Weaving Afresh

In CY17, while the benchmark Sensex delivered 27% return, the stock of the country’s third-largest textile company (by market cap), Vardhman Textiles, underperformed — generating only 23% return. Not surprising, given that in the first half of FY18, the company reported 4% YoY growth in topline, while profit plummeted 55% owing to GST-led destocking and high cotton prices.

However, things could start looking up for the company soon. As GST-related weakness moderates, demand is picking up in the domestic market. Exports to a key market such as China are also showing signs of improvement. The expected decline in cotton prices on the back of a bumper cotton crop bodes well for Vardhman. The management believes that there is a good probability that the Ebitda margin will improve to 18-22% from 15% level seen in Q2FY18. In fact, analysts have raised their FY19 and FY20 earnings estimates by 5% each.

Against such a backdrop, on January 9, 2018, S P Oswal, chairman and managing director of Vardhman Textiles, through the promoter-entity Vardhman Holdings bought close to Rs.66 crore worth of shares from the open market at an average price of Rs.1,407 a share. Post the purchase, Vardhman Holdings’ stake has gone up to 25.5% from 25.09%. Shareholding data as on September 2017 quarter shows that Vardhman Holdings held 25.02% stake, while overall promoter holding stood at 62.3%.

Analysts feel the second half of FY18 could be better for Vardhman Textiles. Signs of a turnaround were visible in Q2FY18 thanks to better-than-expected Ebitda of Rs.244 crore in Q2FY18 even as topline remained flat and net profit was down 23% on a YoY basis.

With the stock currently trading at 11x one-year forward earnings (as per analyst estimates), fund managers believe the company should enjoy higher valuation going ahead. Domestic mutual funds have maintained sizeable stakes in the company. DSP BlackRock’s Micro Cap Fund holds 1.29% stake, DSP’s Small and Mid Cap Fund holds 1% stake, HDFC’s Mid Cap Opportunities Fund holds 2.35% stake, Reliance Growth Fund holds 1.7% and Franklin India Prima Fund holds 1.62% stake. If growth and margins improve, the fund managers would have made the right call by staying invested in the stock. If the market action of the promoter is any indication, good tidings seem to be in store.