INR 3,400 Crores CapEx Will Modernize Operations And Improve Sustainability

Key Takeaways

• Extensive capital expenditure and modernization efforts aim to increase production capacity, improve efficiencies, and potentially boost profitability and earnings.
  
• Investments in sustainability and potential for favorable government policies could enhance cost competitiveness and positively impact margins and revenue.
  
• High domestic cotton prices, import duties, and locked-in costly inventories hinder Vardhman's competitiveness and margin improvement amid challenging market conditions.

Catalysts

Manufactures, purchases, and sells textiles and fibres in India and internationally.

• The company plans to complete an extensive capital expenditure of ₹3,400 crores by the end of the calendar year. This CapEx aims to add 46 million meters of fabric capacity, modernize existing spinning infrastructure, and enhance sustainability. Successful execution could lead to revenue growth due to increased production capacity.
  
• Vardhman Textiles is undertaking a considerable modernization drive within its existing operations, likely to improve efficiencies, reduce costs, and potentially enhance net margins by 200 basis points over current levels, thereby positively impacting future earnings.
  
• The company's fabric division is performing well in terms of utilization and profitability, in contrast to the struggling spinning segment. As the fabric business expands and new capacities become operational, there could be a meaningful positive impact on overall company revenue and profitability.
  
• Vardhman is investing in sustainable and green power solutions with an allocated ₹600 crores. This initiative could reduce operational costs and improve net margins over time, as the reliance on traditional power sources decreases.
  
• The potential relief in import duties on cotton and raw materials for synthetic fibers could significantly alter the current cost dynamics. Should government policies become more favorable, this might enhance the competitiveness of Vardhman’s spinning and synthetic operations, boosting revenues and net margins.

Vardhman Textiles Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vardhman Textiles's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.7% today to 9.4% in 3 years time.
• Analysts expect earnings to reach ₹11.3 billion (and earnings per share of ₹39.3) by about March 2028, up from ₹8.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹13.6 billion in earnings, and the most bearish expecting ₹10.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.1x on those 2028 earnings, up from 13.2x today. This future PE is lower than the current PE for the IN Luxury industry at 21.9x.
• Analysts expect the number of shares outstanding to decline by 1.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.92%, as per the Simply Wall St company report.

Vardhman Textiles Future Earnings Per Share Growth

Risks

• The spinning segment of Vardhman Textiles is struggling due to higher domestic cotton prices compared to international prices, impacting net margins negatively.
  
• Yarn prices have tumbled owing to lower New York Futures, leading to lower sequential margin improvement, which could put pressure on earnings.
  
• India's high import duty on cotton and non-tariff barriers on polyester and viscose increase the raw material costs, disadvantaging Vardhman against international competitors and affecting revenue potential from exports.
  
• The company carries large cotton inventories, which locks in higher-than-market raw material costs without the ability to take advantage of price drops, potentially squeezing net margins.
  
• Significant capital expenditure plans may not yield immediate returns or margin improvements, as the competitive environment and raw material costs remain challenging, which could impact future earnings.

Valuation

• The analysts have a consensus price target of ₹519.0 for Vardhman Textiles based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹588.0, and the most bearish reporting a price target of just ₹393.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹120.5 billion, earnings will come to ₹11.3 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 14.9%.
• Given the current share price of ₹385.95, the analyst price target of ₹519.0 is 25.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.