 70.0 mn metres p.a. to 111.0 mn metres p.a. over FY2013-15, a CAGR of 25.9%. Volumes, however, would grow at a CAGR of 19.5% over the same period, as there will be some time required to absorb the output from the new capacity. We have estimated the realizations to grow at a CAGR of 6.0% over FY2013-15, much lower than the 11.2% increase experienced over the last 5 years.

Exhibit 4: Volumes to increase on the back of enhanced capacity


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Debt (LHS) Debt Equity Ratio (RHS)

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Capacity Volumes

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Operating Margins to be maintained at the current levels

Operating margins in this business are subject to cotton price movements. A sudden change in cotton prices may have an unfavourable impact on operating margins. However, the company has historically been able to pass on all or most of the increases in cotton prices, as indicated by the strong 11.2% CAGR in denim realizations over FY2008-12. We expect that in the future as well, the company will be able to defend its gross margins. The management expects employee costs to increase at around 10-12% every year, owing to the high employee churn rate in this industry. Overall, we have estimated that the company would be able to maintain its operating margins slightly below the FY2013 levels of 15.2%, at around 15.0%. The EBITDA would increase from Rs 106.9 cr to Rs 164.8 cr over the same time period, owing to the increase in sales.

Exhibit 5: OPM expected to remain stable


Gross Block to increase owing to capacity addition

The company has planned a capital expenditure of Rs 260 cr, required to increase the denim capacity from 51.1 mn metres p.a. at the end of FY2012 to 111.0 mn metres p.a. by FY2015. The capacity has already been increased to nearly 70.0 mn metres p.a. by the end of FY2013. We have assumed the capacity addition to be completed in FY2014. The gross block is expected to increase to Rs 735 cr in FY2015, compared to Rs 515 cr in FY2013, a total increase of 42.7%.

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EBITDA (LHS) OPM (RHS)

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Exhibit 6: Gross Block expected to increase by 64%


PAT to grow at a high pace of 26.9% CAGR

Over FY2013-15, the PAT growth is estimated to be 26.9% CAGR, higher than the sales growth of 24.9%. The main reason is that the company’s interest costs are not expected to rise at the same rate as the PAT, primarily because of the interest subsidy schemes of the central and the Gujarat governments. The overall interest rate is expected to fall from 9.2% in FY2013 to 8.0% in FY2015, leading to a mere 10.2% CAGR in interest payments, over the duration in which sales are expected to rise at a CAGR of 24.9%. Notably, this increase comes despite an assumption of higher tax rate. We have estimated a tax rate of 20% in FY2014 and FY2015, compared to an effective tax rate of 13.2% in FY2013.

Return ratios to firm up significantly

Nandan has witnessed a fluctuation in the return ratios in the last 8 years, an indication of the turbulent times we have witnessed in the global economy. However, going ahead, with the rapid increase in sales and PAT, we expect the return ratios to firm up from the 16.8% (RoE) in FY2013 to 19.7% in FY2015. We

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Exhibit 7: PAT growth expected to be 27% CAGR

Source: Company Reports, Research; Note: PAT Margin excludes XO items

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expect this increase to be gradual, as the company’s new capacity gets commissioned and gets absorbed over time.

Exhibit 8: RoE expected to increase to 19.7% by FY2015


(2.0) 3.0 8.0 13.0 18.0 23.0

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

%

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Outlook and valuation

We are very positive on the outlook of Nandan Exim Ltd, primarily owing to the strong sales growth that is expected due to opportunities in the global denim industry. Historically, China has dominated this industry. However, with Chinese policy directed towards presence in higher value-added areas, the time is ripe for players like Nandan to make a mark globally. The company’s exports still do not fully tap major destinations like US and Europe. So, there is a tremendous potential to grow in the international markets. Besides, the Indian domestic market also has been performing very well, posting a growth of nearly 10% in orders. This big opportunity, coupled with the assistance of various government schemes augurs well for Nandan. The capacity expansion to 111.0 mn metres p.a. is expected to provide the requisite trigger for future growth.

Overall we expect the company’s sales to grow at a CAGR of 24.9% over FY2013-15, while PAT is expected to grow at a CAGR of 26.9% over the same period, despite our estimation of a higher tax rate of 20% in FY2014 and FY2015, compared to an effective tax rate of 13.2% in FY2013. The relatively higher Bottom-line growth is expected primarily due to the decrease in the interest costs, based on the interest subvention schemes of the central and state governments.

