March 22, 2011 Vardhman Textiles (MAHSPI) - ICICI Directcontent.icicidirect.com/mailimages/ICICIdirect_VardhmanTextiles... · We are initiating coverage on Vardhman Textiles with

March 22, 2011

ICICIdirect.com | Equity Research

Initiating Coverage

ICICI Securities Limited

Set to cash in on increased demand… Vardhman Textiles, an integrated textile conglomerate, is in a sweet spot to benefit from the revival in the textile industry. With the largest domestic spindlage, Vardhman is well poised to benefit from the increasing spreads between yarn and cotton prices. A crunch in global supply of cotton is an added positive. Also, it has incurred majority of its capex during FY06-10 and is now ready to reap the benefits thereof. We are initiating coverage on Vardhman Textiles with an ADD rating.

Global supply crunch, increasing spreads augur well for Vardhman A decline in global cotton output by 6% in cotton season (CS) 2009-10 (October to September) has led to an increased demand for Indian yarn (as India is a cotton surplus nation). The spread between cotton and cotton yarn prices has increased from | 59/kg in CS08-09 to | 72/kg in December 2010. Hence, operating margins of Vardhman’s spinning segment recorded a marked improvement from 14.4% in FY09 to 24.8% as on December 2010. Opening up of a fresh export quota in April 2011 will allow companies to resume yarn exports. We expect Vardhman to enjoy the benefits at least up to Q1FY12 (post which global prices may correct in anticipation of fresh stocks). However, since utilisation rates are at decadal highs of greater than 90% the chance of a significant price correction in cotton yarn is bleak (refer Exhibit 18).

Key positives: Well poised to cater to demand, comfortably leveraged Vardhman has incurred a capex of ~| 2,300 crore during FY06-10. While spinning capacity has increased 1.8x to 8,70,000 spindles, Vardhman has more than doubled its weaving capacity from 432 looms (FY06) to 900 looms currently. Vardhman is, therefore, well poised to capture the increased demand. On the debt front also, Vardhman’s debt to EBITDA levels stand at 3.7x (FY10) being the lowest among its peers.

Valuations Considering swell yarn realisations, a robust demand outlook, the downside risks like marginally softer yarn realisations and lower than estimated offtake in demand, we have arrived at our target price based on an average reached at by assigning a multiple of 0.65x FY12E book value of | 349 and 4.7x FY12E EPS of | 65.1. We are initiating coverage on the stock with an ADD rating with a target price of | 267.

Exhibit 1: Valuation Metrics FY08 FY09 FY10 FY11E FY12E

Net Sales (| crore) 2,387.7 2,965.4 3,350.7 4,081.4 4,460.7

EBITDA (| crore) 381.6 452.4 705.1 919.2 1,000.0

PBT (| crore) 187.2 129.6 411.3 546.9 581.6

Net Profit (| crore) 143.0 78.3 302.4 382.9 407.1

EPS (|) 25.2 13.8 53.4 61.2 65.1

PE (x) 6.1 5.7 3.0 4.2 3.9

PBV (x) 0.7 0.3 0.6 0.8 0.7

EV/EBITDA (x) 8.5 5.8 4.7 4.7 4.8

ROCE (%) 6.6 5.5 11.0 14.1 13.2

RONW (%) 11.8 5.9 20.2 21.8 19.9

Source: Company, ICICIdirect.com Research

Vardhman Textiles (MAHSPI) | 257

Rating Matrix Rating : Add

Target : | 267

Target Period : 12-15 months

Potential Upside : 4%

YoY Growth (%) (YoY Growth) FY09 FY10E FY11E FY12E

Net Sales 24.2 13.0 21.8 9.3

EBITDA 18.6 55.8 30.4 8.8

Net Profit (45.2) 286.3 26.6 6.3

Current & target multiple

FY09 FY10 FY11E FY12E

PE 5.7 3.0 4.2 3.9

Target PE 19.3 5.0 4.4 4.1

EV/EBITDA 5.8 4.7 4.7 4.8

Target EV/EBITDA 9.7 6.5 5.4 5.3

Price/BV 0.3 0.6 0.8 0.7

Stock Data

Bloomberg/Reuters code VTEX IN/ VART.BO

Sensex 17,988

Average volume 30,959

Market Capitalisation 1,633

EV 3,315

52 week H/L 377 / 228

Equity capital | 63.65 crore

Face value | 10

Promoter's stake (%) 61.01

Comparative return matrix (%)

Returns (%) 1m 3m 6m 12m

Vardhman Textiles (5.2) (12.4) (17.1) 13.0

Alok Industries (9.6) (20.4) (3.6) (12.7)

Arvind (10.0) (18.6) 19.9 50.9

RSWM (12.3) (20.0) (8.0) 36.0

Price movement

4500

5000

5500

6000

6500

Mar-10 Jun-10 Sep-10 Dec-10

200

250

300

350

400

NIFTY Vardhman Textiles Ltd

Analyst’s name

Bharat Chhoda [email protected]

Dhvani Modi [email protected]@icicisecurities.com

ICICIdirect.com | Equity Research Page 2


Company background Vardhman Textiles Ltd (Vardhman) (earlier known as Mahavir Spinning) is part of the Vardhman Group, a large textile conglomerate with a presence across the textile value chain. Vardhman has evolved through history from a small beginning in 1965 into a modern textile major under the dynamic leadership of its chairman SP Oswal.

The Vardhman Group has a turnover of over $800 million and a workforce of 25,000 employees. The group has over 24 manufacturing facilities spread across five states in India. The group has one of the largest spinning capacity in India (8,70,000 spindles) and is among the largest domestic yarn producers with a market share of 3.5%.

Exhibit 2: Group structure


Vardhman Holdings Ltd (VHL)

Vardhman Textiles Ltd (VTEX)

26.66% stake

Vardhman Yarns & Threads Ltd

Business: Yarn, Fabric, Steel

VTL Investments LtdVardhman Spinning Co Ltd

Vardhman Acrylics Ltd

Stake: 51% Stake: 100%Stake: 73%Stake: 59%

Business: RMG/ Industrial/ Speciality

Threads

Business: Acrylic Staple Fibre

Business: 100% cotton yarn

Business: NBFC

0.75% stake

Shareholding pattern (Q3FY11)

Shareholder Holding (%)Promoters 61.0Institutional Investors 23.1General Public 15.9

FII & DII holding trend (%)

6167 67 67

2313 12 11

0

20

40

60

80

Q3FY11 Q2FY11 Q1FY11 Q4FY10

Promoters Institutional investors

700045



Product profile

Vardhman, a fully integrated textile player, is present across the textile value chain ranging from yarns, threads, fibre to fabrics and garments. Exhibit 3: Product mix

1,126 1,281 1,532 1,695

413450

687811

312 322

344385

302326

288255

7114

185

-

500

1,000

1,500

2,000

2,500

3,000

3,500

FY07 FY08 FY09 FY10

| cr

ore

Yarn Fabric Sewing Thread Steel Fibre


Yarns

From a humble beginning of 14,000 spindles, Vardhman today has the largest domestic spinning capacity of over 8,70,000 spindles. The company has technical tie-ups with world leaders from Japan and Korea. Vardhman is one of the largest cotton yarn exporters from India and accounts for ~5% of the total cotton yarn exported. Vardhman offers the widest range of specialised greige and dyed yarns in cotton, polyester, acrylic and varieties of blends. It also offers value-added products like organic cotton, melange, lycra, ultra yarns (contamination controlled), gassed mercerised, super fine yarns and fancy yarns for hand knitting.

