Crisil assigns valuation grade of 5/5 to Nandan Denim

The domestic denim fabric industry is currently facing an oversupply situation. This is

expected to impact the utilisation rates of denim fabric manufacturers, including Nandan Denim (NDL), which could have an adverse impact on its margins. However, in FY14 NDL was able to expand its margins despite the oversupply. Crisil has used the discounted cash flow (DCF) method to value NDL and have arrived at a fair value of 54 per share. This fair value implies P/E multiples of 5.8x and 5.7x FY15E and FY16E earnings respectively. At the current market price of .43, Crisil has provided a valuation grade of 5/5 to the company.

Ahmedabad-based NDL is a leading player in the denim fabric industry in India. To achieve the next level of growth, NDL’s management has embarked on a two-phase capacity expansion plan. In terms of installed capacity, NDL now ranks as the largest domestic denim fabric manufacturer. Considering the company’s established position, large capacity and a healthy clientele, we expect it to benefit from steady growth in demand for readymade garments (RMG) in the domestic and overseas markets. However, oversupply in the domestic market and uncertainties in product offtake after capacity expansion are key challenges. Crisil initiates coverage on NDL with a fundamental grade of 3/5, indicating that its fundamentals are ‘good’ relative to other listed securities in India.

After the completion of the first phase of expansion in January 2014, NDL’s denim fabric manufacturing capacity has increased to 110 mmpa (million metres per annum) – the highest in India. The company plans to cater to the growing local and global demand with the expanded capacity. Buoyed by the potential in exports, NDL has increased its focus on markets such as Bangladesh, Latin America and the Middle East, and is expected to witness healthy growth across these markets.

In the first phase of the expansion plan, NDL has diversified its product offerings to include shirting fabric (manufacturing facility of 10 mmpa) and yarn dyeing (6 TPD facility), which is expected to lower its dependence on the denim segment and broaden its revenue base. Additionally, in the second phase of expansion, NDL is in the process of backward integrating into weaving and processing; where the company is expanding its spinning facility to ensure that a majority of its yarn requirement is met internally leading to lower raw material costs, boosting operating margins.