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09 October, 2015 13:26 IST
Karvy bullish on Arvind, Kewal Kiran, Page Inds and Vardhman
Source: IRIS | 05 Sep, 2013, 04.29PM
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With rising global cotton inventories and expectation of bumper domestic cotton crop amid depreciating INR to all time high levels, Indian textile industry is expecting to reap benefits on all fronts with competitive positioning in yarn, fabric as well as apparel exports, Karvy Stock Broking said.

Karvy is bullish on stocks like Arvind, Kewal Kiran Clothing, Page Industries and  Vardhman Textiles. Karvy gave following investment rationale for its bullish stance:

1. Arvind: Buy
Target Price: Rs 103
CMP: Rs 80

"Arvind's major raw material is cotton, where India is self sufficient and a net exporter of fibre. Moreover, its revenue contribution from exports is ~33%, which further improves prospects amid depreciating INR making more competitive. As bumper cotton crop is likely to contain the prices at Rs. 100, we expect that its Textiles segment would continue to display strong performance, while Brands & Retail segment would pick up on marriage and festive seasons. Better consumer sentiments were imminent with Q1FY14 numbers, with its Brands & Retail segment grew by 34% YoY with improved margins. Moreover, complete removal of Excise Duty from branded apparel is helping on overall profitability in Apparel business and revenue from Realty divestment is an additional cushion.

We expect revenue and net income to grow at 14.5% & 13.7% CAGR, respectively over FY13-FY15E on strong volume growth in Textiles along with encouraging performance of Brands & Retail segment. At CMP of Rs. 80, the stock trades at 6.5x and 5.0x of FY15E EPS and EV/EBITDA, respectively. We have 'BUY' recommendation on the stock with a target price of Rs 103 a share based on 5.6x FY15E EV/EBITDA, having a potential upside of 28%. At target price, the stock would trade at 8.3x FY15E earnings."

2. Kewal Kiran Clothing: Buy
Target Price: Rs 912
CMP: Rs 720

"Kewal Kiran Clothing (KKCL) operates as branded and retailer company in apparel business. Its product portfolio of Jeans, Trousers, T-Shirts & Shirts is largely dependent on cotton as a raw material where Jeans' revenue share is 60%. We believe that KKCL would be a major beneficiary of corrections in cotton price on expectation of good cotton crop, given its product portfolio. Moreover, KKCL is among the biggest beneficiaries of removal of Excise Duty on readymade garments, as the Company operates only in Apparel segment, which will help to expand EBITDA margins further. We expect revenue and net income to grow at 18% & 20% CAGR, respectively over FY13-FY15E. At the CMP of Rs. 720 a share, the stock is trading at 10.5 and 8.9x of FY14E and FY15E EPS (ex-cash), respectively. We value KKCL at 12.0x FY15E EPS, and add Rs. 162 a share of Cash & Equivalent of FY15E, implying target price of Rs. 912 a share, having an upside potential of 27%."

3. Page Industries: Buy
Target Price: Rs 5,172
CMP: 3,980

"Page Industries (PI) is evenly placed in a high growth consumer discretionary space, with leading brand position in its segment, delivering consistent high performance and growth amid challenging consumer sentiments. We believe with strong brand positioning and successful price hikes in the past, PI enjoys strong market position. Moreover, its second largest segment i.e. Leisure Wear is growing fast, where average realizations are high with better profitability, thus driving blended realizations up. On bumper cotton crop expectations in coming season, operational profitability is likely to improve.

Moreover, PI is expected to take a realization hike in H2FY14 to cover higher input costs. The possibilities of 2011 like situation can't be ruled out where the Company took realization hike and subsequently cotton prices corrected sharply; further improving operating margins. We expect PI's top-line and earnings would growth 28% & 31% CAGR over FY13-FY15E. At CMP of Rs. 3,980 per share, the stock is trading at 30.2x and 23.1x FY14E and FY15E earnings, respectively. We have 'BUY' recommendation on the stock with target price of Rs 5,172 a share valuing at 30x FY15E EPS, having an upside potential of 30%."

4. Vardhman Textiles: Buy
Target Price: Rs 356
CMP: Rs 311

"Vardhman Textiles (VTEX) is the largest spinner in India with strong institutional relationship. We believe in the event of bumper domestic cotton harvest in coming season, the Company is in a favorable position as it holds 6-8 months cotton inventory, procuring best quality in peak season. China is reportedly planning to change its cotton policy before the onset of cotton season 2014/15. Therefore, we believe VTEX would be light on cotton inventory by the time action comes from the Chinese policy. VTEX enjoys super-normal margins due to high yarn and fabric demand from export markets, as exports' revenue contribution is 30%, while ere depreciating INR is aiding profitability. Scaling up fabric capacity is further improving its EBITDA margins over a longer period (read 18-2% from earlier ~14-15%).

Moreover, favorable policies on investments from MP state government; giving 4%-6% interest subsidy over and above TUFS (annual interest savings of Rs 250 million) along with tax benefits aiding net income growth. VTEX is undergoing capex of Rs. 10.5 billion in FY14 to add 230 looms and 1.3 lakh spindles to reach total capacity of 1,320 looms and 1.1 million spindles. It commissioned 29,568 spindles in Q1FY14 while rest is expected to start commercial production in phases from Sept'13 & Dec'13 onwards. Thus FY15 will be witnessing full benefits of ongoing capex.

We expect VTEX revenue and net income to grow at a CAGR of 13% and 8%, respectively over FY13-15E, At CMP of Rs. 311, the stock trades at 4.8x and 4.1x FY15E earnings and EV/EBITDA respectively. We have a 'BUY' recommendation with target price of Rs. 356 a share, valuing at 5.5x FY15E EPS, having an upside potential of 14%."

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