Indo Count - Poised For A Healthy Volume Recovery In FY24: ICICI Direct

ICICI Direct Report

Investment Rationale:

Most of the negatives behind; poised for steady recovery in FY24E:

India’s home textile export market in FY23 was marred by various challenges such as significantly higher domestic cotton prices and excess inventory build-up with U.S. retailers. Despite several headwinds, Indo Count Industries Ltd. displayed a resilient show in FY23 as volume de-growth was restricted to mere 1% versus industry de-growth of ~32% (partly aided by GHCL acquisition).

More importantly, Indo Count maintained healthy Ebitda margin levels of 15% plus through better hedging of cotton prices and constant efforts towards enhancing share of -added products (~19%).

Currently, the industry is witnessing demand greenshoots as inventory levels at the global retailers are gradually correcting. Furthermore, India has regained its lost market share (for Cotton sheets) in the USA from ~ 50% in CY22 to 58% in year-to-date-23 (January-June 2023).

Indo Count too is witnessing incremental business and enhancement in order book position for the upcoming holiday season. We expect volumes to grow by 18% YoY in FY24 to 88 million pieces (capacity utilisation rate 57%).

We expect company to cross 100 million pieces mark by FY25E translating into compound annual growth rate of 16% in FY23-25E. With positive operating leverage kicking in and stabilisation of cotton prices, we build in Ebitda margin expansion of 125 bps during FY23-25E (Ebitda CAGR: 19%).

Expect balance sheet strength to solidify going forward:

On the balance sheet front, company generated healthy operating cashflow of Rs 750 crore in FY23 driven by reduction in working capital days from 175 days in FY22 to 130 days in FY23 (owing to normalisation of global supply chain).

Subsequently, despite higher capex requirements (Rs 385 crore in FY23), company generated free cash flow of Rs 365 crore. Company reduced debt by around Rs 460 crore in FY23 (debt/equity: 0.5 times in FY23 versus 0.8 times in FY22). With minimal maintenance capex over the next two years (~Rs 50-60 crore annually) and steady cashflow generation (~Rs 560 crore in FY24-25), we expect debt levels to further reduce by Rs 420 crore in FY25E (debt/equity: 0.2 times).

Rating and target price

Government initiatives like signing of free trade agreements with multiple countries and stability in export incentive policy to provide robust opportunities for Indian exporters.

Indo Count through its sizeable capacity is well poised to capture the export opportunity in global home textile trade.

Hence, we ascribe 'Buy' rating on the stock. We Indo Count at Rs 295 i.e. 13 times FY25E EPS.

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