Exhibit 4: Vardhman’s spinning capacity

0.21 0.21 0.21 0.240.31 0.31

0.47 0.480.54

0.68 0.68 0.740.87

-

0.20

0.40

0.60

0.80

1.00

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

E

In m

illio

n

Spindles (nos)


Exhibit 5: India’s organised spinning capacity

34.0 33.1 32.0 31.2 31.2 31.1 33.3 34.7 36.6 36.8 38.3

-

10.0

20.0

30.0

40.0

50.0

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

E

In m

illio

n

Spindles (nos)

Source: Textile Commissioner’s Office, ICICIdirect.com Research

Over the years, Vardhman has continuously added spinning capacities to meet the increasing demand. It has more than doubled the spinning capacity from FY05 to FY10. In years of a slowdown also, the company has invested in capacity expansion to cater to the demand in the years to come.

Vardhman, a company with the largest domestic

spindlage, derives a major portion of its revenues from the

spinning segment



In this segment, the company has launched quite a few variants and also offers specialised and value-added yarn, which fetches higher realisations. Some of its latest product offerings include organic cotton and contamination free yarn. Fabrics

Taking a further step towards forward integration, the company entered the fabric business in 1992 and started manufacturing greige (unprocessed) fabric. It further graduated to manufacture processed fabric in 1999. Vardhman currently operates with a capacity of 900 looms and 90 million metres of processed fabric.

Vardhman makes fabrics for both tops (shirting) and bottoms (trousers/pants). Apart from this, it also makes specialised fabrics like yarn dyed, special white and also finishes fabrics with effect like teflon/nanocare (which is basically an oil and water repellent). Vardhman supplies fabrics to leading apparel makers like Tommy Hilfiger, Esprit, Gap, Louis Philippe, Arrow and the like.

Exhibit 6: Segment-wise fabric sales

6 7 7 414 19 17 16

35 30 31 35

41 39 42 38

4 6 4 7

-

20

40

60

80

100

FY07 FY08 FY09 FY10

%

Brands RMG Exports Distributors

Buying Houses Other Exports


Exhibit 7: Process-wise sales mix

9 12 10 910 9 11 1513 19 14 12

68 60 65 63

-

20

40

60

80

100

FY07 FY08 FY09 FY10

%

Full Bleached Ready for Dyeing Yarn Dyed Piece Dyed


Sewing thread

Vardhman entered the sewing thread business in 1982 as a forward integration to its yarn business. It is the second largest brand of specialised threads in the country. Vardhman’s product offerings in this segment include apparel sewing threads, specialty threads, textile craft, embroidery threads, kite flying threads, tea bags, cosmetic threads and industrial threads. It currently has four plants in Punjab, Tamil Nadu and Himachal Pradesh with a total capacity of 33 TPD. In 2002, it entered into a strategic alliance as a licensee with American & Efird, Inc. US (A&E) for manufacturing and distribution of A&E branded sewing threads in India. In 2008, it spun off the threads business into a new company (Vardhman Yarns & Threads Ltd) and entered into a 51:49 joint venture with A&E.

Fibre

In 1999, Vardhman commenced manufacturing of acrylic staple fibre used in manufacturing of hand knitted yarns, blankets, jerseys, sweaters, saris, carpets, upholstery, etc. The company’s plants are located in Gujarat with world class wet spun technology and highly automated, microprocessor controlled systems with an annual capacity of 18,000 tonnes. The company’s products are marketed under the brand name Varlan.



Steel

In 1972, as part of its diversification strategy Vardhman entered the steel business and commenced operations with capacity of 35,000 TPA. Currently, Vardhman has a 1,00,000 TPA of steel melting capacity and a 80,000 TPA rolling mill capacity. Vardhman’s products find usage in automotive components, forging, ball bearings, piston pins, engineering applications, railways, defence, etc. Vardhman takes pride in being a preferred OE supplier to leading OEMs like Tata Motors, Ashok Leyland, Maruti, Hindustan Motors, Toyota, M&M and Escorts among others.

Vardhman has received shareholders’ and creditors’ approval for the demerger of the steel business of Vardhman into Vardhman Special Steels Ltd (VSSL), a wholly owned subsidiary of the company with effect from January 1, 2011. Further, the Board has also approved the share entitlement ratio of one fully paid equity share in VSSL for every five shares held by the shareholder. The record date for the same has been fixed as March 30, 2011. Garments

Vardhman has entered into a joint venture with Nisshinbo Textile Inc. to enter the last leg of the value chain – garment manufacturing. Vardhman owns 51% in the venture. The company has incurred a capex of | 37 crore funded through equity of | 14 crore and debt of | 23 crore.

The initial capacity is expected to be ~1.2 million pieces and the company plans to scale this up to 1.8 million pieces by the end of FY12. The unit has started operations in December 2010 but will be completely operational by H1FY12. As this segment is still at a nascent stage, we have not factored the same into our revenue estimates, thus far.



Investment Rationale Indian cotton textile industry well placed versus peers Due to a bumper cotton crop in India, Indian textile players are in a sweet spot vis-à-vis their global peers that are required to import cotton from India. China (the largest cotton producer) is facing issues like high raw material and labour costs. Also, the appreciation of the Chinese yuan has made their products relatively expensive. Pakistan also had weather issues, which have led to a lower cotton output of 2,112 million kg in CS09-10 as compared to a consumption of 2,400 million kg. China is not planning to add spinning capacity as costs in China are increasing and it is becoming increasingly feasible for Chinese players to gradually move up the textile value chain. As a result, India is likely to be the largest beneficiary where the number of spindles is likely to increase from 36.8 million in CS09-10 to 44.3 million in CS14-15E.

