Why are FIIs buying shares of Nandan Denim at 57% premium to the CMP? …
One aspect that has perplexed novice
investors like you and me is as to why elite FIIs are aggressively buying
warrants of Nandan Denim where the conversion into equity shares is at a price
much higher than the prevailing market price.
We
saw this phenomenon first when Polus Global Fund, a FII with a stellar track
record for finding multibagger stocks, scooped up a chunk of 2.5 million convertible warrants of
Nandan Denim where the shares were to be issued at Rs. 200 each
even though the then prevailing price was only Rs. 115.
Later,
more elite FIIs such as LTS Investment Fund Ltd and LGOF Global Opportunities
Ltd have queued up for convertible warrants
of Nandan Denim. The FIIs have pumped in Rs. 100 crore to acquire 5
million convertible warrants.
The astonishing aspect is that the
conversion price of Rs. 200 per share represents a premium of over 57 per cent
to the present stock price of about Rs 127.
…. Because the Company is at an “inflection point”
& is all set to gain from “operating leverage“
The wizards of Sunidhi have laid bare the entire rationale as to why the FIIs are so excited about Nandan
Denim. The rationale is as follows:
Best proxy play on high growth Indian Denim market: Industry estimates suggest
Denim wear market in India is expected to register a Retail Value figure of Rs.
361 bn by CY 20 from the level of ₹177 bn in CY15 i.e CAGR of 15%.
Nandan Denim Ltd, currently the second largest manufacturer of Denim fabric in
India with installed capacity of 99MMPA should be a major beneficiary of this
secular demand surge.
Higher Topline and better margin-
dual benefit post capex: Nandan Denim
initiated an ambitious capital expenditure project in FY14 with planned capital
outlay of Rs. 6.12bn to increase the denim manufacturing capacity to 110MMPA
from 71MMPA, spinning capacity to 124TPD from 54TPD and installing Yarn dyed
shirting capacity of 10 MMPA. Post this capex, company is expected to register
topline growth of 29% between FY16-FY18E while EBITDA margin should expand by
120bps during the same period to reach a level of 17.8%.
Change in Product mix should help
improve Realization: Capex based topline
growth has its limitations and hence value addition is the only sustainable
growth driver. Currently company derives around 10% of revenue from Value Added
products (VADP) which it plans to grow to 33% over next 2-3 years period. We
expect, Average Denim realization of the company to improve to Rs. 149/ meter
by FY18E from Rs. 133/ Meter in FY15 helped mainly by growing contribution of
Value added products in company’s Topline.
Incentives under Gujrat Textile
Policy- Icing on the cake: Gujrat Textile
Policy offers VAT reimbursement to textile companies for 8 years on procurement
of raw material from Gujarat from the date of commissioning of spinning &
weaving plant. VAT reimbursement benefit is a contingent benefit depending upon
quantum of Cotton/ cotton yarn/Other inputs procured from state of Gujarat. VAT
reimbursement benefits should start accruing to company from FY18 onwards and
upper limit of this benefit could be close to Rs. 300mn for FY18E.
Buy with Price target of Rs. 219
At the current price
of Rs. 126, Nandan Denim is trading at 8.0x FY17E and 6.1X FY18E Earnings,
while in terms of EV/EBITDA it is quoting at 5.2x FY17E and 4.3x FY18 EBITDA
respectively. Valuation looks attractive compared to peers like Arvind, Indo
Count, Vardhman Textiles and Trident Ltd when compared on parameters like PAT
CAGR, ROE and Dividend yield. Post completion of Capex by Q3FY17, Nadan should
be able to do ROE of above 20% in a sustained manner and hence we believe 6x
FY18E EBITDA is a fair value for the company, which gives us fair value of
company’s Equity at Rs. 219. At the fair value of ₹219, stock is valued at
13.9xFY17E PE and 10.6xFY18E PE and offers upside potential of 74%.
Dolly Khanna has also
increased her stake in Nandan Denim
It is an indisputable proposition that Dolly Khanna knows more
about stocks than the elite FIIs. Dolly’s aggressive ramp up of holding in
Nandan Denim implies that the FIIs are on the right track.
When
I first
reported on the matter, Dolly’s holding (as of 31st March 2015) was
5,06,754 shares. By 31st December 2015, the holding had gone up to 5,12,218
shares. As of 31st March 2016, the holding had gone up further to 5,58,373
shares. As at 30th September 2016, the holding has gone up further to 6,56,121
shares.
It is crystal clear from Dolly’s conduct that she regards Nandan
Denim as being highly undervalued and as having the potential to give mega
gains.
Sunidhi’s
first recommendation to buy Nandan Denim yielded promised returns
It
is evident that Sunidhi has a deep understanding of the mechanics of Nandan
Denim. Sunidhi
first recommended a buy of Nandan in
May 2015 when the stock was languishing at Rs. 73 and confidently predicted a
target price of Rs. 110.
The target price of Rs. 110 was not only effortlessly breached
by Nandan but it also surged to an all-time high of Rs. 174 on 4th August 2016.
Thereafter, the stock has been on a downward trajectory and is presently
resting at Rs. 130.
Conclusion
Prima facie, the unanimous bullishness of Dolly Khanna, the
elite FIIs and the expert analysts’ augers well for Nandan Denim. It does look
like the stock has the necessary wherewithal to deliver mega gains and delight
the believers!
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