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1
Jun 05, 2018
Nandan Denim Ltd
India Research - Stock Broking
SELL
Recommendation (Rs.)
CMP (as on Jun 04, 2018) 76
Target Price 79
Previous Target Price 166
Upside (%) 4
Stock Information
Mkt Cap (Rs.mn/US$ mn) 3666 / 55
52-wk High/Low (Rs.) 187 / 76
3M Avg. daily value (Rs. mn)
8.10
Beta (x) 1.0
Sensex/Nifty 35012 / 10628
O/S Shares(mn) 48.0
Face Value (Rs.) 10.0
Shareholding Pattern (%)
Promoters 61.2
FIIs 9.3
DIIs 0.1
Others 29.4
Stock Performance (%)
1M 3M 6M 12M
Absolute (39) (48) (53) (43)
Relative to Sensex (39) (49) (56) (49)
Source: Bloomberg
Relative Performance*
Source: Bloomberg; *Index 100
Analyst Contact
Thomas V Abraham
040 - 3321 6323
thomas.abraham@karvy.com
For private circulation only. For important information about Karvy’s rating system and other disclosures
refer to the end of this material. Karvy Stock Broking Research is available on Thomson Reuters &
Bloomberg (Code: KRVY<GO>)
Exhibit 1: Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 11567 12204 15889 16556 17358
EBITDA 1911 1868 2258 2166 2456
EBITDA Margin (%) 16.5 15.3 14.2 13.1 14.1
Net Prot 633 725 468 365 541
EPS (Rs.) 13.9 15.1 9.7 7.6 11.3
RoE (%) 21.2 18.7 10.2 7.4 10.2
PE (x) 8.4 7.9 7.8 10.0 6.8
Source: Company, Karvy Research; *Represents multiples for FY16 - FY18 are based on historic market price
No Reprieve in Denim Demand Outlook
Proportion of Denim sales to the overall revenue mix has continuously been the
low in FY17 (Q1 – 69.7%, Q2- 67.1%, Q3 – 63.2% and Q4 – 64%), indicating
the supply-demand gap continues to be large. We expected recovery towards
2HFY18, as industry and economy in general recovered from the double impact
of demonetization and GST. However, the sector continues to be under stress
because of the largely unorganized nature of the business. Given the recent extent
of credit provided by Nandan, should the supply-demand scenario continue to
follow the recent trend, it will have a signicant negative impact on PAT. As a result,
Nandan could take much longer to restore the earlier revenue mix of ~86% from
denim as of FY17. Hence, we downgrade to “SELL, with a Target Price of Rs. 79.
Deteriorating working capital scenario: Working capital days have increased
sharply to 90, - an increase of 14 days from the prior scal. As a result, short-term
borrowings increased by Rs. 428 Mn. Hence, despite Rs. 501 Mn decrease in
long-term borrowings, total borrowings stood at Rs. 5,724 Mn vs Rs. 5,797 Mn and
Debt/Equity stands at 1.2x. Given the lower margins, a further stretch in balance
sheet will lead to even sharper decline on bottom-line.
Q4FY18E update: Revenue growth was at on YoY basis and the product mix
was signicantly skewed against denim (58% in Q4FY18 vs 82% in Q4FY17).
Additionally, lower realization of Yarn led to a decline in EBITDA margins by 458
bps to Rs. 413 Mn, despite backward integration. PAT stood at Rs. 8 Mn, and
corresponding margins were 0.2%. For the full year FY18 vs FY17, the shift in
revenue mix led to EBITDA and PAT margins declines of 110bps and 300bps on
YoY basis. FY18 PAT stood at Rs. 467 Mn vs Rs. 725 Mn in FY17
Valuation and Risks
Increased capacity in a fast growing denim segment and improving realizations
led to signicant re rating in recent scals. However, revenue being largely from
open market, in a segment an unorganized space has caught up with valuations.
With revenue mix continuing to be skewed towards yarn, it will signicantly impact
protability in the next scal. As a result, we signicantly lower our EBITDA margins
for FY19E by 442 bps and additionally, on account of higher interest costs, and
revise our EPS estimates downward to 7.6 from 15.6. We also lower our valuations
from 8x to 7x. Key risks are increase in realization of yarn and faster than expected
pick up in denim demand.