Exhibit 8: India to benefit from bumper crop in CS09-10E

6,800

4,963

2,112

9,705

4,252

2,400

0

2,000

4,000

6,000

8,000

10,000

12,000

China India Pakistan

mill

ion

kg

Production Consumption

Source: International Cotton Advisory Committee, ICICIdirect.com Research

Exhibit 9: World cotton production at six year low

20,732

26,29325,676

26,79126,049

23,415

22,084

1,500

3,000

4,500

6,000

7,500

9,000

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 E

mill

ion

kg

18,000

20,000

22,000

24,000

26,000

28,000m

illio

n kg

China India USA Pakistan Others Total (RHS)


Global cotton production has been declining for the last three years. However, rising global cotton prices have resulted in higher area under cotton production in several major cotton producing countries. In India alone, the area under cotton cultivation is expected to increase from 10.31 million hectares in CS09-10 to 11.06 million hectares in CS10-11. Also,

Of the three largest global producers of cotton, India is the

only country that had a cotton surplus in CS09-10

Global cotton production has been on a decline for three

years now and has reached the lowest level in six years



due to better climatic conditions the yield per hectare is likely to increase from 467 kg per hectare in CS09-10 to 506 kg per hectare in CS10-11.

Exhibit 10: World cotton consumption exceeds production by ~2,300 million kg

21,78023,526

24,99526,450 26,385

23,410 24,378

700

2,200

3,700

5,200

6,700

8,200

9,700

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 E

milli

on k

g0

5,000

10,000

15,000

20,000

25,000

30,000

mill

ion

kg

China India USA Pakistan Others Total (RHS)


The recession had eroded demand for textiles and clothing, as global cotton use fell from 26,450 million kg in CS06-07 to 23,410 million kg in CS08-09. Global cotton consumption is expected to pick up in CS09-10 on the back of economic recovery to reach 24,378 million kg. China and India (accounting for ~60% of the global consumption) are expected to account for a large part of the increase in world cotton mill use in CS10-11.

While total global cotton consumption is expected to increase by 4% in CS09-10 to 24,378 million kg, the growth in Indian cotton consumption is expected to increase by 6% to 9,705 million kg (from 9,156 million kg in CS08-09). China is expected to outpace the global and Indian cotton consumption growth and increase its cotton consumption by 10% to 4,252 million kg in CS09-10.

Exhibit 11: Global cotton prices at all-time high

-

0.50

1.00

1.50

2.00

2.50

3.00

Jun-

93

Jun-

94

Jun-

95

Jun-

96

Jun-

97

Jun-

98

Jun-

99

Jun-

00

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

$/po

und

Global cotton prices at an all time high of $2.44 per pound

Source: Bloomberg, ICICIdirect.com Research

In September 2010, global cotton prices crossed the $1/pound mark for the first time after June 1995 on the back of weak cotton output. According to The International Cotton Advisory Committee, the increase

Apparel being a discretionary spending item took a beating

during the global economic slowdown. Consequently,

demand for cotton was on a downtrend during that period.

However, with a revival in global economies demand for

cotton is projected to increase, going forward.

Global cotton prices touched an all-time high of

$2.44/pound in March 2011



in output in the current cotton season is likely to be absorbed by the mills. This has led to a steep increase in cotton prices and they have crossed $2 per pound in March 2011 to touch an all-time high of $2.44 per pound.

Indian textile industry to more than double by 2020 Exhibit 12: Indian textile industry

139 219 246419

656

72108 122

212

376

2005 2009 2010 (E) 2015 (E) 2020 (E)

| '0

00 c

rore

Domestic Exports

Source: Technopak, ICICIdirect.com Research

The domestic textile industry is projected to grow from | 2,46,000 crore in 2010 to | 6,56,000 crore by 2020, translating to a CAGR of 10.5%. The exports market is expected to be worth | 3,76,000 crore from the current | 1,22,000 crore, growing at a CAGR of 12%, faster than the domestic markets. The strong growth in exports is expected on the back of increased sourcing shift from developed countries to Asia.

The global textile market is reviving after the recent global recession with increasing consumer demand. In the last five years, the Indian textile industry has grown by ~10% annually and is expected to grow at a faster rate driven by domestic consumption.

Cotton balance sheet indicates cotton prices will remain firm Exhibit 13: Cotton Balance Sheet

In mn bales 2009-10 2010-11

Supply

Opening Stock 7.15 4.05 Crop 29.50 31.20 Imports 0.70 0.50 Total Supply 37.35 35.75 Demand

Mill Consumptin 20.70 23.50 SSI Consumption 2.30 2.00 Non-mill Consumption 2.00 2.00 Exports 8.30 5.50 Total Off-take 33.30 33.00 Carry-over Stock 4.05 2.75

Source: Cotton Association of India, ICICIdirect.com Research

Unlike world cotton production, India witnessed a 2.4% increase in cotton production in CS09-10. The cotton association expects production in CS10-11 to increase to 31.2 million bales (1 bale = 170 kg). Due to cotton prices reaching record highs, the acreage (10.3 million hectare) under

The main drivers of growth are increasing population,

increasing income levels, rapid urbanisation, improving

demographics, higher organised players and increasing

penetration of retailer in small cities



cotton cultivation has increased significantly. Despite record production, inventories are likely to be at a five year low in CS10-11. Also, the quota for exports in CS10-11 is likely to be lower due to robust domestic demand. Considering this scenario, the chances of a steep correction in cotton prices are very bleak.

Rising cotton-yarn spreads Exhibit 14: Cotton-yarn spreads - yearly

47 58 6647 51 54 66 61

76110 106

121 115 103 109 110 120135

63

4855

68

52 55

44

59 59

0

20

40

60

80

100

120

140

160

CS-02 CS-03 CS-04 CS-05 CS-06 CS-07 CS-08 CS-09 CS-10

| pe

r kg

0

10

20

30

40

50

60

70

80

| pe

r kg

Cotton Prices Yarn Prices Spread (RHS)


Global yarn prices have increased ~60% in the last 18-20 months while cotton prices have increased only ~20% in the same period. This had a spiralling effect on the EBITDA margin of yarn manufacturers. Owing to an extended monsoon, lower output in Pakistan, increased demand from China and depletion of inventory levels for two consecutive years, cotton yarn prices are likely to remain firm in CS 2010-11 as well.

Exhibit 15: Cotton-yarn spreads – monthly

79 81 83 83 92 106 116 124 117147 150 154 152 154 162 170

188 188

68 70 71 6962

56 54

6472

-20406080

100120140160180200

Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10

| pe

r kg

-

10

20

30

40

50

60

70

80

| pe

r kg

Cotton Prices Yarn Prices Spread (RHS)


It has been witnessed in the past that spreads in the

domestic market have increased in a year where global

consumption is more than production. CS2009-10 has

been one such year. Hence, the chances of significant

softening of cotton and yarn prices are bleak.

