War Horse Vardhman Textile

May 22, 2012

Recommendation Transaction Price Range Target Time horizon 1-yr stock price movement (NSE)
260

Buy Rs.199.8- Rs.224.2 Rs.286.94 6 months

Business: Vardhman Textiles Limited (Vardhman Textiles or The Company) is one of the largest listed, integrated textile manufacturing companies in the Country. The Vardhman Group has a turnover of over $986 million and a workforce of 25,000 employees. Spanning over 24 manufacturing facilities in five states across India, The Group business portfolio includes Yarn, Greige and Processed Fabric, Sewing Thread, Acrylic Fibre and Alloy Steel Vardhman. The group is among the largest domestic yarn producers and has one of the largest spinning capacities in India 8,70,000 spindles, 65 tons per day yarn and fibre dyeing, 900 shuttle less looms, 90 mn meters per annum processed fabric, 33 tons per day sewing thread, 18000 metric tons per annum acrylic fibre and 100,000 tons per annum special and alloy steel.

210

160

Snapshot CMP Date Beta 52-week High (Rs.) 52-week Low (Rs.) Industry FYE Adj. EPS (Rs.) P/EPS ratio (x) Cash EPS (Rs.) P/ Cash EPS (x) P/ BV ratio (x) BV/ Share (Rs.) M. Cap/ Sales (x) Market Cap (Rs. Cr) Dividend yield (%) FV/ share (Rs.) F&O Presence Avg. Daily Trades (Rs. Cr.) Bloomberg Ticker NSE Ticker BSE Ticker Return Comparison vis--vis Nifty Particulars (%) Vardhman Textiles Nifty Particulars (Rs. Cr.) Net Sales Net Profit Cash Profit Profit (%) Adj. EPS (Rs.) Share Holding Pattern No. of shares: Promoter holding (%): Institutions (%): Non-Institutions (%): Free Float (%): Sumpoorna Estimates* 63,651,879 61.01 23.46 15.43 38.99 1m 2.5% -6.6% 3m -1.1% -11.7% FY12 Q3 984.0 60.3 120.2 6.1% 9.5 9m 2,979.3 53.0 227.2 1.8% 8.3 1yr -11.4% -9.9% FY11 12m 3,606.8 469.7 695.7 13.0% 73.8 212.55 22-May-12 0.36 291.90 155.30 Textiles March 73.39 2.90 109.3 1.94 0.71 301.37 0.38 1352.92 2.1 10 NO 0.83 VATEX IN VTL 502986

Investment Rationale: Vardhman Textile is one of the leading integrated fabric producers and has high economies of scale due to integrated operations and large cotton inventory holding capacity. The recovery in the Indian textiles industry and capacity expansion undertaken by most textiles companies will boost demand for yarn and fabrics and drive growth for Vardhman. The company will also benefit from rise in demand for Indian yarn after Chinese yarn prices have moved up. Also, the rise in spread between cotton and cotton yarn is likely to boost growth for the company, going forward. All the loans of Vardhman Textiles fall under TUFS and hence debt on the Companys books enjoys TUF scheme benefits which lead to lower interest rates. During Fiscal year ended March 31, 2011(FY2010-11 or FY11) the Company has registered a turnover of Rs. 3,636.96 crore as compared to Rs. 2,767.22 crore showing an increase of 31.43 percent over the previous year turnover. The export of the Company increased from Rs. 704.00 crore to Rs.1,218.26 crore, showing an increase of 73.05 percent over the previous year mainly due to price rise and better product/market penetration. The companys share is quoted at an attractive valuation of Price/Book value of 0.71 times, Price/Cash EPS of 1.94 times, and Market Cap/ Sales of 0.38 times. The valuations are quite attractive considering Vardhman Textiles integrated and diversified business model. Further, the valuation multiples are expected to further moderate rapidly due to strong earnings growth contributed by capacity additions and improvement in realizations. Thus, aided by robust capacity expansions, and healthy consumption demand (domestic and global) going forward, we strongly recommend a BUY for the companys stock. Business Outlook Strength: o Highest quality acrylic manufacturer of the country o The company having good presence in entire value chain. o De-risked business through value added and specialized products o Vardhman owns one of the largest brands of specialized threads in the country Risks: o Volatility in raw materials prices cotton, yarn, fabric, etc o Rising energy prices which would adversely affect the profitability of textile mills. o Intense competition in the fragmented market and from established players in the textile sector o Uncertainty in Government export policy
*Annualized Investment rating scale: Buy (>15% returns); Add (5% <15% returns); Sell (<-5%returns)