On the bourses, the stock has historically traded in the range of 0.6x to 1.9x its one year forward Book Value and a band of 5x to 11x one-year forward EPS. We believe that since this is a capital intensive business, P/BV is a more appropriate method of valuing the stock. The stock is currently trading at 0.6x its FY2015E Book Value and 2.5x its FY2015E EPS. We have assigned a Target Multiple of 1.0x to its one-year forward Book Value, which is slightly less than the long term average valuation of 1.1x its one-year forward BV. We recommend a Buy on the stock with a target price of Rs 55.

Exhibit 9: One year forward P/BV

Source: BSE, Company Reports, Research

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About denim Industry

India is one of the largest players in the global denim industry. However, the size of Indian denim manufacturing capacity dwarfs in comparison with China. The denim industry in India has 8-10 major players, with a total capacity of around 800 mn metres p.a. In comparison, China has a capacity of 2.5 bn metres p.a. Other major manufacturers of denim, Pakistan and Turkey have a capacity of 500 mn metres p.a. The Indian industry is almost completely organized in nature, with little or no presence of unorganized players. The combined capacity is expected to increase to 1,000 mn metres p.a. in the year 2013. The largest player in the denim industry in India is Arvind Ltd, with a capacity of nearly 110 mn metres p.a. The driver of growth for the industry is both, export orders as well as domestic markets. While the domestic market has been growing at a rate of 10% yoy, exports are clocking a growth of 10-15%, backed by the vacating of space by the Chinese players. The domestic market in India is still severely underpenetrated, with per capita consumption of jeans at 0.3 p.a., compared to nearly 2.0 p.a. for the US. This under-penetration provides a big opportunity to the denim manufacturers in the domestic market as well.

About the company

Nandan Exim Limited, established in 1994, has gained prominence among the Denim Fabrics Manufacturers in India. Nandan Exim Ltd is one of the largest manufacturers of Denim in the country, with a capacity of about 70.0 mn metres p.a. at the end of FY2013. Based in Ahmedabad, the company has been engaged in the supply of various textile products, especially denim to several parts of the world. The business is extended to several countries like Europe, USA, Morocco, Egypt, Syria, Bangladesh, Sri Lanka and Latin America.

The company belongs to the diversified Chiripal group, which has presence in the fields of Petrochemicals, Spinning, Weaving, Knitting, Fabric Processing, Chemicals, Infrastructure, Packaging and Educational Initiatives, offering employment to more than 20,000 people directly or indirectly. Having started with a few power looms, the group has evolved into multi-activity, multi-product Textile House that produces fiber to apparel under one roof. The Chiripal group has various divisions like Wovens Processing, Knits, Polar Fleece, Flocking, Embroidery and Chemicals with which it is able to cater to the needs of varied customer groups.

In addition, the group has also integrated facilities to manufacture Partially Oriented Yarn (POY) and Fully Drawn Yarn, thus ensuring regular supply of raw materials required for manufacturing various fabrics. The group has further diversified by setting new projects for manufacturing Bottom Weights, Denims, Home Furnishings and Cotton Knitted Fabrics. Besides being a major player in textiles, the group has also developed an Integrated Textile Park near Ahmedabad. It is a well developed industrial park for small and medium Enterprises that works on plug n play concept with ready availability of all facilities required for successful functioning of textile business. Nandan counts as its customers, players like Calvin Klein, Ralph Lauren,

Tommy Hilfiger, Armani Exchange and GAP, signifying its status as one of the

top players in the global denim manufacturing industry.

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Profit & loss statement (Standalone)