Spreads in December have been the highest for this

financial year



Exhibit 16: Spreads increase in year following one where consumption exceeds production

55

68

55

44

59 59

52

-

5,000

10,000

15,000

20,000

25,000

30,000

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 E

mill

ion

kg

40

45

50

55

60

65

70

| / k

g

Global Cotton Production Global Cotton Consumption Spreads (RHS)


It has been witnessed in the past that spreads in the domestic market have increased in a year following the year in which global consumption is more than the production. As witnessed in 2004-05, spreads increased from | 55/kg in the previous year to | 68/kg as global cotton consumption exceeded the production in 2003-04. Similarly, spreads increased in 2008-09 also. The year 2009-10 too has been one such year and the trend seems to be continuing. Spreads for December 2010 have touched a high of | 72/kg. This was evident in the December quarter results for all spinning companies.

Indian yarn prices are 5-10% lower than international yarn prices. However, the government has imposed a ban on cotton yarn export beyond the stipulated 720 million kg and domestic yarn manufacturers are unable to book fresh orders for yarn exports. Still, companies like Vardhman have holding capacity and will hold yarn inventories till fresh quotas are opened in April 2011. This will ensure that margins are protected, going forward.

The average spread for the nine months of the current

fiscal is | 65/kg, thereby reinstating the fact that spreads

increase in a year following one where consumption

exceeds production



Demand for cotton yarn to grow, albeit at a slower pace

After declining by 1.7% in 2008-09, the total cotton yarn demand grew by 6% to 3,073 million kg in 2009-10. The growth in 2009-10 was primarily led by strong domestic demand. Going forward also, demand for cotton yarn will continue to grow backed by strong domestic demand. The Office of Textile Commissioner expects the demand for cotton yarn to grow at a CAGR of 5.1% during 2010-15E.

Exhibit 17: Cotton yarn demand

-

500

1,000

1,500

2,000

2,500

2007-08 2008-09 2009-10E 2010-11E 2011-12E 2012-13E 2013-14E 2014-15E

mill

ion

kg

Domestic Demand Derived Demand Direct yarn exports

Source: Office of Textile Commissioner, ICICIdirect.com Research

Exhibit 18: Demand growth

4

6

45 5

65

10

5 56

8 8 8

9

(2)(4)

(2)

-

2

4

6

8

10

12

2007-08 2008-09 2009-10(E) 2010-11(E) 2011-12(E) 2012-13(E) 2013-14(E) 2014-15(E)

%

Cotton yarn demand growth PFY demand growth


The ratio of cotton yarn price and polyester filament yarn (PFY) price has been in the range of 1.4-1.6x during 2002-09. The same has gone up to a historical high of 2.3x in September 2010. Consequently, the demand for blended yarn will continue to increase at a more rapid pace.

Continued demand from major export destinations such as

China, Bangladesh, Korea and Turkey will drive demand for

Indian cotton yarn



Exhibit 19: Cotton yarn demand mix

55 56 59 60 61 61 62 62

25 25 22 22 21 21 20 20

20 19 19 19 18 17 17 17

0102030405060708090

100

2007-08 2008-09 2009-10(E) 2010-11(E) 2011-12(E) 2012-13(E) 2013-14(E) 2014-15(E)

%Domestic Demand Derived Demand Direct yarn exports


Utilisation rates to be at decadal high levels Exhibit 20: Spinning capacity addition in India

34.0 33.1 32.0 31.2 31.2 31.133.3 34.7 36.6 36.8 38.3 39.8 41.3 42.8 44.3

76 78

8991 92 90

9694939291

82

7474

85

05

1015202530354045

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

E

FY12

E

FY13

E

FY14

E

FY15

E

In m

illio

n

70

75

80

85

90

95

100

%

Spindles Capacity Utilisation (RHS)


Considering that the Indian textile industry is likely to double by 2020 and following demand from the apparels industry, the Indian spinning sector is likely to increase its capacity from 36.8 million spindles in FY10 to 44.3 million spindles by FY15E. Also, the capacity utilisation rates are likely to be at decadal high levels at greater than 90%. This augurs well for spinning companies as in an increasing utilisation rate and growing demand scenario, pressure on operating margin is likely to be minimal.

In order to meet the future demand the Indian spinning industry would need an additional ~7.5 million spindles requiring an investment of | 18,700 crore till FY15E. Also, another | 9,500 crore would be required for replacement of ~7.5 million old spindles during FY11E-15E.

Domestic demand for cotton yarn is expected to grow at a

CAGR of 6.2% during 2010-15E while that of derived and

direct yarn exports is likely to grow at 3.2% and 2.6%,

respectively

Demand growth and decadal high utilisation levels would

minimise the pressure on spreads despite the prevailing

high cotton prices



Vardhman - well equipped to capitalise on opportunities

Capacity addition to boost topline growth

Vardhman has incurred a capex of ~| 2,300 crore during FY06-10 and expanded its spinning capacity by 1.8x to the current 8,70,000 spindles from 4,77,920 spindles in FY06. On the back of this, revenues from the spinning segment have increased at a CAGR of 15% during FY06-10. It has also more than doubled its weaving capacity from 432 looms (FY06) to 900 looms currently. We expect Vardhman’s spinning segment to maintain its share in the revenue pie and earn an incremental revenue of ~| 780 crore over FY11-12E, thereby growing at a CAGR of 22% during FY10-12E. The company has a planned capex of | 1,500 crore over the next three years. It plans to add another 1,80,000 spindles and 400–600 looms by FY13E. We believe that with the largest domestic spindlage Vardhman is well poised to further tap the opportunities that lie ahead.

Exhibit 21: Vardhman’s spinning capacity

82 8481

7876

96

103 102 101

91

106 107

100

106

-0.100.200.300.400.500.600.700.800.901.00

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

E

FY12

E

In m

illio

n

70

80

90

100

110

%

Spindles (nos) Capacity Utilisation (RHS)


Exhibit 22: Spinning segment to drive growth, going forward

1,126 1,281 1,532 1,6952,283 2,540

153 149 153 162

210 200

-

500

1,000

1,500

2,000

2,500

3,000

FY07 FY08 FY09 FY10 FY11E FY12E

| cr

ore

-

50

100

150

200

250

| / k

g

Spinning Segment Revenues Yarn Realisations (RHS)


We expect Vardhman to garner incremental revenue from

the spinning segment to the tune of | 780 crore (during

FY11E and FY12E). Considering that EBITDA margins from

the spinning segment are also on an uptrend, the capacity

addition will be earnings accretive



Exhibit 23: EBITDA margin of yarn segment

18.1 16.5 14.4 20.2 22.5 24.8 26.6 24.8

5452

59

70

62 6365

50

12

14

16

18

20

22

24

26

28

FY07 FY08 FY09 FY10 Q1FY11 Q2FY11 Q3FY11 9MFY11

%

45

50

55

60

65

70

75

| / k

g

Yarn Segment EBITDA Margin Spreads (RHS)


Increasing spreads between cotton and yarn prices have aided the EBITDA margin expansion for spinners. Vardhman was no exception and we saw EBITDA margins spiralling from 14.4% in FY09 to 24.8% for the nine months ended December 2010. The current scenario with widening spreads will augur well for Vardhman as EBITDA margins from the yarn segment will improve. We expect the spinning segment to clock an EBITDA margin of 25.0% in FY11E and a marginal decline in FY12E at ~24%. Vardhman is well poised to capitalise on this margin expansion through its expanded spinning capacities.

