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Vardhman Textiles (VTEX IN, Mkt Cap US$0.4b, CMP Rs.280, Buy)

3QFY11 results are above estimates Revenues were up 44.4% YoY to Rs.10.1b. EBITDA stood at Rs.2.76b due to significantly improved performance of the yarn division. Yarn prices in 3QFY11 increased ~15% to touch record highs. 3QFY11 while Adjusted standalone profit stood increased 187% YoY to Rs.1.35b

VTL normally follows a conservative procurement policy of covering their cotton requirement for entire year between Nov-Feb (cotton harvesting period), as such we expect VTL to continue to enjoy robust margins in FY12 as well.

We are revising our FY11 net profit estimates up by 6.4% to Rs.66.7 and our FY12 net profit estimate by 14.1% to Rs.58.9. We expect cotton yarn margins to have peaked in 3QFY11, but expect margins to remain strong at ~22-23% in FY12 on the back of buoyant demand and India’s raw material advantage.

We believe, VTL is one of the best proxy to play the textile reflation theme and cotton advantage theme. VTL trades at attractive valuations of PER of 4.3x FY11 EPS of Rs.66.7 and 4.8x FY12 EPS of Rs.58.9. Maintain Buy.