NANDAN DENIM LTD: STYLE YOUR PORTFOLIO !!!

Scrip Code: 532641 / NDL

CMP:  Rs. 150.25; Market Cap: Rs. 687.79 Cr; 52 Week High/Low: Rs. 174.00 / Rs. 56.10

Total Shares: 4,55,49,056 shares; Promoters : 2,77,58,720 shares – 60.94 %; Total Public holding : 1,77,90,336 shares – 39.06 %; Book Value: Rs. 56.84; Face Value: Rs. 10.00; EPS: Rs. 12.96; Dividend: 16.00 %; P/E: 11.59 times; Ind. P/E: 20.16; EV/EBITDA: 6.30x

Total Debt: Rs. 470.86 Cr; Enterprise Value: Rs. 1,136.08 Cr.

NANDAN DENIM LIMITED: The Company was founded on August 09, 1994 and is headquartered in Ahmedabad, India. It was earlier known as Nandan Exim ltd and changed its name to Nandan Denim in 2013. It is part of the Chiripal Group, which has multiple businesses including textiles, real estate, education and construction. The company commenced commercial operation in 1999. It was initially involved in the trading of textile fabrics. The company came with an IPO in May 12, 2005 with issue size of 60 lakh shares of face value of Rs. 10 each at the price of Rs. 20 per share raising Rs. 12 Cr for foraying into denim and cotton fabric production. The Company had declared split in face value of its shares from Rs. 10 to Rs. 1 on 01 September 2005 and on 05 August 2011 it consolidated its face value from Rs. 1 to Rs. 10. The company declared last bonus on 31 October 2006 in ratio of 1:1. Nandan Denim Limited (Nandan Denim) is an India-based denim manufacturer. The Company's products include shirting fabrics, engineered khakis and denim home. Nandan Denim manufactures shirting fabrics for fashion garments and accessories applications. The Company manufactures khakis fabrics for fashion garments and accessories applications. It also manufactures handcrafted masterpieces made from denim fabric and natural indigo. The Company's installed capacity is around 110 million meters per annum (MMPA) for denim fabric, approximately 10 MMPA for yarn-dyed shirting, and around 124 tons per day (TPD) for yarn manufacturing. The Company exports its denim fabric to around 30 countries across the globe. Over the years, the company has expanded its denim fabric manufacturing Capacity and has established itself as one of the leading players in the Indian denim fabric industry. Currently, the company has a denim fabric processing capacity of 110 mmpa and shirting fabric processing capacity 10 mmpa. NDL’s denim fabric manufacturing plant is located in Ahmadabad, Gujarat. Since its inception, Nandan has been looking to the growing demand in Denims bottom-wear and shirting fabrics. Nandan has stood by its commitment to provide quality at the best price. To add to its glory it is now Nandan Denim Limited has an ISO certification and Oeko-Tex certification on its credit. Nandan Denim annually makes 100 million metres of fashion fabrics enough to go around Earth 2.5 times. NANDAN DENIM Ltd is locally compared to Arvind Mills, Aarvee Denims & Exports Ltd, Sudarshan Jeans Pvt Lts, Etco Denim Ltd, Ashima, Bombay Dyeing The Ruby Mills Ltd, Tuni Textiles Mills, Subh Tex (India) Ltd, Rainbow Denim Ltd, Dhanlaxmi Fabrics India Ltd, Santogen Exports Ltd, Alka India Ltd, Shri Lakshmi Cotsyn, Morarjee Textiles and globally with Michael Kors Holdings Ltd of USA, Guess? Inc of USA, PRADA SPA COM of Europe, Joe’s Jeans Inc of USA, Fossil Group Inc of USA, Ralph Lauren Corp of USA, VF Corp of USA, St. John Knits International Inc of USA, Ever-Glory International Group Inc of USA, Billabong of Australia, Speacialty Fashion group ltd of Australia, United Clothing FZE of UAE, Denim Area Industrie SPA of Italy, Berto E.G. Industria Tessile of Italy, Aqua Fabrics of Italy, Textile Canatiba from Brazil, Vicunha Textiles from Brazil.  