Exhibit 24: Yarn segment - EBITDA/ tonne


Volume (MT) 67,266 74,928 86,567 90,928 103,008 120,488

Growth (%) 3.4 11.4 15.5 5.0 13.3 17.0

Realisation (|/MT) 152,935 148,852 153,028 162,436 210,000 200,000

Growth (%) 7.4 (2.7) 2.8 6.1 29.3 (4.8)

Avg Ind Rate (|/MT) 109,000 110,000 120,000 135,000 180,000 175,000

Premium/ (Discount) (%) 40.3 35.3 27.5 20.3 16.7 14.3

Segment EBITDA (%) 18.1 16.5 14.4 20.2 25.0 24.0

EBITDA/Tonne (|) 39,576 37,381 32,284 48,982 55,473 50,587

Source: Company, Office of Textile Commissioner, ICICIdirect.com Research

Vardhman’s yarn has consistently enjoyed a premium over the average industry realisations. However, in our assumptions we have been conservative and assumed a lower premium to the expected yarn prices in FY11E and FY12E. Going forward, if Vardhman’s yarn continues to command a similar premium to average industry rates then the earnings will be positively impacted by | 4.6 and | 8.9 per share in FY11E and FY12E, respectively.

Exhibit 25: Sensitivity Analysis: If yarn realisations are higher than assumed

FY11E FY12E

Premium to market price assumed originally (%) 17 14

Premium enjoyed in FY10 (%)

Original EPS (|) 61.2 65.1

EPS assuming premium at 20% (|) 65.8 74.1

20


The margins of the spinning segment have risen

considerably on the back of increasing spreads between

cotton and cotton yarn prices



Integrated model mitigates risk and also enhances profitability Exhibit 26: Textile value chain

Source: Technopak, ICICIdirect.com Research

Vardhman is already present in the fibre to yarn segment and has recently entered the garments business, which will boost profitability. As one goes higher in the textile value chain, the margins continue to increase. Also, if a particular segment faces a downturn in demand or witnesses a price correction, Vardhman can use the same as an input and sell the products at the higher end of the value chain.

Considering that Vardhman is present across the value

chain, a downturn in a particular segment will mitigate the

downside risk to earnings. If yarn prices correct

significantly, Vardhman can reduce the direct sales of yarn

and sell the product at a higher level in the value chain.

Also, when prices are in an uptrend, Vardhman will benefit

from the captive capacities



Risk & concerns

Commodity nature of business Vardhman operates in an industry where demand supply forces and government regulations govern input and end-product prices. Any adverse movement in prices can affect the financial performance of the company. Sensitivity to cotton prices Exhibit 27: Cotton prices weigh on EBITDA margin

FY07 FY08 FY09 FY10

Cotton Price (|/ kg) 54 66 61 76

Yarn Realization (|/ kg) 153 149 153 162

Yarn Segment EBITDA margin (%) 18.1 16.5 14.4 20.2


Though in the current demand supply scenario Vardhman has been able to pass on the impact of increased cotton prices, any inability to do the same can weigh on the EBITDA margin of the company. It is evident in the table above that operating margins shrank from 18.1% in FY07 to 16.5% and 14.4% in FY08 and FY09 (years where demand was affected due to global slowdown) due to an increase in cotton prices. Also, during the same period yarn prices did not improve and actually declined in FY08 to further put pressure on the operating margin. Cotton yarn may face substitution from PFY Exhibit 28: Price differential between cotton and polyester yarn

70 74 70 75 75 71 70

121 115103 109 110

120135

0

20

40

60

80

100

120

140

160

CS-0

4

CS-0

5

CS-0

6

CS-0

7

CS-0

8

CS-0

9

CS-1

0

|/kg

PFY Prices Cotton Yarn Prices


The ratio of cotton yarn price and polyester filament yarn (PFY) price has been in the range of 1.4-1.6x during 2002-09. The same has gone up to a historical high of 2.3x in September 2010. Consequently, the demand for blended yarn will continue to increase, thereby dampening the demand for cotton yarn.



Lower than assumed yarn realisations Vardhman’s yarn has always enjoyed a 20-30% premium over industry realisations. Nonetheless, we have been conservative and assumed lower premiums of 17% and 14% in FY11E and FY12E, respectively. On the other hand, if Vardhman’s realisations get aligned with industry realisations and the premium enjoyed becomes zero then the earnings will be ~35% lower than our estimates. Exhibit 29: Downside risk to earnings assuming lower yarn realizations

FY11E FY12E

Originally assumed realisations (|/ kg) 210 200

Industry expectation of yarn realisation (|/kg) 180 175

Original EPS (|) 61.2 65.1

EPS assuming NIL premium (|) 38.3 42.8


Global or domestic slowdown Vardhman derives 25-30% of its revenues from exports. Any slowdown in the global economies will adversely impact Vardhman’s revenues. Domestic textile players, including Vardhman, are bullish on the domestic consumption led demand. A slowdown in domestic offtake will also adversely affect the company and lead to under utilisation of the expanded capacities, thereby impacting the return ratios.



Financials Topline to grow at a 14% CAGR during FY10-12E Exhibit 30: Product Mix

52 54 52 51 56 57

19 19 23 24 22 2214 13 12 11 10 914 14 10 8 7 7

4 6 5 5

-

20

40

60

80

100

120


%



We expect Vardhman to post a CAGR of 14% in topline during FY10-12E lead by strong growth in the yarn segment. Though the revenues of the yarn segment have grown at 15% CAGR during FY07-10, we expect the same to grow at a CAGR of 21% during FY10-12E. We expect yarn, fabric, steel and fibre sales to grow at a CAGR of 21%, 9%, 7% and 9%, respectively, during FY10-12E.

