• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Shanthi Venkataraman

INVESTORS can consider taking exposure in Vardhman Spinning. Robust demand from fabric manufacturers and garment exporters; WTO-linked industry-level changes — the phasing out of the Multi-fibre Agreement (MFA) from January 1, 2005 — that would open up opportunities; yarn prices that are unlikely to pressure margins; and stable cotton prices on the back of rising output augur well for earnings growth.

The stock trades at a price-earnings multiple of about eight times its trailing four-quarter earnings per share. Vardhman Spinning, the flagship company of the Vardhman Group, is the largest producer of cotton, synthetics and blended yarns in the country. It has one of the largest installed spinning capacity in India and a range of textile products. It is a supplier to such international majors as GAP, Wal-mart, and JC Penny's. Fabrics now contribute about one-third of its revenues. Robust demand: The demand for cotton yarn from China and other countries is expected to grow. In the domestic market too, the demand for cotton yarn and fabric is likely to be a growth driver. In anticipation of a spurt in demand for yarn and fabric in the post-MFA, Vardhaman has been on an expansion mode. The total weaving capacity is to expand from 208 to 264 looms.

As an integrated player, Vardhman Spinning stands to benefit more from the imminent changes in the industry environment. It has the twin-advantage of catering to the requirements of fabric manufacturers and garment exporters. The integrated nature of operations would be an advantage in widening the global clientele base and securing large orders. The company is likely to increase its focus on fabric processing and the garment business. As it moves up the value chain, margins are expected to be higher. Given its scale of operations, it has an advantage of sourcing yarn at lower prices.

Comfortable yarn prices: The company enjoys a good pricing position and has been able to load on to yarn much of the increase in cotton prices. Despite raw material costs, operating profit margins have risen by a percentage point to 11.8 per cent in the nine months ending December 2003.

Stable cotton prices likely: Cotton output is expected to improve in India this year. This will help prices remain stable with a soft bias. This may improve Vardhaman's profitability.

Over the long term, the likely volatility in cotton output and prices will remain a cause for concern. As the company has handled such trends for several years now, it may be able to weather periods of high prices without much of a dent on the bottomline.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
On stock option and employee stock ownership plans

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line