Investment Rationale:

NANDAN DENIM LTD is a part of Chiripal group and currently the second largest integrated denim fabric company in India based in Ahmedabad. Chiripal group is widely recognized as the Textile House with manufacturing facilities for POY, Texturising, Cotton Spinning, Denim Weaving, Knitting and Processing, Home Furnishing. NDL manufactures and supplies quality grey cotton fabrics, khakis and denims. Denim contributes 90 % of the total revenue to the company. It has invested heavily in capacity expansion to become the largest denim company in India and fourth largest in the world by March 2016. Nandan Denim was in the business of trading of fabrics in domestic and international markets. During FY04, it commenced implementation of Weaving (Grey) project. Currently, the exports account for nearly 10 % of sales. NDL is second largest denim player in the India with 99 mn meters per annum, and also has 10 mmpa manufacturing capacity of shirting fabrics. NDL is the largest denim suppliers to global brands such as Carrefour, Ralph Lauren Corp, Polo, A/X, Tomy Hilfiger, Gini & Jony, CP Colorplus, Mufti, Killer, Spykar etc. India’s textiles sector is one of the mainstreams of the national economy. It is also one of the largest contributing sectors in India’s exports, contributing around 11 % to the country’s total exports basket. The textiles industry is labour intensive and is one of the largest employers. The industry realized export earnings worth US$ 41.57 billion in 2013-14. The textile industry has two broad segments, namely handloom, handicrafts, sericulture, power looms in the un-organised sector and spinning, apparel, garmenting, made ups in the organised sector. The Indian textiles industry is extremely varied, with a hand-spun and hand-woven sector at one end of the spectrum, and the capital intensive sophisticated mill sector at the other. The de-centralised power looms and knitting sector forms the largest in textile and within that knitting sector forms the largest section. The close linkage of the industry to agriculture and the ancient culture, the traditions of the country make the Indian textiles sector unique in comparison to the textiles industry of other countries. This also provides the industry with the capacity to produce a variety of products suitable to the different market segments, both within and outside the country. The future for the Indian textile industry looks promising, buoyed by both strong domestic consumption as well as export demand. With Consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade. The organised apparel segment is expected to grow at a Compound Annual Growth Rate of more than 13 % over a 10-year period. Also Indian denim capacity is poised to reach 2 billion meters per annum (bmpa) by 2018 from 1.2 bmpa currently, signifying 18.5 % CAGR. In contrast, international market capacity is likely to grow at 3 % to 5 % CAGR. Of the current 1.2 bmpa Indian denim capacity, usable installed capacity is about half of 1 bmpa. Domestic market demand for denim is of 800 mmpa while the balance 200-300 mmpa is exported. India houses 10 % of global denim capacity and NDL manufactures 10 % of Indian denim capacity. Nandan Denim is poised to become the largest manufacturer of denim fabrics in India after its expansion of its capacity to 110 mn meters per annum (mmpa). In India, Arvind Ltd has capacity of 130 mmpa and Aarvee has capacity of 84 mmpa, Sudarshan Jeans has capacity of 70 mmpa, ETCO Denim has capacity of 50 mmpa. However NANDAN is still behind its global competitors like Vicunha Textiles which has capacity of 230 mmpa, iSKO which has the capcity of 200 mmpa and Tavex corporation which has the capacity of 160 mmpa. NDL, Arvind and Aarvee, (together) would constitute one-third of the Indian denim industry. Consumption in India is skewed with 7 % of population consuming 49 % of denim. Male segment contributes 85 % to the total consumption while balance 15 % is consumed by female and kids segment. The overall denim market is expected to witness higher growth rates due to their lower base and increasing focus of brands and retailers on those segments. Denim is of the most promising category in India’s apparel market. In 2013, the denim market of India was worth Rs. 13,500 Cr (NDL having 10 % share with Mcap