Exhibit 31: Topline growth trend

1,126 1,281 1,532 1,6952,283 2,540413 450

687 811

897976

312 322344 385

398415

302 326288

255

279291

-7

114185

210 221

-500

1,0001,5002,0002,5003,0003,5004,0004,5005,000




We expect the spinning segment (on a consolidated basis) to grow from | 1,695 crore in FY10 to | 2,540 crore in FY12E, growing by | 845 crore in a span of two years. We expect the realisation to increase from | 162/ kg in FY10 to | 210/ kg in FY11E and marginally soften to | 200/kg in FY12E. On the back of increased spindlage, we expect volumes in the spinning segment to grow from 90,928 MT in FY10 to 1,20,488 MT in FY12E. We expect the fabric segment to grow from the current | 811 crore to | 976 crore in FY12E, growing at a CAGR of 10% during FY10-12E. We expect realisations of the unprocessed fabric (~30% of total fabric sales) to increase from | 52/ metre in FY10 to | 54/ metre in FY12E while that of

During FY11E and FY12E, we expect incremental revenues

to the tune of | 845 crore from the spinning segment alone

Vardhman’s yarn has consistently enjoyed a premium over

average industry realisations. Conservatively, we have

assumed a lower premium to the industry, going forward.

If it continues to enjoy the same premium then the upside

to the earnings can be significant



processed fabric will increase from | 93/metre in FY10 to | 99/ metre in FY12E. In FY12E, we expect the unprocessed and processed fabric volumes to increase to 53 million metres and 70 million metres, respectively, (from 46 million metre and 60 million metre in FY10). In the steel business, we expect revenues to increase at a CAGR of 7% during FY10-12E. Also, we expect the billets segment to post a healthy growth of 21% on a lower base (largely led by 20% volume growth). We expect the rolled products side of the business to marginally grow from | 273 crore in FY10 to | 286 crore in FY12E led by marginal volume and realisation growth. On the subsidiary front, Vardhman’s two leading subsidiaries Vardhman Acrylics and Vardhman Yarns and Threads are expected to grow at a CAGR of 9% and 4%, respectively, during FY10-12E.

EBITDA to be maintained with marginal compression Exhibit 32: Enhanced profitability

17.64

15.9815.26

21.04

22.52 22.42

12.00

14.00

16.00

18.00

20.00

22.00

24.00


%

EBITDA Margin


On the back of a healthy improvement in spinning margins, we expect an upward movement in the EBITDA margin for FY11E. However, in FY12E we expect marginal pressure on the operating margin on the back of resistance in demand from downstream industries – weaving and garmenting. Due to this, we expect the margins from the spinning segment to face marginal pressure. In FY10, spinning margins improved to 20.2% from 14.4% in FY09 while the fabric segment witnessed margin expansion from 11.2% in FY09 to 15% in FY10.



Exhibit 33: Segmental EBITDA margin

1817

20

24

1412

11 11

15

1413

10

15

20

25


10

11

12

13

14

15

16

Yarn Fabric (RHS)


The yarn segment has seen substantial operating margin expansion on the back of increased demand from the apparel industry. Going forward, we expect the operating margin of the yarn segment to increase to 25% in FY11E and marginally correct to 24% in FY12E on the back of increased input cost pressure.

On the other hand, in the fabric segment we foresee pressure on the operating margin due to higher yarn prices. Inability to pass on the impact of increased yarn prices will pressurise the EBITDA margin. We expect the margins of the fabric segment to soften to 13% in FY12E.

Lowest debt to EBITDA levels Exhibit 34: Peer comparison of debt to EBITDA levels (FY10)

Debt/EBITDA

6.6 6.4

4.63.8 3.7

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Alok Industries Raymond Arvind Welspun India Vardhman Textiles

x


Vardhman has the lowest debt to EBITDA levels among its peers. This gives it comfort to further raise debts to fund its expansion. Also, in a rising interest rate scenario, Vardhman will be in a very comfortable position to service its debt.

After incurring a large part of capex also Vardhman is

comfortably leveraged compared to its peers



Solvency position Exhibit 35: Debt to peak in FY12E

Debt to Equity Ratio FY07 FY08 FY09 FY10 FY11E FY12E

Vardhman Textiles 1.5 1.9 1.8 1.6 1.5 1.6

Alok Industries 3.3 4.0 3.8 3.2 3.0 3.0

Arvind 1.5 1.6 1.9 2.0 1.5 1.2

RSWM 2.3 3.1 4.0 4.6 6.3 4.8

Average 2.1 2.7 2.8 2.8 3.1 2.7

Interest Coverage Ratio FY07 FY08 FY09 FY10 FY11E FY12E

Vardhman Textiles 6.8 3.1 1.6 3.7 4.0 3.5

Alok Industries 4.6 4.1 2.7 2.3 1.5 1.7

Arvind 1.2 1.2 0.6 1.1 1.8 2.4

RSWM 2.8 1.0 (0.3) 1.8 2.0 2.3

Average 3.8 2.3 1.1 2.2 2.3 2.5

Source: Consensus Estimates, ICICIdirect.com Research

Vardhman, like most textile companies, has witnessed a steep increase in debt levels over the last few years. This was mainly on account of expansion activity conducted by the company. A large part of the repayment for Vardhman will kick in from FY14-15. Hence, we are likely to see a marked improvement in the return ratios, going forward.

In October 2010, Vardhman raised | 200 crore through a QIP issue of 58,82,352 shares at the rate of | 340 per share. The proceeds of the same will be used to meet expansion plans and retire the outstanding FCCB.

Return ratios Exhibit 36: Return ratios to remain healthy

16.5

11.8

5.9

20.221.8

19.9

8.96.6

5.5

11.0

14.1 13.2

4.06.08.0

10.012.014.016.018.020.022.024.0


%

RoE RoCE


Vardhman’s return ratios have been under pressure in the last few years owing to the expansion activities of the company. However, as the expanded capacities are fully utilised and as profitability gets enhanced, we expect the return ratios for Vardhman to improve significantly, going forward. We expect the RoCE to improve from 11.0% in FY10 to 13.2% in FY12E. Also a large part of the debt repayment is scheduled during FY14-15. Post this one is likely to witness an improvement in the return ratios.

Despite significant capex during FY06-10, Vardhman is

comfortably leveraged compared to its peers. Historically,

Vardhman has maintained better solvency ratios. We

expect the same to continue this trend, going forward



Changes in depreciation policy

Vardhman currently depreciates its spinning assets over a 10 year period. Under IFRS, the management could decide to depreciate the same over 15-20 years as the life of a spinning asset ranges from 17-20 years. If the management decides to go ahead with this, the savings per share at the net level could be to the tune of ~| 11 (~17% of FY12E EPS).

Also, the said savings will boost the return ratios for the company. Our back of the envelope calculations indicate that if IFRS is implemented w.e.f. FY12, Vardhman’s RoE and RoCE will go up by 189 and 336 bps, respectively. However, as there is not much clarity on the implementation of IFRS we have not factored the benefit of the same into our estimates.

