Table of Contents
BRIEF SUMMARY OF MOTILAL OSWAL’S RESEARCH REPORT ON TRIDENT SHARE
DEMAND MOMENTUM CONTINUES TO DRIVE GROWTH
Revenue and PAT better than estimated; EBITDA in-line
In the segment of Home Textile and Paper, Trident share reported a strong performance which was driven by the superb demand due to easing in pandemic woes.
Home textile trend is still in demand with major export demand bouncing back in FY22E.
Motilal Oswal maintains its estimate of FY22 earnings for Trident share, on factors such as:
a) Normalization of operations in business as the growth opportunity as well as
b) an improving demand outlook, Motilal Oswal increased their FY23E/FY24E earnings estimate by 11%/9%.
Textile, Paper drive earnings
Revenue grew 52% YoY to INR19.6b (est. INR17.4b) for Trident share. The EBITDA margin expanded 230bps to 20.6% despite a 430bps contraction in the gross margin (to 50.8%).
EBITDA, adjusted for forex gains, was in line with estimates at INR 4.0b (up by 71% YoY).
Adjusted PAT grew 2.4x YoY to INR 2,346m for Trident share.
Revenue from Textile rose 54% YoY (+21% QoQ) to INR17.1b, with the EBIT margin expanding 400bps YoY (-390bps QoQ) to 16.8%.
Textile EBIT surged 2.0x YoY (~-2% QoQ) to INR2.9b.
Capacity utilization in the Sheeting and Towel businesses stood at 99% and 69%, respectively, in 3QFY22.
The Home Textile segment sustained the demand momentum in 3QFY22, with the Bath and Bed Linen segments posting revenue growth of 34% and 26% YoY, respectively.
Volumes grew 12% YoY to 15,568 MT in the Bath Linen segment, while Bed Linen volumes came in flat YoY at 10.8m meters.
Yarn volumes grew 19% YoY to 33,228 MT for Trident share.
Revenue from Paper and Chemicals grew 38% YoY (~-2% QoQ) to INR 2.5b.
The EBIT margin expanded 170bps YoY (-90bps QoQ) to 23.0%. Paper EBIT rose 49% YoY (-5% QoQ) to INR581m.
Capacity utilization in the Paper segment stood at 91% (v/s 98% in 2QFY22).
Highlights from management interaction
Market share:
As per OTEXA data, India’s market share in US Cotton Sheets increased to 57% over Jan–Nov’21 (v/s 52% in 2020), whereas China lost ~2%share (v/s the same period last year).
In the Terry Towels segment, India’s share has risen 200bp to 44% in CY21YTD (v/s 42% in CY20), while China’s share has fallen 200bp.
Prices of cotton would be impacted due to the following reasons:
i) the US banning products made from cotton obtained from China’s Xinjiang region and,
ii) while one-fifth of the world’s cotton production is accounted by this region.
As a result, other cotton-supplying countries are likely to face added pressures.
Debt repayment:
The management of Trident share has taken several initiatives to pare down its debt, including a) reducing working capital through the retention of cash accruals, b) implementing other measures to reduce the CTC cycle, and c) building up its cash reserves. However, net debt had increased to INR14.9b as of Dec’21 (v/s INR10.5 as of Sep’21) on account of cotton procurement during the cotton procurement season.
Valuation and view
The healthy growth seen in India’s Home Textile segment is expected to continue on the back of increased awareness about health and hygiene, easing logistic issues, and market share gains from China in the US market.
While Motilal Oswal maintains their FY22 earnings estimate, on factoring in a) the growth opportunity with the normalization of business operations as well as b) an improving demand outlook, they increased their FY23E/FY24E earnings estimate by 11%/9%.
KEY TAKEAWAYS FROM MANAGEMENT INTERACTION OF TRIDENT SHARE
Textile and Apparel
The industry was significantly impacted by the first and second COVID waves.
However, it has rebounded well in FY22 given the revival of consumer demand in the aftermath of the two waves.
The sector has shown positive signs with the support of various government initiatives and robust demand globally.
The primary challenge that may impact stability is the uncertainty regarding another potential COVID wave.
This, coupled with the shortage of containers, is leading to higher freight costs.
In the future this industry is expected to do good globally.
Home Textile
The US and Europe are major importers of home textile products globally.
The industry saw a rebound in sales due to pent-up demand.
The growth driver for home textile products is the emphasis on working from home, health and hygiene.
Pressure on logistics has increased drastically due to a surge in demand.
Exporters are facing a shortage of containers for shipping products, which has led to a spike in logistic costs.
The sector is expected to perform well going forward, driven by government support in the form of an extension of the RoSCTL benefits up to Mar’24.
This is expected to provide stability and ensure the competitiveness of Indian products globally.
As per OTEXA data, India’s market share in US Cotton Sheets increased to 57% over Jan–Nov’21 (v/s 52% in 2020), whereas China lost ~2% share (v/s the same period last year).
In the Terry Towels segment, India’s share has risen 200bp to 44% in CY21YTD (v/s 42% in CY20), while China’s share has fallen 200bp.
India’s textile and apparel exports to the US, its single largest market, were up 55% in the first seven months of 2021.
The share of India’s textile and apparel exports in mercantile shipments stood at 11% over 2019–20.
Paper
Demand was affected by the closure of schools and colleges due to the COVID-19 outbreak.
However, with the opening up of schools and colleges, demand is expected to rebound in 4QFY22.
Demand for writing and printing paper is largely dependent on the Education sector, which is recovering and expected to normalize further in 4QFY22.
Demand and supply have taken a hit in recent times.
Global consumption is currently low.
However, paper volumes as well as realization are expected to improve in the coming quarters.
Cotton
The Cotton Association of India (CAI) has revised the estimated production of the cotton crop for 2021–2022 by 7 lakh bales to 360 lakh bales in Jan’2 2.
The CAI Crop Committee estimated the total cotton supply until the end of the 2021–22 season (i.e., up to 30th September 2022) at 445 lakh bales.
Domestic consumption for the 2021–22 crop year is estimated by the CAI to be at the same level as last year (i.e., 335 lakh bales).
Exports estimated by the CAI for the cotton season 2021–22 stand at 48 lakh bales, against 78 lakh bales estimated for 2020–21. Cotton exports for Oct’2021 and Nov’21 was collectively recorded at 7 lakh bales (v/s 12 lakh bales last year).
The following is expected to impact cotton prices going forward: i) the US banning products made from cotton obtained from China’s Xinjiang region and ii) this region accounting for one-fifth of the world’s cotton production. As a result, other cotton-supplying countries are likely to face added pressures.
Motilal Oswal expects cotton prices to stay range-bound, with the positive bias to remain high for this crop season, considering the supply shortage.
Other highlights
Capital requirement:
Cash and cash equivalents are expected to meet the company’s short-term obligations and assist in working capital and capex plans.
The management intends to raise capital through debt and equity components.
Growth drivers:
The domestic Textile and Apparel industry is in a sweet spot to benefit from 1) a competitive advantage in raw materials (better traceability of cotton); 2) an integrated supply chain, resulting in a reduction in the supply lead time; 3) increasing market share in the global market, specifically in the US; and 4) the government reinstating the RoSCTL, RoDTEP, and mega textile park schemes.
Debt repayment:
For debt reduction, the management took several initiatives such as retention of cash accruals, other measures for reduction in CTC cycle, and cash reserves building.
However, net debt had increased to INR14.9b as of Dec’21 (v/s INR10.5 as of Sep’21) on account of cotton procurement during the cotton procurement season.
Motilal Oswal values Trident share at 25x FY24E EPS and has set a target price of ₹ 73.
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