Sumpoorna 2012

War Horse Vardhman Textile

May 22, 2012

Legal History & Structure: The Vardhman Group was established in 1965, under the entrepreneurship of Late Lala Rattan Chand Oswal (Formerly known as Mahavir Spinning Mills Limited) has today blossomed into one of the largest Textile Business houses in India. Subsidiaries: Vardhman Yarns & Threads Ltd. Vardhman Stake Business Capacity Revenue Collaborations Market Status 51% RMG / Industrial / Specialty Threads 33 TPD threads 70k spindles (captive) Rs. 428.8 crore A&E, USA Unlisted Listed on NSE & LSE Vardhman Acrylics Limited 59% Acrylic Staple Fibre 20,000 TPA Rs. 405.3 crore VMT Spinning Limited 73% Cotton Yarn 45,120 spindles Rs. 124.3 crore Marubeni & Rayon, Japan Unlisted Toho To be Listed on BSE & NSE Co. VSS Ltd. 31% Special Steels 80,400 MTPA Rs. 3,942 crore Nisshinbo, Japan Unlisted VNG Co. Ltd. 51% Garments 0.87 pieces million

Joint Ventures: o Vardhman Yarns & Thread Ltd has a joint venture partnership of 51:49 with A&E threads of USA. o Vardhman Nisshinbo Garments Company Limited (VNGL) has Joint Venture partnership of 51:49 with Nisshinbo Textiles Inc., Japan.

Managements Growth Path Mission: Vardhman Textiles aims to be world class textile organization producing diverse range of products for the global textile market. Expansion Plans: o Yarns: Capacity expansion of 76,000 spindles and improving capacity utilization o Fabrics: Capacity expansion by Grey: 220 Looms Processed: 30 MMPA o Threads: Develop the market for value added segment like automobiles, premium footwear and building up export business in Indian sub continent on a non compete basis with other A&E subsidiaries. o Garments: Vardhman Textiles enter entered into a Joint Venture agreement with Japan based Nisshinbo Textiles Inc. The total manufacturing capacity of the project shall be about 1.8 million pieces per annum. This venture of Vardhman is a step towards a gradual integration of our Textile Value Chain to meet the clothing requirements of the higher end customers in domestic and international market. The estimated capital cost of the project is Rs. 30 crore which will be financed partly from equity contribution by joint venture partners and partly by debt. o Steel: Capacity expansion: Rolling Mill 1,35,000 MTPA by FY14. Markets: o The company has a strong presence in the markets of Japan, Hong Kong, Korea, the UK and the EU, in addition to the domestic market. o The export of the Company increased from Rs. 704.00 crore to Rs.1,218.26 crore, showing an increase of 73.05 percent over the previous year mainly due to price rise and better product/market penetration. o Exports of yarns diversified into more value added products. Growth of value added yarn exports is around 37 percent in comparison to last financial year. Particulars (Rs. Lakh) Domestic Export Total FY 11 Amount 3,11,471.48 1,30,374.35 4,41,845.83 Percent 70% 30% 100% FY 10 Amount 2,58,851.87 76,215.37 3,35,067.24 Percent 77% 23% 100% FY 09 Amount 2,26,187.90 70,354.20 2,96,542.10 Percent 76% 24% 100%

Sumpoorna 2012

War Horse Vardhman Textile

May 22, 2012

o o o

The Company business is a wholly integrated concern operating across the entire value chain from fibre to fabrics. This allows the Company to be a one stop shop for customers including buying houses, retailers, overseas garment manufacturers, recognized export houses, wholesalers and marketing agents. Market Leader in Hand Knitting Yarn Acrylic Fibre products are marketed under the brand name VARLAN. The company also has strong market position in sewing threads due to diverse product mix. It manufactures about 150 types of threads in different colors/ shades and has specialized in manufacturing industrial threads.

Segmental Performance: Particulars (Rs. crore) Yarn Steel Fabric Unallocated Total Less: Inter Segment Revenue Net Sales Segment Profit/Loss before interest & tax Yarn Steel Fabric Unallocated Total Less Interest Net of Un-allocable expenditure Profit/loss Before Tax Quarter ended 11-Dec 827.61 319.72 38.38 1,185.71 201.71 984 81.85 37.67 6.03 125.55 36.27 4.99 84.29 Year ended 12-Mar 3,456.86 3.54 1,225.61 146.83 4,832.84 1068.96 3,763.88 185.43 0.28 124.56 15.62 325.89 173.62 6.21 146.06

12-Mar 799.44 309.27 35.15 1,143.86 205.12 938.74 73.35 43.49 0.74 117.58 44.81 0.78 71.99

11-Sep 898.5 288.11 37.71 1,224.32 189.28 1,035.04 71.51 21.71 3.92 97.14 42.51 2.37 52.26

Vardhman Textiles has diversified business 56 percent of total income coming from yarn products; within the yarn products the focus is on non-commoditized products.