Exhibit 37: Incremental earnings and return ratios from changed depreciation policy (| crore) FY12E

Depreciation assuming asset is depreciated over 10 years 235.75

Depreciation under IFRS (assuming asset is depreciated over 15-20 years) 137.52

Savings 98.23

Incremental EPS (|) 11

Incremental ROCE(bps) 189

Incremental ROE(bps) 336




Valuation Vardhman is trading at a discount to the 5 year P/E and P/BV Vardhman is currently trading at ~56% discount to its five year median P/E and a ~34% discount to its five year median P/BV. Considering the steep increase in yarn realisations and a robust demand outlook, the stock can comfortably trade above the five year median multiples. However, bearing in mind the downside risks like marginally softer yarn realisations and lower than estimated offtake in demand, we believe it should continue to trade at its median five year multiples. We have arrived at our target price based on an average of the value received by assigning a multiple of 0.65x FY12E book value of | 349 and 4.7x FY12E EPS of | 65.1. We are initiating coverage on the stock with an ADD rating and a target price of | 267 signifying 4% upside from current levels. Exhibit 38: Trading at ~56% discount to five year median P/E

-2.04.06.08.0

10.012.014.016.0

Apr-0

4

Aug-

04

Dec-

04

Apr-0

5

Aug-

05

Dec-

05

Apr-0

6

Aug-

06

Dec-

06

Apr-0

7

Aug-

07

Dec-

07

Apr-0

8

Aug-

08

Dec-

08

Apr-0

9

Aug-

09

Dec-

09

Apr-1

0

Aug-

10

Dec-

10

5 yr Median P/E 1 Year Fwd P/E

Source: ICICIdirect.com Research

Exhibit 39: Trading at ~34% discount to five year median P/BV

-0.20.40.60.81.01.21.41.61.8

Apr-0

4

Aug-

04

Dec-

04

Apr-0

5

Aug-

05

Dec-

05

Apr-0

6

Aug-

06

Dec-

06

Apr-0

7

Aug-

07

Dec-

07

Apr-0

8

Aug-

08

Dec-

08

Apr-0

9

Aug-

09

Dec-

09

Apr-1

0

Aug-

10

Dec-

10

5 yr Median P/Bv 1 Year Fwd P/Bv

Source: ICICIdirect.com Research



Exhibit 40: Peer comparison

EBITDA Margin

RoE RoCEDebt to EBITDA

FY12E FY12E FY12E FY11E FY12E FY11E FY12E FY12EUnit % % % x x x x xVardhman Textiles 22.4 19.9 13.2 4.2 3.9 0.8 0.7 3.4Alok Industries 28.0 12.3 10.9 5.7 4.0 0.6 0.5 4.3Arvind 13.6 11.2 11.4 11.1 6.8 0.9 0.8 3.7RSWM 12.5 29.3 12.2 6.4 4.9 1.6 1.3 4.5

ParticularsP/E P/BV


We undertook a rating activity whereby we assigned weights to several financial parameters and ranked the companies in the peer group to decipher the company with superior financials. We have assigned a 15% weightage each to EBITDA margin, return on equity, P/E ratio and P/BV ratio and a 20% weightage to return on capital employed and debt to EBITDA ratio. Even based on these parameters, Vardhman stands out as the best among its peers.

Exhibit 41: Rating Matrix

Company EBITDA Margin RoE RoCE P/E P/BV Debt/EBITDAVardhman Textiles 2 2 1 1 2 1Alok Industries 1 3 4 2 1 3Arvind 3 4 3 4 3 2RSWM 4 1 2 3 4 4

Weighted Average Ranking Final RankingVardhman Textiles 1.5 1Alok Industries 2.5 2Arvind 3.1 4RSWM 3.0 3




Exhibit 42: Profit and loss account (| crore)

FY07 FY08 FY09 FY10 FY11E FY12ENet Sales 2,162.1 2,387.7 2,965.4 3,350.7 4,081.4 4,460.7 % Growth 10.4 24.2 13.0 21.8 9.3 Other Income 25.4 38.0 52.9 85.2 70.0 95.0 Raw Materials 954.1 1,095.4 1,405.2 1,505.5 1,819.9 1,993.7 Manufacturing Expenses 525.9 587.7 680.2 737.1 861.6 918.5 Employee Expenses 132.5 162.5 200.1 214.9 264.3 292.1 Sell. & Admin. Expenses 171.2 161.5 230.6 188.5 216.3 256.5 Total Exp. 1,784.7 2,007.0 2,513.1 2,645.7 3,162.1 3,460.7 % Growth 12.5 25.2 5.3 19.5 9.4 Operating Profit 381.3 381.6 452.4 705.1 919.2 1,000.0 Depreciation 122.4 162.0 243.4 256.6 285.4 316.3 Interest expense 38.3 70.4 132.4 122.3 156.9 197.1 PBT 246.0 187.2 129.6 411.3 546.9 581.6 Tax 56.0 44.2 51.3 108.9 164.1 174.5 Net Profit 190.0 143.0 78.3 302.4 382.9 407.1 % Growth (24.7) (45.2) 286.3 26.6 6.3 Net Profit (after minority int) 185.6 135.0 171.3 261.5 338.8 356.0 Equity 56.6 56.6 56.6 56.6 62.5 62.5 Dividend % 40.9 40.9 32.3 40.7 51.5 113.9 EPS (from ordinary activities) 33.5 25.2 13.8 53.4 61.2 65.1


Exhibit 43: Balance Sheet (| crore)

FY07 FY08 FY09 FY10 FY11E FY12EEquity Share Capital 56.6 56.6 56.6 56.6 62.5 62.5 Share Application money - - - - - - Reserves & Surplus. 1,093.8 1,206.4 1,326.6 1,547.5 1,848.7 2,121.4 Secured Loans 1,508.2 2,178.5 2,232.7 2,346.5 2,818.0 3,388.0 Unsecured Loans 263.6 255.4 300.5 296.5 34.0 40.3 Minority Interest 15.8 77.6 228.7 272.0 316.0 367.1 Deferrred Tax 97.3 163.4 208.0 228.7 235.0 260.0 Total Liabilities 3,035.4 3,937.9 4,353.0 4,747.9 5,314.3 6,239.4 Net Block 1,239.9 2,219.2 2,561.4 2,553.3 2,804.4 3,157.6 CWIP 541.5 334.1 69.4 45.3 378.4 407.0 Investments 57.6 5.4 140.1 92.3 125.0 225.0 Goodwill on consolidation - 5.1 5.1 2.9 - - Inventories 730.3 937.7 739.6 1,297.0 1,285.9 1,417.7 Sundry Debtors 261.9 287.2 345.9 475.8 559.1 672.2 Cash & Bank 222.8 71.9 373.0 262.4 139.7 304.6 Loans & Adv. 260.9 348.9 409.1 348.3 375.0 418.0 Current Assets 1,475.9 1,645.6 1,867.6 2,383.5 2,359.7 2,812.4 CL & Prov. 279.5 271.5 290.5 329.4 353.1 362.8 Net Current Assets 1,196.4 1,374.1 1,577.1 2,054.1 2,006.6 2,449.7 Total Assets 3,035.4 3,937.9 4,353.0 4,747.9 5,314.3 6,239.4




