Vardhman Textiles Q2 Results Review - Capacity Utilisation, Demand Revival To Improve Margins: Systematix

Systematix Research Report

Vardhman Textiles Ltd.’s Q2 FY24 revenue increased 3% QoQ but dropped 3% YoY to Rs 24 billion, in line with our estimate. Sale volumes in yarn rose by 34% YoY (+9% QoQ), that of grey fabric by 15% YoY (+22% QoQ), while volume of processed fabric stayed flat YoY (+21% QoQ).

Gross margin rose 88 basis points QoQ, but contracted 370 bps YoY to 39.7%; Ebitda margin fell 73 bps QoQ and 593 bps YoY to 8.6% (our estimate 11.5%). Ebitda fell 43% YoY to Rs 2 billion, versus our estimate of Rs 2.8 billion, due to 50% and 36% lower profitability in the textile and acrylic fibre segments.

Reported profit after tax slipped 34% YoY and 14% QoQ to Rs 1.4 billion, versus our estimate of Rs 1.6 billion. Key growth drivers for H2 FY24:

1. Ongoing festive season in India,

2. inventory destocking in the UK,

3. spring-summer season demand surge in the U.S., and

4. improvement in cotton-yarn spread.

A weak Q2 FY24 performance has led us to cut our FY24 earnings by 15%, but we have retained EPS for FY25E.

We reiterate 'Hold' on Vardhman Textiles with an unchanged target price of Rs 360, based on 10 times FY25E price/earning.

Key risks:

• slower-than-anticipated demand recovery in India and the U.S.,

• lower availability of cotton and

• higher cotton prices.

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