Earnings Revision (%)
YE Mar FY19E FY20E
Sales (%) 8.8 12.1
EBITDA (%) (18.7) (20.1)
PAT (%) (51.4) (38.9)
Source: Karvy Research
L
L
L
L
L
L
Company Update
Apparel & Textile Products
Nandan Denim Ltd
Bloomberg Code: NAND IN
90
110
130
150
170
May-17
Jun-17
Jul-17
Aug -17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb
-
18
Mar -18
Apr-18
May-
18
Nandan Denim Ltd
Sensex
2
Jun 05, 2018
Nandan Denim Ltd
Key takeaways from quarterly earnings
FY18 revenues grew 30% YoY, to Rs. 15,889 but EBITDA growth was lower at 21%
YoY, due to change in revenue mix.
Interest and depreciation costs were higher during scal – 60% YoY and 39.6% YoY
as new capacities came on stream in the scal.
PAT came in at Rs. 467 Mn in FY18, vs Rs. 547 Mn in FY17.
No major capacity expansions in the coming scal.
Shift in product mix had
signicant impact on
margins. Denim mix to
overall revenue continues
to be on the lower side as
compared to the previous
scals.
Focus is now on increasing
capacities- FY18, capacity
utilization currently stands
at 74%.
Exhibit 2: Q4FY18
YE Mar (Rs. Mn) Q4FY18 Q3FY18 QoQ % Q4FY17 YoY %
Turnover 3868 3634 6.5 3821 1.3
Expenditure 3455 3034 13.9 3238 6.7
EBITDA 413 600 (31.2) 583 (29.1)
Depreciation 319 299 6.6 356 (10.3)
Interest 150 137 9.6 125 19.5
PBT (56) 164 (133.9) 102 (154.6)
Other Income 119 7 1,531.5 195 (38.9)
Ta x 56 34 62.1 (29) 294.4
PAT 8 137 (94.3) 326 (97.6)
Adjusted PAT 8 137 (94.3) 326 (97.6)
EBITDA Margin (%) 10.7 16.5 (583) bps 15.3 (458) bps
EBIT Margin (%) 2.4 8.3 (585) bps 5.9 (352) bps
Net Prot Margin (%) 0.2 3.8 (357) bps 8.5 (832) bps
Source: Company, Karvy Research
Exhibit 3: Revenue Segmentation - FY18
Source: Company, Karvy Research
Exhibit 4: Revenue Segmentation - FY17
Source: Company, Karvy Research
Exhibit 5: Change in Earnings Estimates
YE Mar - Standalone (Rs. Mn)
FY19E FY20E
Comments
Old New % Change Old New % Change
Net Sales 15218 16556 8.8 15480 17358 12.1
Open market sales and lack of value additions
is dragging down the overall sales of denim.
EBITDA 2664 2166 (18.7) 3072 2456 (20.1)
EBITDA Margin (%) 17.5 13.1 (442) bps 19.8 14.1 (570) bps
Increased yarn sales in the revenue mix will
drag down protability.
Adj. PAT 751 365 (51.4) 884 541 (38.9)
EPS (Rs.) 15.2 7.6 (51.6) 18.4 11.3 (38.9)
Source: Karvy Research
Denim
85.6%
Shirting
fabric
6.8%
Bottom
weight
0.6%
Others
7.0%
Shirting
fabric
5.7%
Bottom
weight
4.9%
3
Jun 05, 2018
Nandan Denim Ltd
Reduced target valuations
below 5 year average of
1 year forward P/E. Given
the increased capacities
(making Nandan the
largest in capacity in India)
and the good growth of
15% CAGR for Denim, the
valuations had run-up in
the last 3 years.