Exhibit 44: Cash flow statement (| crore)

FY07 FY08 FY09 FY10 FY11E FY12ENet Profit Before Tax 246.0 187.2 129.6 411.3 546.9 581.6 Depreciation 122.4 162.0 243.4 256.6 285.4 316.3 Interest Expense 39.7 65.6 127.6 116.3 156.9 197.1 Direct Tax Paid (64.7) (32.7) (37.2) (73.6) (164.1) (174.5) (Income)/ Loss from Assc. (4.0) (0.8) (0.0) (0.1) (0.1) (0.1) Interest / Dividend Income (19.1) (14.4) (29.4) (38.2) (38.2) (38.2) Other Non Cash (Inc)/Exp (9.2) (27.1) 45.0 (32.3) (6.3) (25.0) CF before change in WC 311.1 339.8 478.9 640.1 780.6 857.3 Inc./Dec. in WC (106.9) (295.8) 85.9 (628.8) (122.6) (297.5) CF from operations 204.2 44.0 564.8 11.3 658.0 559.9 Pur. of Fix Assets (net) (837.7) (795.7) (178.1) (227.1) (797.6) (659.3) Purchase of Investments (net) 3.2 (4.5) (128.3) 55.3 (32.7) (100.0) Income from Inv 15.9 15.2 28.5 39.9 39.9 39.9 CF from Investing (818.6) (785.1) (277.8) (131.9) (790.4) (719.4) Inc./(Dec.) in Debt 656.6 652.8 36.4 144.4 4.2 604.9 Inc./(Dec.) in Net worth - - 130.7 2.6 200.0 - Others (93.4) (62.6) (153.1) (137.0) (194.5) (280.4) CF from Financing 563.2 590.1 14.1 10.0 9.7 324.5 Opening Cash balance 274.0 222.8 71.9 373.0 262.4 139.7 Closing Cash balance 222.8 71.9 373.0 262.4 139.7 304.6


Exhibit 45: Key ratios

FY07 FY08 FY09 FY10 FY11E FY12EExpenditure Break-up (%)Raw Material Expenses 55.1 56.7 56.1 59.2 61.0 60.4 Manufacturing Expenses 29.5 29.3 27.1 27.9 27.2 26.5 Personnel Expenses 7.4 8.1 8.0 8.1 8.4 8.4

Profitability Ratios (%)EBITDA Margin 17.6 16.0 15.3 21.0 22.5 22.4 PAT Margin 8.8 6.0 2.6 9.0 9.4 9.1

Per Share Data (|)Revenue per share 381.8 421.6 523.6 591.6 652.8 713.5 EBITDA per share 67.3 67.4 79.9 124.5 147.0 160.0 EV per share 567.2 573.9 462.2 585.3 695.0 760.8 Book Value per share 203.1 223.0 244.2 283.2 305.7 349.3 Cash per share 39.3 12.7 65.9 46.3 22.3 48.7 EPS 33.5 25.2 13.8 53.4 61.2 65.1 Cash EPS 55.2 53.9 56.8 98.7 106.9 115.7 DPS 4.0 4.0 2.0 3.0 5.0 10.0

Return Ratios (%)RoNW 16.5 11.8 5.9 20.2 21.8 19.9 RoCE 8.9 6.6 5.5 11.0 14.1 13.2 RoIC 7.2 4.0 2.3 7.8 8.5 8.0

Financial Health RatiosOperating Cash flow (| crore) 204.2 44.0 564.8 11.3 658.0 559.9 Free Cash flow (| crore) (630.1) (773.4) 75.8 (273.1) (191.1) (161.9) Capital Employed (| crore) 2,922.3 3,697.0 3,916.4 4,247.2 4,763.3 5,612.2 Debt to Equity (x) 1.5 1.9 1.8 1.6 1.5 1.6 Debt to Capital Employed (x) 0.6 0.7 0.6 0.6 0.6 0.6 Interest Coverage (x) 6.8 3.1 1.6 3.7 4.0 3.5 Debt to EBITDA (x) 4.6 6.4 5.6 3.7 3.1 3.4




Exhibit 46: DuPont Analysis

DuPont Analysis (x) FY07 FY08 FY09 FY10 FY11E FY12EPAT / PBT 0.8 0.8 0.6 0.7 0.7 0.7 PBT / EBIT 0.9 0.9 0.6 0.9 0.9 0.9 EBIT / Net Sales 0.1 0.1 0.1 0.1 0.2 0.2 Net Sales / Total Assets 0.7 0.6 0.7 0.7 0.8 0.7 Total Assets / Networth 2.6 3.1 3.1 3.0 2.8 2.9


Exhibit 47: Growth parameters

(YoY Growth %) FY07 FY08 FY09 FY10 FY11E FY12ENet Sales 10.9 10.4 24.2 13.0 21.8 9.3 EBITDA 5.2 0.1 18.6 55.8 30.4 8.8 Net Profit (7.0) (24.7) (45.2) 286.3 26.6 6.3


Exhibit 48: Turnover ratios

Turnover Ratios FY07 FY08 FY09 FY10 FY11E FY12EWorking Capital / Sales (x) 0.5 0.5 0.4 0.5 0.5 0.5 Inventory turnover (days) 123.3 127.5 103.2 110.9 115.0 116.0 Debtor turnover (days) 44.2 42.0 39.0 44.8 50.0 55.0 Creditor turnover (days) 47.9 39.9 29.1 24.7 28.0 26.0 Current Ratio (x) 5.3 6.1 6.4 7.2 6.7 7.8


Exhibit 49: FCF calculation

Free Cash Flow (| crore) FY07 FY08 FY09 FY10 FY11E FY12EEBIT (post-tax) 200.0 167.7 126.3 329.7 443.7 478.6 Add: Depreciation 122.4 162.0 243.4 256.6 285.4 316.3 Less: Changes in working capital (106.9) (295.8) 85.9 (628.8) (122.6) (297.5) Less: Capex (845.6) (807.3) (379.8) (230.6) (797.6) (659.3) FCF (630.1) (773.4) 75.8 (273.1) (191.1) (161.9)


Exhibit 50: Valuation ratios

Valuation Ratios FY07 FY08 FY09 FY10 FY11E FY12EPrice to earnings ratio (x) 8.6 6.1 5.7 3.0 4.2 3.9 EV / EBITDA (x) 8.4 8.5 5.8 4.7 4.7 4.8 EV / Sales (x) 1.5 1.4 0.9 1.0 1.1 1.1 Dividend Yield (%) 1.4 2.6 2.5 1.9 1.2 2.0 Price / BV (x) 1.4 0.7 0.3 0.6 0.8 0.7




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