Y/E March (Rs cr) FY2011 FY2012 FY2013 FY2014E FY2015E

Net sales 507 574 703 897 1,097

% chg 35.0 13.1 22.5 27.6 22.3

Total expenditure 440 490 596 762 932

Net raw materials 378 409 488 622 761

Other mfg costs 33 38 55 70 85

Personnel 15 19 25 34 42

Other 15 23 28 36 44

EBITDA 67 84 107 135 165

% chg 13.6 25.5 26.9 26.0 22.3

(% of Net sales) 13.2 14.7 15.2 15.0 15.0

Depreciation 25 33 41 49 65

EBIT 42 51 66 86 100

% chg 14.5 22.1 29.4 29.6 16.4

(% of Net sales) 8.2 8.9 9.4 9.5 9.1

Interest charges 17 28 32 39 39

Other income 0 1 2 2 2

Recurring PBT 25 24 36 48 62

% chg 27.1 -5.8 50.9 33.9 30.5

Extra. Inc/(Expense) 1 3 0 0 0

PBT (reported) 26 26 36 48 62

Tax 9 8 5 10 12

(% of PBT) 33.1 28.6 13.2 20.0 20.0

PAT (reported) 17 19 31 38 50

% chg 49.8 8.3 65.2 23.4 30.5

% of Net Sales 3.4 3.3 4.4 4.3 4.6

Basic EPS (Rs) 3.8 4.1 6.8 8.4 11.0

% chg 49.8 8.3 65.2 23.4 30.5

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Balance sheet (Standalone)


SOURCES OF FUNDS

Equity share capital 46 46 46 46 46

Reserves & surplus 100 113 139 169 209

Shareholders’ funds 145 159 185 215 254

Total loans 261 285 402 502 462

Deferred tax liability 19 20 18 18 18

Total liabilities 425 465 604 734 733

APPLICATION OF FUNDS

Gross block 367 435 515 715 735

Less: Acc. depreciation 100 133 174 223 289

Net Block 266 301 341 492 447

Capital work-in-progress 15 5 54 5 5

Investments 3 0 0 0 0

Current assets 209 220 282 332 398

Inventory 121 98 120 154 188

Cash 7 16 20 17 14

Loans and advances 25 32 48 49 60

Sundry Debtors 55 69 91 109 133

Other non-current assets 1 5 3 3 3

Current liabilities 69 61 74 96 117

Net current assets 140 158 208 237 281

Total assets 425 465 604 734 733

Cash flow statement (Standalone)


Profit before tax 26 26 36 48 62

Depreciation 25 33 41 49 65

Change in working capital (11) 9 45 31 48

Less: Other income 0 1 2 2 2

Direct taxes paid 9 8 5 10 12

Cash flow from operations 54 42 25 55 66

Inc./ (Dec.) in fixed assets 44 58 130 151 20

Inc./ (Dec.) in investments 0 (3) 0 0 0

Other income 0 1 2 2 2

Cash flow from investing (43) (54) (129) (149) (18)

Issue of equity 0 (0) 0 0 0

Inc./(Dec.) in loans (11) 25 116 100 (40)

Dividend paid 0 5 5 8 11

Others 3 1 (3) 0 0

Cash flow from financing (8) 21 108 92 (51)

Inc./(Dec.) in cash 2 9 4 (2) (4)

Opening cash bal. 5 7 16 20 17

Closing cash bal. 7 16 20 17 14

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Key ratios

Y/E March FY2011 FY2012 FY2013 FY2014E FY2015E

Valuation ratio (x)

P/E (on FDEPS) 7.3 6.7 4.1 3.3 2.5

P/BV 0.9 0.8 0.7 0.6 0.5

Dividend yield (%) 0.0 3.6 3.6 5.4 7.2

Per share data (Rs)

EPS (Basic) 3.8 4.1 6.8 8.4 11.0

DPS 0.0 1.0 1.0 1.5 2.0

Book value 31.9 34.9 40.5 47.2 55.8

Margin Analysis

OPM 13.2 14.7 15.2 15.0 15.0

EBIT margin 8.2 8.9 9.4 9.5 9.1

PAT margin 3.4 2.5 4.4 4.3 4.6

Returns (%)

RoCE (Post-tax) 6.6 7.8 9.5 9.3 10.9

RoE 11.9 11.8 16.8 17.8 19.7

Turnover ratios (x)

Asset turnover (gross block) 1.6 1.4 1.5 1.5 1.5

Inventory (days) 68 70 57 56 57

Receivables (days) 66 40 42 41 40

Payables (days) 57 46 38 37 37

WC cycle (days) 101 101 108 96 94

Solvency ratios (x)

Net debt to equity 1.8 1.8 2.2 2.3 1.8

Net debt to EBITDA 3.9 3.4 3.8 3.7 2.8

Interest coverage 4.0 3.0 3.4 3.4 4.3

Cost of debt 6.3 10.2 9.2 8.7 8.0

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Disclaimer This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. First Step Capital, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. First Step Capital or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. First Step Capital has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Neither, First Step Capital, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information.

nandan exim research report

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