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Nitin Spinners – Vijay Stambha of the Indian Cotton Textile Industry


Company Name – Nitin Spinners Limited (Nitin Spinners)


Current Share Price – INR 209 (March 1, 2023)


Market Cap – INR 1,177 cr


 

1. What is interesting about the stock?


Cotton has played a significant role in Indian civilization for thousands of years. India has a rich history of cotton cultivation, weaving, and textile production, and cotton has been a vital part of India's economy, culture, and society for centuries.


Some of the key reasons why cotton is important in Indian civilization are:

  • Economic Importance: Cotton is one of the most important cash crops in India, and the country is one of the largest producers of cotton in the world. Cotton cultivation and textile production employ millions of people in India, from farmers to textile workers.

  • Cultural Significance: Cotton has been woven into fabric and used to create clothing in India for thousands of years. Cotton textiles are an essential part of Indian culture, and many traditional textiles such as sarees, dhotis, and kurta pajamas are made from cotton.

  • Historical Significance: India has a rich history of cotton cultivation and textile production dating back to ancient times. Cotton textiles have played a significant role in Indian trade and commerce, and Indian cotton textiles were highly prized in ancient times for their quality and beauty.

  • Environmental Importance: Cotton is a sustainable and eco-friendly crop that can be grown with minimal use of pesticides and fertilizers. Many farmers in India rely on cotton cultivation as a means of sustainable livelihood and income generation.

However, it has not been a fairy tale story for the Indian cotton textile industry as seen from the rise and fall of textile mills in Mumbai which is a complex story that spans over a century. Mumbai, formerly known as Bombay, was one of the most important centers of cotton textile production in India during the colonial period, and the city's cotton mills played a vital role in the city's economic and social development.

  • Rise of Cotton Textile Mills in Mumbai: The first cotton textile mill in Mumbai was established in 1854, and by the early 20th century, Mumbai had become the largest producer of cotton textiles in India. The growth of the cotton textile industry in Mumbai was driven by several factors, including favorable government policies, access to cheap labor, and the availability of raw cotton from the hinterland.

  • Fall of Cotton Textile Mills in Mumbai: The decline of cotton textile mills in Mumbai began in the 1960s when the industry began to face increasing competition from synthetic textiles and other materials. The mills were also affected by labor unrest, rising costs, and outdated technology.

Today, only a handful of cotton mills are still operational in Mumbai, and the city's textile industry has shifted or developed in other locations in India, such as Gujarat, Tamil Nadu, and Rajasthan. One such large player is Nitin Spinners.


Nitin Spinners Limited is a textile company based in India that specializes in the production of cotton yarn and knitted fabrics. The Company was established in 1992 and is headquartered in Rajasthan, India.


The Company's product range includes a variety of cotton yarns such as combed, carded, compact, and slub yarns. Nitin Spinners also produces a wide range of knitted fabrics such as single jersey, double jersey, rib, interlock, fleece, and terry fabrics. Revenue break-up in 9MFY23 is:

  • Yarn – 65%

  • Knitted Fabrics – 7%

  • Woven Fabrics – 22%

  • Others – 6%

Nitin Spinners has an installed capacity of 3,07,000 spindles and 3,488 rotors producing 75,000 tons of yarn per annum. It also has 63 knitting machines with a capacity to produce 8,500 tons of knitted fabrics per annum and 168 looms and dyeing, printing, and finishing capacities to make approximately 300 lakh meters of finished fabrics per annum at its two plants located in Rajasthan. The Company also has an 8.5 MW rooftop solar power plant for captive power consumption which helps in reducing power costs to some extent. Nitin Spinners also had a coal-based power plant of 10 MW for captive power consumption which was scrapped during FY22 due to the impact of rising coal prices and the availability of sufficient power supply by State Electricity Boards at a competitive tariff.


Company has a strong customer base both in India and abroad, exporting to more than 50 countries. Some of the company's key customers include Raymond, Arvind, Donear, D’Decor, Siyaram’s, Welspun, etc in the domestic market, and Zara, United Colors of Benetton, Hennes &

Mauritz (H&M), Marco Polo in the international market. Nitin Spinners generated 54% revenue from exports in 9MFY23.


Nitin Spinners is expanding its capacity through a brownfield project to expand its cotton yarn and weaving capacity at existing locations in Rajasthan. The project's estimated cost is INR 955 cr, funded by a term loan of INR 655 cr and remaining through internal accruals.

However, the cotton yarn manufacturing industry is highly cyclical, and doing a debt-funded capex increases the risk profile.


Why invest in Nitin Spinners?

  • Extensive experience with the management team

  • Established market position and track record

  • Long-standing relationships with its key customers with a good presence in exports

  • Captive power generation

2. Key Historical Financials

  • Company revenue and PAT grew at a CAGR of 24% and 42% respectively in the last 5 years

  • Nitin Spinners had an exceptional FY21 and FY22 on account of higher demand for cotton yarn and knitted fabrics coupled with price increases – which also led to a higher EBITDA margin of 24%. A player like Ambika Cotton showed a similar trend

  • Market situation has eased in FY23 driving a sharp fall in revenue and EBITDA margin in Q3FY23 – higher cotton price with a fall in cotton yarn realization

  • CFO/EBITDA was poor in FY22 with an increase in working capital

  • ROCE/ROE increased to 37% and 45% respectively in FY22 – steady-state level should be around 15% or maybe lower as the Company is lower in the cotton textiles manufacturing value chain

3. What is my view on company valuation?


The Company trades at P/E (TTM) multiple of 5.6x vs a 5-year median of 6.6x. Other players like Vardhman Textile trade at 9.4x, Indo Count at 9.9x, Arvind at 5.9x, and Ambika Cotton at 6.0x. So, the valuation is in line with the industry.


However, the TTM multiple is a bit depressed as the market situation was exceptional up to Q1FY23 and turned normal in Q2FY23. The P/E multiple of annualized profit of Q2 and Q3FY23 is 9.6x which is quite expensive.


On an overall basis, Company looks quite interesting and is growing faster as compared to the industry (though using debt for capacity expansion in a cyclical industry increases riskiness). Long-term investors could evaluate investing if they want to invest in this part of the apparel manufacturing value chain.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Susceptibility to volatility in raw material prices and forex rates

  • Highly competitive industry – both in India and global markets

 

About the Author


I have over 17 years of experience in venture capital, private equity, and investment banking across various sectors in India and the Middle East. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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