Vardhman Textiles sees yarn-led growth as capacity expansion supports post-FY28 earnings

Investment View and Valuation

Motilal Oswal Financial Services Limited (MOFSL), in its August 1, 2026 results update, retains a Neutral rating on Vardhman Textiles. The broker expects high-single-digit revenue growth, supported by yarn realisations, the scaling of the yarn business and ongoing capacity additions. However, it has reduced its earnings estimates as it expects the bulk of the benefit from new capacity to be reflected only after FY28.

MOFSL has reduced its target price to Rs665 from Rs700, based on 11 times FY28E EV/EBITDA. The key risks identified are Vardhman Textiles' high dependence on the cotton-yarn spread and delays in announced capex.

Strong 1QFY27 Financial Performance

Vardhman Textiles reported consolidated revenue of Rs27.0 billion in 1QFY27, up 13.3 per cent year on year and 5 per cent above MOFSL's estimate. EBITDA rose 45.0 per cent year on year to Rs4.7 billion, exceeding the broker's estimate by 35 per cent, while adjusted PAT increased 49.2 per cent year on year to Rs3.1 billion, 44 per cent above estimate.

Gross margin expanded 246 basis points year on year to 47.6 per cent and EBITDA margin rose 387 basis points to 17.5 per cent, aided by improved cotton-yarn spreads. The broker notes that Indian cotton was trading at an approximately 4-5 per cent premium to US cotton prices.

Yarn-led Growth and Segment Trends

Yarn was the main growth driver in 1QFY27. Yarn revenue increased 25 per cent year on year, led by a 23 per cent increase in realisations and a 2 per cent increase in volumes. In contrast, fabric revenue declined 4 per cent year on year as fabric realisations fell 4 per cent, while fabric volumes were broadly flat, increasing 0.2 per cent.

MOFSL expects the yarn business to grow at about 8 per cent CAGR over FY26-28, primarily through higher realisations. The garment segment is projected to deliver about 50 per cent CAGR over the same period from a low base, as capacity expands to about 4.5 million pieces.

Cotton Supply, Spreads and Order Outlook

Management said global cotton availability could decline 4-5 per cent as Brazil, Australia and the US face lower crops. Supply is expected to trail consumption for one to two years. Management expects the current supply-demand gap of 3-4 per cent to support elevated spreads.

Spinning utilisation was full in 1QFY27, aided by lower-cost inventory being converted at improved yarn prices. The export order book was around 90-95 days and the domestic order book was around 45-50 days, suggesting that the April-May price improvement should largely flow through in 2QFY27.

Management expects overall FY27 revenue growth to trend towards the mid-teens. Spinning margins should moderate from 1QFY27 levels but are expected to stabilise at 13-14 per cent, compared with 10-11 per cent in recent years.

Fabric and Garment Expansion

Fabric volumes were comparable with 1QFY26 but 3-4 per cent below 4QFY26 because US sampling was missed amid tariff disruption. Management said US order flow had begun recovering and expected improved business over the next two to three months.

Around 60-70 per cent of the recent yarn-cost increase had been passed through in fabric prices, with the balance expected to be passed through as volumes recover. Synthetic fabric capacity was operating at only 15-20 per cent utilisation. However, two large-brand approvals had been obtained and management targeted 70-80 per cent utilisation within six months.

Garment capacity of about 7,000 shirts per day is being doubled to improve the cost structure. Full capacity could generate peak revenue of about Rs3.0-3.5 billion, with ramp-up expected in 8-12 months.

Capacity Expansion and Capex Execution

Vardhman Textiles has announced an open-end project intended to raise its total spindle count to about 1.34 million by FY28, alongside a greenfield expansion at Dhar. The open-end project has capacity of about 55-60 tonnes per day, construction had begun and completion was expected in 10 months.

Management expects Rs8-9 billion of capex to continue into 1QFY28 for modernisation and the open-end project. Dhar land is expected by December 2026, but power availability is not expected before June 2027, delaying firm construction commitments.

Earnings Outlook and Key Risks

MOFSL expects gross margin to improve towards 47 per cent and EBITDA margin to reach 15-16 per cent in FY27. However, it does not expect the cotton-yarn spread benefit to persist in FY28. The broker also expects the bulk of the earnings benefit from new capacity to be reflected only after FY28.

The principal risks are Vardhman Textiles' high dependence on the cotton-yarn spread and potential delays in announced capex, including the Dhar expansion and other capacity projects.