Exhibit 6: 5yr PE Band
Source: Bloomberg, Karvy Research
Exhibit 7: Nifty India Consumption Index - PE Band
Source: Bloomberg, Karvy Research
-5
0
5
10
15
20
25
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
1 Yr Fwd P/E
average P/E
+1SD
-1SD
SD
+2SD
-2SD
0
20
40
60
80
100
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec
-15
Feb-16
Apr
-16
Jun-16
Aug
-16
Oct
-16
Dec
-16
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18
Jun-18
1yr forward PE
Avg PE
SD
+1 SD
-1SD
4
Jun 05, 2018
Nandan Denim Ltd
Financials
Exhibit 8: Income Statement
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Revenues 11567 12204 15889 16556 17358
Growth (%) 5.5 5.5 30.2 4.2 4.8
Operating Expenses 9656 10336 13631 14391 14902
EBITDA 1911 1868 2258 2166 2456
Growth (%) 15.6 (2.3) 20.9 (4.1) 13.4
Depreciation & Amortization 660 864 1206 1229 1315
Other Income 42 212 139 157 174
EBIT 1293 1216 1192 1094 1315
Interest Expenses 412 362 580 608 595
PBT 881 855 612 486 721
Tax 248 129 145 122 180
Adjusted PAT 633 725 468 365 541
Growth (%) 23.2 14.6 (35.6) (22.0) 48.1
Source: Company, Karvy Research
Exhibit 9: Balance Sheet
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Cash & Equivalents 175 326 270 133 609
Sundry Debtors 1222 1352 2725 2994 3139
Inventory 1951 2162 2475 2735 2795
Loans & Advances 2 2 1 0 0
Investments 489 374 15 166 174
Net Block 5733 8040 7372 7163 6814
Miscellaneous 643 545 596 706 772
Total Assets 10216 12801 13453 13895 14302
Debt 4453 5797 5724 5790 5662
Other liabilities 2371 2628 2979 3029 3077
Total Liabilities 6824 8425 8703 8819 8739
Shareholders Equity 455 480 480 480 480
Reserves & Surplus 2937 3896 4270 4596 5083
Total Networth 3392 4376 4750 5077 5563
Total Networth & Liabilities 10216 12801 13453 13895 14302
Source: Company, Karvy Research
Revenue growth was
bolstered by the sale of
yarn - 64.4% of the product
mix and hence, despite an
EBITDA growth of ~21%,
margins dropped 110 bps.
Interest costs continue
to be higher, despite
repayment of Rs. 501 Mn
in long-term borrowings.
Long-term borrowings
decreased by Rs. 501 Mn,
but the total debt remains
approx. the same as of
FY17, as
short-term borrowings
have signicantly
increased by 27%.
5
Jun 05, 2018
Nandan Denim Ltd
Exhibit 10: Cash Flow Statement
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
PBT 881 855 612 486 721
Depreciation 660 864 1206 1229 1315
Interest 378 338 441 451 420
Tax Paid (198) (272) (145) (122) (180)
Inc/dec in Net WC (273) 17 (1259) (531) (161)
Other non cash items 18 6 (7) 0 0
Cash ow from operating activities 1466 1807 848 1513 2114
Inc/dec in capital expenditure (1821) (2844) (538) (770) (954)
Inc/dec in investments 36 63 140 (46) 162
Others (15) (39) 359 (249) (12)
Cash ow from investing activities (1799) (2819) (39) (1065) (804)
Inc/dec in borrowings 840 1271 (190) 60 (186)
Issuance of equity 0 250 0 0 0
Dividend paid (126) 0 (95) (36) (54)
Interest paid (396) (357) (580) (608) (595)
Cash ow from nancing activities 318 1164 (865) (584) (835)
Net change in cash (15) 151 (56) (137) 476
Source: Company, Karvy Research
Exhibit 11: Key Ratios
YE Mar FY16 FY17 FY18 FY19E FY20E
EBITDA Margin (%) 16.5 15.3 14.2 13.1 14.1
EBIT Margin (%) 11.2 10.0 7.5 6.6 7.6
Net Prot Margin (%) 5.5 5.9 2.9 2.2 3.1
Dividend Payout Ratio (%) 13.7 15.9 20.3 10.0 10.0
Net Debt/Equity (x) 1.3 1.2 1.1 1.1 0.9
RoE (%) 21.2 18.7 10.2 7.4 10.2
RoCE (%) 23.3 17.5 17.2 16.0 17.3
Source: Company, Karvy Research
Exhibit 12: Valuation Parameters
YE Mar FY16 FY17 FY18 FY19E FY20E
EPS (Rs.) 13.9 15.1 9.7 7.6 11.3
DPS (Rs.) 1.9 2.4 2.0 0.8 1.1
BVPS (Rs.) 74.5 91.1 98.8 105.7 115.8
PE (x) 8.4 7.9 7.8 10.0 6.8
P/BV (x) 1.6 1.3 0.8 0.7 0.7
EV/EBITDA (x) 5.0 6.0 4.0 4.3 3.5
EV/Sales (x) 0.8 0.9 0.6 0.6 0.5
Source: Company, Karvy Research; *Represents multiples for FY16 - FY18 are based on historic market price
Given the current demand
scenario, we reduce the
valuations below the 5 year
average1 year fwd. P/E.
The revenue mix is
expected to be in the same
range as of FY18, and
hence, we expect margins
to continue to be lower
than in the last 4 scals.
6
Jun 05, 2018
Nandan Denim Ltd
Stock Ratings Absolute Returns
Buy : > 15%
Hold : 5-15%
Sell : < 5%
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