Textile Stocks offering value?

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The whole textile sector has witnessed a strong performance in last 1 year and the last quarter numbers were exceptional. Yet most of the stocks are languishing and available at low PE multiples. Yes, it could be a value trap if the textile cycle turns towards bad but there are several long term positives going on for the sector and the medium term looks bright, for eg: Appreciation of Yuan is making Indian Textile much more competitive than before.

Ideal way to bet on this sector is to choose few stocks which offer decent margin of safety and invest for medium term. Few ideas which we like are:

Nitin Spinners (BSE Code: 532698) – We had mentioned about the stock recently at our blog. Established in 1993 and based out of Bhilwara, Rajasthan, this company has been growing aggressively. Last 5 year CAGR topline growth is 32% and last 10 year CAGR is 27.50%!.

The company had come out with an IPO at Rs 21 in Jan, 2006. Since then the turnover of the company has increased by more than 3.5 times from 98 Cr to 375 Cr (Expected for FY 2011), yet the stock is available at around Rs 12.

For this year the company is expected to do a turnover of 375 Cr+ and post a Net Profit of about 16-18 Cr thus resulting in an EPS of 3.5 to 4. For FY 2011, the Book Value of the stock would be close to 20-21 and at CMP of about 12, the stock is avilable at a 40% discount to Book Value.

Welspun Syntex (BSE Code: 508933) – We wrote in detail about this company at our blog about 1 year back at Rs 15. The stock did very well and had gone to Rs 25 levels.

Now the stock has come down to Rs 15 levels in this midcap correction and looks good again.

Salona Cotspin (BSE Code: 590056) – This is a micro-cap company doing consistently well in this space. At CMP of about 31, the company is available at a Market Capitalization of just about 15 Crore while this year’s turnover would be around 80 Crore+ with a Net Profit of 6-7 Crore. The stock is trading at a TTM PE of just 3. Salona is also a dividend paying company – Last year dividend was 10%.

Financial Results:

32 thoughts on “Textile Stocks offering value?”

      1. HI Ayush , can u research on Rajapalayam Mills in textile ? Apart from textile has some investments in madras cem (group co.), etc worth 350 cr on mcap of 155 cr , some wind mills , etc. do u find any value in it?

        1. Hi,

          Yes, the company has value for sure but the problem is that the value of investment in the group co has remained there for quite a long time but hasn’t got unlocked.

          Similary, textile sector is not a value creator over a long term so if one has a medium term view it may work out.

          Regards,

          1. hey ayush !!! Rajapalayam mills racing from 400 to 600 !!!! in a month ; what do u say ? Great returns naa ? I asked u to research on it ( I posted as rare investor). My next query is if u can track tide water oil and let me know what sort of returns should be expected from it and what should be entry point.

          2. Hi Rareinvestor,

            Good Call πŸ™‚

            Tide Water Oil is a good co and trading at decent valuations. Good for long term from here.

            What are your expectations on this one?

            Regards,

          3. still studying this stock , many possibilities but andrew yule had declined to divest this stock and brand veedol is controversial.. also looking at Punjab and sindh bank… does the sebi rule of minmum 25% holding applicable on UP Hotels and is it open offer candidate ? I have started looking at IST Ltd. recommended at this website. good results and cheap valuations (At consolidated level) but no dividends. Any management concerns ??Would u recommend to buy that stock?

          4. IST has been been doing well and story is progressing as expected earlier.

            Till now the promoters have been fair in showing the results…but one can’t have high confidence as business is in subsidiary.

            I would recommend IST at these levels.

            Regards,

          1. apart from the textile stuff, they have an interesting diversification (NextBlock Unit ).
            refer -http://www.mohitindustries.com/home/?pid=0

          2. Hi,

            Couldn’t see anything too exciting here. Seems to be like other textile plays.

            On the negative, their margins are lower than many other players.

            Regards,

  1. Most of these textile companies carry loads of debts and hence it would be a good idea to look at EB/EBIDTA rather than eps/pe ratios.

    They have been getting loans under TUFS and hence most of them never bother to look at the debt levels and tend to get complacent about it.