of Rs. 689 Cr) which accounts for 5 % of the total apparel market of the country. As per a report, the world trade in denim fabric averaged 670,000 tonnes over the past one decade, while in value terms; it fluctuated between $3 billion and $3.5 billion. India accounts for 5 % of this trade. Going forward, a large part of the growth of denim apparel shall be driven by deeper penetration in the smaller cities with increasing acceptance of denim within India. The Indian denim market is projected to grow at 15 % CAGR to become Rs. 27,200 Cr market in 2018 owing primarily to youngster’s obsession for cult fabric. This boom will be fuelled by not only due to an increasing demand from small cities and rural areas, but also because of acceptance of the fabric at workplaces etc. In terms of volumes, the denim market is estimated at 300 mn pairs of jeans, which is projected to grow to 550 mn-600 mn by 2016. India is the second largest denim manufacturer in the world with 1200 MMPA capacity, second to China, which has a capacity of 3497 MMPA. Asia accounts for about 70 % of the global denim fabric production, while the global denim fabric market is $17bn, growing at a modest rate of 3 % to 5 %. The western lifestyle and western fashion has boosted the consumption of casual fashion apparel like denims, dress, shirts, tees, casual shirts among both men and women consumers in all developing countries including India. The average number of denim items owned by Indian consumer is much lower in comparison to consuming market of the United States, Europe etc. The number is even lower than countries like Brazil and China. This difference in the number demonstrates the huge potential that exists for denim in the domestic market. Per capita denim jeans consumption in India is only 0.3 compared to USA’s 9, UK’s 8, Brazil 7, Thailand 7, Japan 6 and China’s 2. The 78 % of Indian population is less than 45 years of age. While denim story started elsewhere in the world as work-wear, it started as a fashion statement of youth in India. It reflected the fashion statement, style quotient and comfort wear anywhere for the youth. With more than 70% of Indian population aging around 26 years and the median age remaining under 30 years even after 10 years, huge potential exist for denim, a fabric with the target Indian age bracket of 14-40 years. Current share of male segment within denim wear is almost 75-80 % with the female gender catching up faster than the growth registered in the male segment. The young generation, either gender, has accepted denim as “normal” wear rather than a “functional” wear. Current domestic market is dominated by metro cities that account for almost two-third of consumption while having got less than 10% of national population. With rising disposable incomes and fashion consciousness, increasing demand from women’s wear segment and the growing acceptance of denim jeans as an office wear coupled with the expanding demand from Tier II & III cities driven by expanding organised retail industry will lead the growth of denim in India. Also NDL has strategic tie-ups with 10 firms for exclusively selling Nandan products around the country and 2/3rd of the orders are confirmed through long term agreements involving minimum yearly quantity commitment. NDL has strong global network of around 15 distributors spread across 8 countries – Peru, Mauritius, Hong Kong, Dubai, Thailand, Bangladesh, New York, Columbia. NDL exports its denim fabric to over 22 countries across the globe through its strong global dealer-distribution network. Merchant exports through various star export houses give an additional boost to exports. Currently, exports constitute over 10 % of total turnover in next three to four years taking benefit from decreasing competitiveness from its Chinese players. As the penetration of denim category and the awareness of denim quality increases in those cities and rural India, their share in market value will start increasing with more number of consumers willing to pay premium for the quality, design and fit. The latest trend in the denim fashion augurs well for the denim companies in India and the Nandan Denim (NDL), which is the second largest manufacturer of denim in India and the 5th largest in the global arena will definitely be the winner in this sector.