Contribution to Top line (FY11):

Yarn 56% Fabric 21%

Contribution to Yarn (FY11):

Specialised Yarn 30% Compact Yarn 20% Commoditisd Yarn 50%

Fiber 8%

Sewing Thread 8%

Steel 7%

Sumpoorna 2012

War Horse Vardhman Textile

May 22, 2012

Vardhman Business: Segments Plant Location Capacities Uses Compact Yarn, Fibre Dyed, Cotton Lycra Gas, Mercerized Melange, Yarn Fancy, Yarns Cotton Dyed, Slub Yarns, PC Yarn Dyed, Acrylic Yarns, Yarn Dyed, Hand Knitted, Yarns Specialized Suppliers Financials

Yarn

12 production plants located in the states of Punjab, Himachal Pradesh and Madhya Pradesh

130861 MT

Exporter of cotton yarn to the most quality conscious markets like EU, USA and Far Eastern

The sales revenue of yarn increased from Rs. 1,476.99 crore to Rs. 2,041.06 crore during the year

Fabrics

900 looms & 90 million meters of processed fabric per annum

Yarn Dyed, Special White, Mlanges, Nylon, Modal & Linen Doing specialized finishes like Liquid Ammonia, Teflon / Nanocare (oil & water repellent), ETI etc

Supplier of Fabric to Top of the Line customers

The sales revenue of the processed fabric also increased from Rs. 556.52 crore to Rs. 828.20 crore showing an increase of 48.81% over the previous year.

Sewing Thread

4 plants at Punjab, Tamil Nadu & Himachal Pradesh

33 TPD

Acrylic Fibre

Gujarat

20,000 MTPA

Manufacturing of hand knitted yarns, blankets, jerseys, sweater, saris, upholster, carpets etc.

Steel Melting 100,000TPA Steel Rolling TPA Mill

Shop

80,400

Automotive components, forging, ball bearings, piston pins, engineering applications, railways, defense etc.

Supplier to leading OEMs like Telco, Ashok Leyland, Maruti, Hindustan Motors, Toyota, M&M and Escorts among others

Sumpoorna 2012

War Horse Vardhman Textile

May 22, 2012

Financial Performance (Standalone Basis):

