Recommendation from Yarn spinning mills company

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year. 

NITIN SPINNERS: WEAVING A PROFITABLE GROWTH CURVE

HERE IS WHY
✓Up to 90 per cent capacity utilisation
✓Brownfield expansion project
✓Increasing promoters’ holding

The textile sector is at the cusp of change similar to that we saw for chemical companies a few years ago. The pandemic has made many global producers realise that they cannot depend on a single country to fulfil their requirements. The strong tailwind for the textile sector triggered by the China + 1 strategy and a ban on Chinese cotton has created a huge opportunity for the textile sector in India. One company that is well-poised to capture these growth opportunities is Nitin Spinners which is engaged in the manufacturing of cotton and blended yarns, knitted fabrics, greige and finished woven fabrics

Its yarn division contributes 70 per cent of the total revenue, followed by woven fabric (14 per cent), knitted fabric (11 per cent) and the rest (5 per cent) by others. In terms of geographical distribution, 73 per cent of the revenue comes from export and the remaining 27 per cent from the domestic market at the end of FY22. The growth in business has led to more than 90 per cent capacity utilisation of all products. Hence, the company decided to go ahead with capacity expansion last year at a total project cost of ₹955 crore. The expansion will be on brownfield basis at the existing locations with small piece of land acquisition adjacent to the existing plant. This will result in benefit of competitive cost advantage and economies of scale. 

The company plans to fund the estimated project cost with a combination of debt of ₹650 crore and balance from internal accruals. The net interest cost is expected to be 2.75 per cent per annum after accounting for interest subsidy from Rajasthan Investment Promotion Scheme. The land is available for expansion, which is expected to be completed by Q4FY24. The expansion is being done with the aim to strengthen the company’s market position and capture the benefit of growing market opportunity in the international as well as domestic markets. The company plans to add 1.51 lakh equivalent spindles as well as expand its knitted fabrics capacity by 2,500 metric tons per annum. 

The expansion is likely to be completed in 20 months. This will increase the overall capacity by 35-40 per cent across the board. The company reported total income of ₹709.65 crore during the period ended June 30, 2022 as compared to ₹553.86 crore during the period ended June 30, 2021, showing a growth of 28.2 per cent. Operating profit saw de-growth due to higher commodity prices and lag in the passing on of the price rise to customers. The bottom-line, however, saw an increase of 9.28 per cent in the same period. This was primarily due to lower tax and interest cost. Going ahead, as we are witnessing a drop in cotton prices, the company is likely to post better results. 

Another encouraging development for the company is that its promoters have been consistently increasing their holding in the company. They have increased their share from 55.92 per cent at the end of June 2020 to 56.36 per cent at the end of June 2022. Even the mutual funds have increased their stake in the company sequentially. The shares of the company are currently available at trailing 12-month (TTM) price to earnings of just 3.66 times and price to book value of 1.3 times. The company has been consistently paying dividends at about 2 per cent currently. Given its expansion plan, good business momentum and attractive valuation, we advise readers to BUY this scrip