VARDHMAN TEXTILES REPORTS STEADY OPERATING PERFORMANCE IN TOUGH SCENARIO

News: Vardhman Textiles (VTL) reported a flattish revenue growth for Q1FY23 on a QoQ basis. Higher input cost led to gross margin being lower on QoQ basis, however the company managed to report a marginally higher EBITDA margin owing to lower other expenses. Sales increased by 46% YoY to Rs 2812 crore (QoQ growth of 4%). Gross margin declined 850 bps YoY to 46.3% (QoQ decline of 206 bps). EBITDA margin declined 616 bps YoY to 18.7% (QoQ increase of 25 bps). EBITDA was higher by 10% YoY at Rs 526 crore (QoQ increase of 5%). Consequently, PAT grew by 4% YoY to Rs 329 crore (QoQ increase of 2%).

Views: VTL’s yarn sales volumes (including internal transfer) were flat on a QoQ basis at 57271 metric tonnes (MT), whereas fabric sales volumes declined by 12% on a QoQ basis to 803 lakh metres. Many smaller yarn players had very low utilisation levels during Q1FY23 owing to high cotton prices which negatively impacted their profitability. However, VTL has been able to maintain the yarn utilisation at optimum levels inspite of the challenging business environment. The continuous surge in cotton prices and the consequent inability of yarn players to fully pass on the increased input cost has led to yarn players margins being lower than in the last three quarters. Vardhman’s management had indicated that the yarn margins in the first three quarters of FY22 were not sustainable as during this period the company had the benefit of low cost inventory. In Q1FY23, the yarn margins appear to have normalised to long term average levels for Vardhman (between 18%-22%) owing to increased input cost due to purchase of cotton at elevated levels. Cotton prices have corrected from its peak levels in the last one month which should gradually aid the margin trajectory. From a medium to long term perspective, the demand for yarn is expected to increase and large companies like Vardhman will be able to capitalise on China + 1 strategy of global retailers. Vardhman due to its strong balance sheet (FY22 debt/equity of 0.25x) is better placed than peers to benefit from the current market scenario.

Impact :Neutral