Supported by rising yarn prices, Ludhiana-based integrated textile company Vardhaman Textiles Ltd registered impressive profit growth for the March quarter. Operating profit rocketed by 102% from a year earlier to Rs169 crore. Sequentially too, it rose by 22.4%. Net profit, too, jumped from Rs2.5 crore a year earlier to Rs75.6 crore.
The long overdue surge in cotton prices and simultaneous recovery in yarn markets since September gave integrated textile firms such as Vardhaman a shot in the arm. Yarn prices in the quarter gained 20%. With around 75% of its turnover coming from yarn, the company’s net sales increased by 27% year-on-year (y-o-y) to Rs756.5 crore in the quarter. While revenue from yarn grew by 26%, that from fabric grew by 30%.
Operating profit margin (OPM) shot up to 22% from 14% in the year-ago period and 20% in the preceding quarter. Most of the profit before interest and tax (PBIT) accrued from its yarn segment, where margins expanded from 7% to 15% on a y-o-y basis.
The Vardhaman Group is among the largest yarn producers in the country. It has a capacity of 870,000 spindles operating at above 90% utilization through the peaks and troughs of the textile cycle. It exports only 25% of the yarn although it is the single largest yarn exporter. While realizations are marginally better in overseas markets, the yarn price swings in local markets are reportedly less. However, 25% of its yarn is consumed in-house by the fabric division.
Of immediate concern is the debt-to-equity ratio of around 1.8:1. There is a foreign currency convertible bond maturing in the last quarter of fiscal 2011. The conversion price of around Rs465 makes the chance of conversion into equity quite improbable at this juncture, as the market price of the share is Rs270. According to a senior executive, the outflow towards redemption is expected to be around Rs370-400 crore. Besides, there is capital expenditure of Rs1,000 crore planned for the next two years.
Investor sentiment towards the company and the sector as a whole has been tepid in the last few weeks due to the government’s move to cut back incentives on exports. However, some industry experts state that the softening of yarn prices is a temporary phenomenon. Demand in global markets is strong as retailers are filling up the inventory pipeline. Besides, there is no immediate capacity addition visible.
The share has gained 26% and outperformed the Nifty mid-cap index since January. The current market price of Rs270 discounts fiscal 2010 earnings around 7 times, leaving room for appreciation.
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