    Nitin spinners does seem to be doing well since past 3 quarters but so also are bannari aman spinning, shiva texyarn etc which are much bigger and still available at low PE levels of 3-4 but there again debt levels are high.

    1. Hi Hitesh,

      Yes, the whole textile sector is sort of a commodity play where there will be cycles. Having gone through a very bad phase over last 2-3 years, the sector is witnessing 1st year of good times.

      Among the above three ideas, Welspun has the lowest debt and then followed by Salona. So if one wants to pick low debt cos in this sector, one can choose them.

      Yes, Nitin has high debt but like other good players, it has good margins and growth yet available at 40% discount to BV. I don’t think many good cos in textile space are quoting at much discount to BV.

      The cos you have mentioned are also good and doing well.

      Thanks & Regards,

    1. Hi Abhishek,

      Like Nitin Spinners, also has superior margins in the range of about 18-20% but is quoting at 2 times the BV while Nitin is available at 40% discount to BV.

      My interest in textile stocks is more from a valuation point of view rather than a long term bet.

      Regards,

      PS: Being a commodity sector, one can have his own choices.

  2. hi ayush,
    sumbodys having a hard time finding great biznesses to invest arent they? gr8 stuff aint coming cheap these days is it?

    any chance of having a luk at turnaround case himachal fibres?

    1. Hi Akash,

      Not exactly…we did got onto Astral Poly recently and we think its a great business.

      If there is a good probable profitable idea why not try it? We are always looking for good ideas πŸ™‚

      Haven’t tracked Himachal Fibres….post a small summary about your logics here.

      Regards,

  3. Hi ,

    Thanks as always for your posts and recos.Gujarat Reclaim has gained about 40% and I made some money there.
    I wanted to toss this idea to you.You typically look for value buys and then follow that with a buy.How about turning the idea on its head , ie, look for overvalued ones and then sell in futures market.Agree that rollover costs have to be factored in.Thoughts?

    best..
    Avinash

    1. HI Avinash,

      Few reasons for against that strategy:
      1. We are optimistic on the markets and see a huge growth in coming years. Hence it is much logical to be positive and look for good business and undiscovered stocks.
      2. Saying that a stock is overvalued and won’t increase is not easy. Valuation differs from person to person one can get badly trapped even if one is right – like it is said – Markets can be irrational for periods greater than I and you can be solvent.
      3. Buying into a stock is like investing into a productive assets. One also gets dividends while owning the shares. Shorting would be sort of speculative activity.

      Regards,
      Ayush

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  5. Hi Ayush,could you please give your comments on VELJAN DENISON(denison hydraulics).
    Veljan is formerly known as Denison Hydraulics . This Company
    is located at Hyderabad and promoted by Sri. V C Janardan Rao.
    Mr Rao,is a qualified and experienced Engineer with specialization in the area of Fluid Power.veljan has promoted
    with technical and financial assistance of Abex Corporation,
    USA .In 1987 parent company ie, Abex corporation transferred
    their interest in the Hydraulic Division to M/s. AB Hagglund & Soner
    of Sweden and since then the Hydraulic Division came to be know
    as Hagglunds Denison worldwide .This Swedish company is still
    holding 13% shares in Veljan through Incentive Fastighet A B.
    Indian promoter is holding 73.10% stake .This makes the total
    promoter holding is 86.1% in this tiny capital company with total
    capital of just 1.8 crore.Later the name of Indian company changed to Veljan Denison to reflect the interest of Indian promoter too .
    Denison is a well known name in hydraulic Industry. Its products span across Hydraulic Valves,Cylinders,Vane pumps and Pneumatic equipments.In reality this small company is the only one listed player offering a product list of more than 200 products related with hydraulic and pneumatic sectors.Its nearest competitor is Yuken india.
    Company’s financial year is ends in sep.Recently it got approval from ROC to close accounts in march for uniformity with other companies.Yesterday it posted excellent results.For quarter ended march 2011 it posted sales of 30 cr and net profit of 6.6 cr.On small equity it posted rs 37 EPS.At the last traded price of 380 it is trading at 3 pe.It is trading historically at 8-12 pe.

    1. Hi,

      Looks to be an interesting idea. But being an illiquid stock, the stock may not be easily available at current levels.