Outlook and Valuation:

NANDAN DENIM LTD is India's one of the largest and Asia's 5th leading denium manufacturer. NDL plant is located in Gujarat, which is a textile hub of India, and is known as largest exporter of denim fabric, largest producer of cotton etc. NDL’s plants are with state of art manufacturing facility with latest machinery & technology sourced from across the globe. The machinery is capable of producing wide range of denim fabrics – 100 % cotton, cotton spandex, cotton poly, cotton poly spandex, cotton modal, cotton tencel etc. NDL’s plant in Gujarat gives a close proximity to machinery vendors, fabric dealers and leading garment manufacturer’s which results in faster delivery and services, translating into lower overheads costs. NDL has easy access to the raw material like cotton as Gujarat meets 70 % requirement and provides skilled & unskilled labour. Cotton is the key raw material used for manufacturing denim fabric. It is a seasonal commodity and production is heavily dependent on monsoon. India, under a normal monsoon condition remains a major source of cotton to the national consumers as well as International market. With production of cotton having stabilized around 37 to 38 million bales and domestic consumption to the tune of 30 million bales, the country is prepared to take advantage of any volatility in the commodity market. Any volatility in cotton market impacts the yarn manufacturers the most, whereas the value added manufacturers are reasonably hedged due to the market conditions, i.e. non-commoditised product leveraging the strong agent-based domestic. Cotton prices remained below minimum support price (MSP) in last year. However, it has now stabilised due to intervention of Cotton Corporation of India. China import of cotton is declining and the NDL management does not expect any correction in cotton MSP. It expects cotton prices to remain range bound with decreased volatility. The decline in cotton prices would be beneficial for the company. The company keeps an inventory of 4 months depending on the outlook and trend of cotton prices. NDL is implementing capacity expansion in denim fabric, spinning and shirting segments. The total Capex requirement is of Rs. 612 crore which is funded with a D/E ratio of 2.4:1. Of the total expansion Rs. 250 Cr would be used for spinning, Rs. 250 Cr for denim and balance Rs. 112 Cr for yarn dyeing to be used in shirting manufacturing. The expansion of denim fabric capacity will help the company to increase its domestic market share as well as diversify its operations on a global scale through a rising share of exports, the addition of new shirting capacity will further diversify its operations, and the expansion of spinning capacity will support the increased denim fabric capacity of 110 MMPA. NDL will backward integrate by expanding its spinning capacity from 64 tpd (tonne per day) to 124 tpd over FY15E-FY16E. This backward integration will help NDL to improve operating flexibility by helping the company to absorb the increasing market demand with faster delivery and timely execution due to limited dependency on external factors along the value chain. This will help NDL to achieve optimum capacity utilization and maintain consistency and high quality standards. With the backward integration in place, the average cost of raw materials will stand at Rs. 150/kg as compared to Rs. 170/kg when outsourced from the open which were 10 % to 15 % higher compared to purchase of yarn from market. Integrated facility will help in better management of the working capital and improve the operational efficiencies. Better market response, efficient capacity utilisation and cost savings on captive yarn would result in improvement in EBITDA margin from current 14 % to 15 % to around 19 % to 20 % in the next two years. This backward integration will also result in improved return ratios. Furthermore, with improved operating flexibility, the company would be better placed to increase its share of exports, which have strict quality and timeline requirements. The company envisages increasing its share of exports from 10 % in FY14 to around 30 % by FY18. Overall, this should further help the company to increase its EBITDA margins to more than 20% beyond FY17. The company would get set off of Value Added Tax (VAT) for 8 years post completion of project in March 2016. With the establishment of higher spinning capacity, the cost of fabric is likely to reduce which would lead to better margins and ROCE. The management mentioned that margin improvement is likely to be in the range of 4 % to 5 % due to an advantage of Rs. 12.5 per meter in the cost of fabric by in-house manufacturing of yarn. Debt of the company stood at Rs. 470 Cr at the end of FY15. The management expects its peak debt to be Rs. 650 Cr by FY16E. The company is planning to raise Rs 50 Cr to 100 Cr to part finance the equity portion. It has already passed a Board resolution to raise Rs. 100 Cr through convertible warrants on preferential basis to promoter & non-promoter investors. Post-expansion, the management mentioned that it would consolidate its capacities for one year. Post FY17E, the Textile Upgradation Funds Scheme would expire and the Company would plan its next growth phase post clarity on investment avenues. Free Cash generated through the current expansion plan is likely to be distributed in the form of dividends, in the event of non-finalisation of further investments. Currently, exports contribute 10 % to the topline of the company. NDL exports to 22 Countries in the world; however, more than 80 % of the exports are to Latin America, Africa and Bangladesh. Polo, Target, Calvin Klein are the indirect client of the company, supplied through the wholesalers-distributors export channel. The company plans to increase the share of exports to 25 % in its revenue mix with an aim of diversifying its clientele and de-risk its revenue model. The realisations and margins are almost same in domestic and export market for the current product mix of the company. On financial side revenue of the company has increased at a CAGR of 21.2 % over FY11-15. This was driven by higher volume due to increasing capacities. Shift to higher value added products, backward integration and lower share of traded products in revenue mix enabled the company to improve its EBITDA margin to 15.1 % in FY15 from 13.4 % in FY11. However, debt remains a key negative for the company with leverage of 1.8 x in FY15. This is likely to reach 2.1 times by FY16E. ROE of the company increased to 21.6 % in FY15 from 12.7 % in FY11 while ROCE increased to 15.8 % in FY15 from 10.6 % in FY11. At CMP of Rs. 150.25 the company is trading at 12.52x the FY16E and 10.65x the FY17E. Company can post EPS of Rs. 12.00 in FY16E and Rs. 14.10 for FY17E. The company is on an expansion mode till FY16E which will start showing results from FY17E. It would be the largest manufacturer of denim in the country. It is likely to manufacture shirting with premium quality. Profitability of the company is likely to increase. It is expected the company to grow around 10-15 % in following 2-3 years. It is expected that the company will keep its growth story intact in the coming quarters also and can be a good pick from this sector. 

KEY FINANCIALS	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	904.10	1,096.50	1,241.40	1,426.30
NET PROFIT (₹ Cr)	39.10	51.40	54.50	64.40
EPS (₹)	8.60	11.30	12.00	14.10
PE (x)	19.80	15.10	7.00	5.90
P/BV (x)	3.60	1.50	1.30	1.10
EV/EBITDA (x)	9.20	4.50	5.00	4.10
ROE (%)	19.50	21.60	19.30	19.40
ROCE (%)	13.20	15.70	16.00	16.10

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