ICICI Direct sees 40% upside in Nitin Spinners in next 12 months after a sharp fall last year — here's why

After a 25 percent decline in the stock of textile firm Nitin Spinners (NSL) in the last one year, domestic brokerage house ICICI Direct believes it will give robust returns to its investors in 2023. 

The brokerage has a ‘buy’ call on the stock with a target price of ₹290, indicating a potential upside of 40 percent in 12 months.

"Consistent improvement in the financial performance of NSL in spite of the cyclical nature of the textile industry signifies NSL’s ability of optimum asset utilisation leading to sustainable profit growth. In line with its superior fundamental performance, the stock price has grown at 15 percent CAGR over the last five years. We believe that NSL, with its presence across the textile value chain (yarn to fabric), is well poised to capture the export opportunity in the global textile trade," said the brokerage.

Nitin Spinners Limited manufactures and sells cotton and blended yarns, and knitted and woven fabrics in India. As per the brokerage, the company has graduated from a small pure spinning company to a company with a sizeable presence in India’s yarn market (3 lakh+ spindles). 

Forward integration into knitted and finished woven fabrics (25 percent of revenues) in its product portfolio, which yields more superior margins than spinning, has fortified its presence across the textile value chain, it added.

The company has been able to sweat its assets effectively and has maintained average utilisation of over 85 percent, said ICICI Direct.

Stock price trend

The stock has been flat in January so far, however, in December, it lost around 2 percent. In the 12 months of 2022, the microcap stock gave negative returns in 7 while positive in just 5. It fell the most in March, down 14 percent followed by February and May 2022, when it shed 11 percent in each of those two months. Meanwhile, it gained the most in January, up nearly 15 percent followed by April, up 9 percent.

Overall, in the past 1 year, the stock has lost 25 percent, however, looking at long-term returns, it has surged 98 percent in the last 5 years.

From its 52-week high of ₹345.75, hit in February 2022, the stock has tanked 40 percent. Whereas, from its 52-week low of ₹182, hit in June 2022, it has gained 13 percent.

The company has a market capitalisation of ₹1,100 crore.

Historical financial performance

The brokerage informed that NSL’s revenues have grown at a CAGR of 20 percent over FY12-22. The quality of revenue growth is balanced with volumes increasing at a CAGR of 13 percent while realisation has grown by 7 percent over the period, it added.

It further stated that exports, which contribute 65-70 percent of revenues, have grown 6.5x (21 percent CAGR) during FY12-22. The yarn segment mainly caters to exports whereas the fabrics division is more inclined toward the domestic market. The yarn segment recorded an 18 percent revenue CAGR in FY12-22 whereas the fabric division reported robust growth of 31 percent (on a favourable base) during the same period. Over the last decade, NSL maintained EBITDA margins in the range of 15-17 percent, highlighted ICICI Direct.

Technical view by ICICI Direct

The share price has been undergoing a slower pace of retracement of the sharp rally seen during 2020-22, highlighting inherent strength that augurs well for the next leg of up-move. Over the past 12 months, the stock has retraced merely 50 percent of the preceding 16 month’s rally. At the current juncture, the stock price has corrected from its lifetime high of ₹345 and is currently forming a base around long-term 52-week EMA of around ₹200. The past six months’ consolidation appears to be forming a potential double bottom, indicating a structural turnaround. Structurally, a slower pace of retracement coupled with base formation at a key support zone provides a favourable risk-reward proposition.

Investment Rationale

As per the brokerage, NSL is one of the fastest-growing players over the last decade, capturing growth across the textile value chain.

"Over the last decade, NSL has shown a resilient performance with yarn volumes (production) increasing at a CAGR of 13 percent during FY12-22. Focus on stringent quality control has resulted in the company having a material presence in global markets (exporting to more than 50 countries) with 60-70 percent of revenue coming from exports. The robust dominance is visible with export revenue improving by 6.5x during FY12-22 while overall India’s yarn exports during the same period grew 2.8x (resulting in consistent market share gains)," noted the brokerage.

FY22 was a landmark year for the textile industry as reduced dependency on China and several trade-related restrictions (such as a ban on the Xinjiang cotton region by the US) fuelled India’s yarn and fabric exports. NSL recorded its highest-ever revenue and profits driven by historically high yarn realisations and spreads. Revenue grew 66 percent YoY to ₹2,692 crore whereas EBITDA margins expanded 820 bps YoY to 24 percent in FY22, informed the report.

The brokerage further pointed out that in a bid to capture long-term growth opportunities and further strengthen the product range, NSL has embarked on a brownfield expansion and outlined capex worth ₹900 crore to enhance capacities across segments.

ICICI expects the capex to be funded partially through internal accruals (OCF generation: ₹430 crore in FY23-24E) and the rest through subsidised long-term debt worth ₹570 crore (average cost: 4 percent). It sees peak debt levels at ₹1,260 crore in FY24E.

ICICI sees NSL generating a superior RoCE of 16 percent in FY25E (vs average RoCE: 10-12 percent) and, in turn, leading to higher EVA creation. With a steady recovery from FY24E onwards, it builds in revenue and EBITDA CAGR of 18 percent and 25 percent, respectively, in FY23-25E.

Key risks

Elevated cotton prices, inability to maintain optimum utilisation levels and delay in capacity expansion may impact the margin and revenue growth of the firm negatively, said ICICI.

Sector outlook

Owing to robust pent-up demand post relaxation of Covid restrictions and closure of nearly 6-10 percent spindle capacity in India, cotton yarn players registered their highest-ever profitability in FY22, said the brokerage. It believes the profitability recorded in FY22 was a decadal phenomenon and replicating the performance would be challenging. However, it expects industry-level yarn spreads (for 40’s count) over a longer term to settle at ₹75-80/kg (25-30 percent higher than average). 

Despite a strong potential upside, it is important to note that microcap stocks have a high-risk return profile. One should allocate only a small proportion of investible income to these stocks and diversify well. These stocks may have low volumes and trade infrequently. The risk of volatility remains in such stocks as they can move up or down with large buy/sell orders, cautioned the brokerage.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.