      Regards,

  6. hi, the valuations of himachal fibres look compelling enough to ignore the illiquidity of the stock.its like one of the cheapest turnaround textile stocks eva!!!!….its trading below a p/e of 1!(after adjusting for cash eps of course, i believe its better to cash earnings here as its a cdr case and they are probably carrying the losses forward, please have a look at the a.r to understand its inherent tax and operational advantages better), also its debt burden has been substantially been reduced`and will be completely debt free in the next 3 yrs or so(even if u include the preference shares) and even though the promoters are not being so fair( they reduced their stake, almost by half and are now trying to do preferential issue) , i believe this might be an interesting situation.
    what do u think?p.s any thoughts on venkys? sure seems pretty hunky dory

    1. Will keep a tab πŸ˜‰

      Had tracked Venkys when it was in double digits. Since then the stock had a fabulous run and is out of our tracking list.

      Regards,

    2. Hey Akash,

      Went through and looked at Himachal Fibres… If the reported numbers are correct than indeed compelling valuation but…

      — Past history of CDR – never a good sign.

      —- Promoter not really investor friendly. Sold shares and then planning preferential allotment in FY11-FY12. So not worth holding for long term. Plus everything done off-exchange, difficult to know much about deals, couple of filings indicate Rs10 – which is difficult to believe, as the stock seems to have gone significantly high.
      Read the below link, makes me loose confidence in the stock.
      http://www.bseindia.com/xml-data/corpfiling/AttachHis/Himachal_Fibres_Ltd1_240809.pdf

      — Highly illiquid stock – only 3,300 shares traded YTD, May 2011 and only 12,400 shares traded in CY2010. So getting out may be difficult, provided you can get in. I think majority of the shares may be in physical form (Don’t know anything about the past history so can’t comment)

      — Book value of Rs73 per share many times higher than CMP of Rs 11.9.

      — Rs21cr of tax credit available due to past losses – hence will not be paying tax for some time. FY10 PBT was 2.1cr, so the credit expected to last for at least 5 years.

      — Raw materials form over 80% of sales – so VERY sensitive to cotton prices.
      Need answer to a know a couple of things though:1. What is the role of Operating Agency for BIFR cases, in this case, IDBI? Does it prepare financial statements? Does it verify whether the fixed assets are actually present? What else does it do which can increase confidence among the future, non-promoter shareholders?2. Anyone has dug up on what happened in the first place for it to go to BIFR? What was the traded price at that time?

      1. thanks for sharing these concerns,
        these combined with the illiquidity have given me a totally new perspective on the co. as ive learnt FROM my recent fiasco with temptation foods- where promoter stake is low,BHAAGO!!!!!
        HOPE TO KEEP IN TOUCH

  7. Scripscan:Rajapalayam Mills Ltdcmp:425Code:532503Story:It is incredible that while the textile producers seek sops from the GOI to survive, there remain isolated pockets down South which outperform in adversity. Look at Rajapalayam Mils as a sparkling starting point. -Rajapalayam Mills is a spinning mill producing yarn of different counts.-The corporate has undertaken a technology upgradation programme under which old machines have been replaced with modern ones. -Rajapalayam supplies high quality yarn to Mitsubishi amongst other large global players.-As a unique diversification Rajapalayam has moved into tissue culture for ornamental and orchard plants. However, this segment has not begun contributing as yet even though the core business remains strong. -For FY10-11 Rajapalayam reported Revenues of Rs 329 crore with after tax profits of nearly Rs 27 crore. -The corporate has an Equity of Rs 3.5 crore and free reserves of Rs 123 crore, which translates into a book value of Rs 363 per share.-The Equity ownership is concentrated with the Promoter PR Ramasubhramaneya Raja and associates directly owning 49 per cent of the stock. The public interest is small.-The corporate has gone in for tax saving measures by putting up Windmills, but the bigger story is the land bank with the company.-It is whispered that Rajapalayam Mills too could become a land bank play making the stock attractive even at current levels.-What should enthuse investors is that against fixed investment of Rs 330 crore(It holds 3.23cr shares of madras cements and 79 lakh shares of ramco industries), Rajapalyam Mills fetches a market cap of Rs 149 crore and given the small equity and a building land bank story this stock could do well in the medium term

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