Income Statement (Rs. Cr.) Net Sales Growth Total Income Growth Expenses Growth EBITDA Growth Int. & Fin. Charges Growth Depreciation Growth PBT Growth PAT Growth Cash Profit Growth FY 11 Annual 3606.81 31.49% 3676.99 29.85% 2706.10 22.82% 970.89 54.47% 136.01 12.75% 226.02 2.33% 608.86 112.13% 469.70 119.73% 695.73 60.07% Dec '11 3 months 3.62 7.42% 5.84% 76.97% 4.33% 8.91 FY 10 Annual 2742.95 11.79% 2831.82 12.71% 2203.29 4.13% 628.53 58.46% 120.63 -5.47% 220.88 6.54% 287.02 41.32% 213.76 51.85% 434.64 24.86% Sep '11 3 months 4.57 8.47% 6.06% 81.86% 4.76% 9.47 FY 09 Annual 2453.65 6.93% 2512.45 7.94% 2115.80 9.06% 396.64 2.38% 127.61 99.74% 207.32 34.14% 203.10 20.20% 140.77 14.87% 348.09 25.62% Jun '11 3 months 3.45 5.05% 3.45% 48.55% 3.89% 5.62 FY 08 Annual 2294.67 -6.48% 2327.54 9.70% 1940.11 11.58% 387.43 1.18% 63.89 69.49% 154.56 29.40% 168.98 -25.15% 122.54 -28.63% 277.11 -4.82% Mar '11 3 months 0.88 -6.51% -4.44% -58.49% -0.53% -6.77 Balance Sheet Cr.) Equity Capital Reserves Net worth Market Capitalization Debt Payable within 1 yr. Capital Employed Highlights Interest Coverage (x) PBT Margin (%) PAT Margin (%) ROE (%) ROCE (%) EPS (Rs.) Price/ EPS (x) CEPS Price/ CEPS (x) BV/ Share Price/ BV (x) M. Cap/ Sales (x) Debt/ Equity (x) Dividend Yield (%) FY 11 Annual 5.48 16.88% 12.77% 24.49% 16.88% 73.79 3.51 109.30 2.37 301.37 0.86 0.46 1.48 1.74% FY 10 Annual 3.38 10.46% 7.55% 14.68% 10.40% 37.00 7.19 75.24 3.54 252.01 1.06 0.56 1.80 1.13% FY 09 Annual 2.59 8.28% 5.60% 11.06% 9.02% 24.37 1.95 60.26 0.79 220.32 0.22 0.11 1.96 4.21% FY 08 Annual 3.64 7.36% 5.26% 10.45% 7.30% 21.21 4.89 47.97 2.16 202.90 0.51 0.26 2.04 3.86% Contingent Liabilities 245.20 54.95 134.42 134.29 Investments Debtors Cash & Bank balance Loans & Advances Other Current Assets Total Current Assets Total Current Liabilities Net Current Assets 352.65 488.47 48.77 957.62 0.00 3093.26 765.13 2328.12 280.48 397.34 222.07 676.88 0.00 2403.75 634.22 1769.52 334.98 275.67 357.21 673.53 0.00 1926.52 556.21 1370.30 79.29 274.70 62.70 621.01 0.00 1828.77 554.54 1274.24 Gross Block Less: Depreciation Net Block Capital WIP 3682.18 1556.52 2125.66 140.65 3571.02 1388.63 2182.39 40.63 3355.48 1173.61 2181.88 58.78 3096.50 1074.28 2022.22 327.60 26.43% 39.46% 37.12% 18.10% 44.13% 29.12% 11.90% 15.05% Growth 08 - '11 10.93% Mar '12 3 months 938.74 -4.60% 976.23 -2.25% 793.16 -2.57% 183.07 -0.81% 50.59 25.35% 60.49 0.97% 71.99 -14.59% 56.69 -5.97% 117.18 -2.51% (Rs. Dec '11 3 months 984.00 -4.93% 998.68 -3.94% 814.12 -8.06% 184.56 19.71% 40.36 -9.75% 59.91 4.76% 84.29 61.29% 60.29 68.60% 120.20 29.32% FY 11 Annual 63.65 1854.61 1918.26 1647.95 2832.01 215.65 4750.27 Serp'11 3 months 1035.04 7.79% 1039.66 6.44% 885.49 -5.04% 154.17 248.01% 44.72 -11.09% 57.19 0.19% 52.26 -182.85% 35.76 -183.01% 92.95 563.93% FY 10 Annual 57.77 1398.08 1455.85 1537.25 2620.80 519.37 4076.65 June '11 3 months 960.22 7.17% 976.75 6.19% 932.45 45.19% 44.30 -84.04% 50.30 8.20% 57.08 9.75% -63.08 -136.38% -43.08 -130.89% 14.00 -92.69% FY 09 Annual 57.77 1214.98 1272.75 274.41 2493.32 211.31 3766.07 Mar'11 3 months 895.99 -10.08% 919.80 -9.32% 642.23 -12.45% 277.57 -1.17% 46.49 50.99% 52.01 -11.09% 173.38 -9.50% 139.47 2.88% 191.48 -1.33% FY 08 Annual 57.77 1114.37 1172.14 599.35 2391.23 26.06 3563.37

Key Ratios Interest Coverage (x) PBT Margin (%) PAT Margin (%) ROE (%) ROCE (%) EPS (Rs.)

Note: In quarter March12 Net sales of Vardhman Textiles increased to Rs.938.74 crore against Rs.895.99 crore a year ago. Net profit reduced to 59 percent as compared to last year. Vardhman Textiles announced that the board of directors recommended a dividend of Rs.4.50 per share on the fully paid up equity share capital of the company. The dividend shall be paid, tentatively, by the end of August, 2012.

Sumpoorna 2012

War Horse Vardhman Textile

May 22, 2012

Financial Performance (Consolidated Basis):

Income Statement (Consolidated; Rs. Cr.) Net Sales Total Income EBITDA Int. & Fin. Charges Depreciation PBT PAT Cash Profit FY 11 Annual 4418.46 4484.02 891.94 136.58 264.67 755.36 567.52 832.19 FY 10 Annual 3350.67 3435.96 533.67 122.34 256.64 411.32 302.38 559.02 FY 09 Annual 2965.42 3018.41 403.37 132.37 243.38 271.00 191.70 435.09 FY 08 Annual 2387.74 2422.00 253.02 65.84 162.02 187.18 138.06 300.08 Cash Flow Statement (Rs. Cr.) PBT Adjustments Operating Cash Flow Financing Cash Flow Investing Cash Flow Free Cash Flow Net Cash Flow Closing Balance FY 11 Annual 755.36 360.16 1115.52 233.88 -456.39 1374.73 -191.72 70.66 FY 10 Annual 411.32 302.40 713.72 10.00 -131.88 957.15 -110.59 262.38 FY 09 Annual 129.60 386.46 516.06 14.08 -277.82 -30.57 301.04 372.97 FY 08 Annual 187.18 185.33 372.51 584.47 -785.05 -211.40 -156.59 71.93

Highlights Interest Coverage (x) PBT Margin (%) PAT Margin (%) ROE (%) ROCE (%) EPS (Rs.) Price/ EPS (x) CEPS (Rs.) Price/ CEPS (x) BV/ Share (Rs.) Price/ BV (x) M. Cap/ Sales (x) Debt/ Equity (x) Dividend Yield (%)

FY 11 Annual 6.53 16.85% 12.66% 25.07% 17.76% 84.02 3.08 133.11 1.94 362.16 0.71 0.37 1.30 1.74%

FY 10 Annual 4.36 11.97% 8.80% 18.85% 12.32% 46.17 5.76 98.70 2.70 283.25 0.94 0.45 1.65 1.13%

FY 09 Annual 3.05 8.98% 6.35% 13.86% 10.19% 30.24 1.57 76.82 0.62 244.23 0.19 0.09 1.83 4.21%

FY 08 Annual 3.84 7.73% 5.70% 10.93% 7.54% 27.58 3.76 52.98 1.96 223.01 0.47 0.25 1.93 3.86%

Balance Sheet (Rs. Cr.) Equity Capital Reserves Net worth Market Capitalization Debt Payable within 1 yr. Capital Employed

FY 11 Annual 62.52 2201.65 2264.17 1618.59 2944.43 179.88 5208.60

FY 10 Annual 56.64 1547.55 1604.18 1507.07 2643.04 431.89 4247.23

FY 09 Annual 56.64 1326.59 1383.23 269.02 2533.15 151.22 3916.38

FY 08 Annual 56.64 1206.38 1263.01 587.59 2433.98 14.01 3696.99

Gross Block Less: Depreciation Net Block Capital WIP Net Current Assets Contingent Liabilities

4418.50 1881.48 2537.02 156.36 2827.07 313.34

4179.33 1623.10 2556.24 45.28 2054.10 67.17

3940.81 1374.38 2566.43 69.43 1577.10 161.21

3465.98 1241.65 2224.33 334.10 1374.10 138.30

Where a rupee is spent (Standalone data; FY 11):

Other Mfg Exp. 47% Employee Cost 29% Mktg & Sales 17%

General & Admin 5%

Other 2%

Financial Notes: The gross fixed assets (including work-in-progress) as at 31st March, 2011 were Rs. 3,822.83 crore as compared to Rs. 3,611.65 crore in the previous year. Inventory level was at Rs. 1,598.39 crore as compared to the previous year level of Rs. 1,107.46 crore. Freehold land includes Rs. 11.00 lakh (Previous Year Rs. Nil) for the cost of land at Budhni, (Madhya Pradesh) for which title deeds are yet to be executed in favour of the Company, though the possession thereof has been taken by the company. The company has paid Rs. 33.75 Lacs (Previous Year Rs. 18.70 Lakh) to Madhya Pradesh Power Transmission Company Limited, Bhopal for expenditure on power lines. As future economic benefits associated with the installation of such power lines will flow to the company, the same has been reflected in the schedule of Fixed Assets.

Sumpoorna 2012

War Horse Vardhman Textile

May 22, 2012

Investment rating scale: Buy (>15% returns); Add (5% <15% returns); Sell (<-5% returns) Source: Sumpoorna Research, Company website and other publicly available data Document prepared by: Ishu Mann Nitesh Aggarwala For further information, please contact Sumpoorna Global Markets & Economics Research Phone: +91 120 4505200 Email: knowledgecentre@sumpoorna.com url: www.sumpoornaonline.com Note: The information and opinions in this report have been prepared by Sumpoorna and are subject to change without any notice. Please contact Sumpoorna for more information on investment decisions. Sumpoorna, its affiliates and clients may have investment positions in the investment vehicles recommended in this report.

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Sumpoorna 2012