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Filatex India Limited

Khambatta Securities Ltd.

MEMBER OF EQUITY & DERIVATIVE SEGMENTS

DEPOSITORY PATICIPANT

17 September 2018

Initiation Report

INVESTMENT SUMMARY

Filatex India Limited (FIL), a polyester yarn and chips manufacturer with

production facilities in Dahej (Gujarat) and Dadra, is one of India’s top

five polyester filament yarn manufacturers.

FIL’s state-of-the-art manufacturing facilities with stringent quality

control, diversified product mix, a pan-India client base, and a healthy

share of export income will enable the company to achieve industry-

leading growth going forward.

Slowdown in the Chinese polyester yarn industry due to the

government’s clampdown, driven by environmental concerns, and a

decline in China’s cost competitiveness owing to wage inflation will

positively impact Indian polyester yarn players.

The Indian polyester market is expected to witness healthy growth with

increasing use of polyester in textiles applications and overall growth in

the textiles market.

The Indian textiles and polyester industries enjoy strong policy support.

In the past, the Indian government imposed anti-dumping duty on cheap

polyester yarn imports. Last year, the government increased customs

duty on polyester to discourage import of polyester products. This will

have a positive impact on Indian polyester yarn manufacturers.

We expect robust topline growth on the back of capacity expansion and

margin improvement, driven by economies of scale. We value FIL at 17x

its FY20E EPS based on the back of strong growth and consistent

profitability, generating a target price of Rs 102 with a potential upside of

89% and informing a BUY rating.

Key Financial Metrics

Rs crore FY16A FY17A FY18A FY19E FY20E

Operating revenue 1,278.2 1,550.6 1,928.0 2,907.6 3,272.4

Growth 21.3% 24.3% 50.8% 12.5%

EBITDA 88.0 132.8 157.0 248.7 296.1

EBITDA margin 6.9% 8.6% 8.1% 8.6% 9.1%

PAT 26.3 41.2 59.8 105.7 133.0

PAT margin 2.1% 2.7% 3.1% 3.6% 4.1%

Diluted EPS (Rs) 8.08 9.45 13.53 4.77 6.01

Note: Standalone financials; EPS estimates reflect 1:5 stock split in FY19

Source: Company data; moneycontrol.com; Khambatta Research

A leader in performance, capacity expansion to drive growth BUY

Sector : Textiles

Target Price : Rs 102

Current Market Price : Rs 54

Market Cap : Rs 1,175 crore

52-week High/Low : Rs 59/30

Daily Avg. Volume : 1,116,681

Face Value : Rs 2

Beta : 1.24

Pledged Shares : 30%

Year End : March

BSE Scrip Code : 526227

NSE Scrip Code : FILATEX

Bloomberg Code : FLTX IN

Reuters Code : FLTX.NS

Nifty : 11,378

BSE Sensex : 37,586

Analyst : Ritwik Bhattacharjee

Price Performance

Shareholding Pattern



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17 September 2018

COMPANY OVERVIEW

Filatex India Limited (FIL) is a Delhi-headquartered polyester yarn and

chips manufacturer with production facilities in Gujarat and the Union

territory of Dadra & Nagar Haveli. It is one of India’s top five polyester

filament yarn manufacturers. The company’s principal products include

fully drawn yarn (FDY), drawn textured yarn (DTY), partially oriented yarn

(POY) and polyester chips. FIL produces both semi-dull and bright

variants across the product categories.

FIL’s net production capacity in FY18 was 237,000 TPA in its two

facilities in Dahej (Gujarat) and Dadra. Subsequently the capacity has

increased to 328,300 TPA during FY19. This includes a total production

capacity of 443,000 TPA, out of which 114,700 TPA is for captive use in

downstream processes.

FIL exports over a half of its DTY production. The company sells its

products to 34 countries outside the domestic market with total exports

contributing 20% of FY18 revenues. Besides its corporate office and

manufacturing facilities, FIL has marketing offices in Delhi, Mumbai and

Surat.

FIL’s promoters/management have over four decades’ experience in the

synthetic fibre market. Before setting up its first monofilament yarn plant

in Noida in 1994, the group was engaged in the trading of different

varieties of synthetic yarn. FIL was incorporated in 1990.

INDUSTRY OVERVIEW

The textiles sector is one of the oldest industrial sectors of the Indian

economy and also a labour intensive one. By directly employing 51

million people and indirectly engaging 68 million, the textiles industry

generates the maximum number of jobs in the country after agriculture.

The textiles industry contributes 14% of India’s manufacturing output

and 5% of GDP. The textile industry can be broadly broken down into the

unorganised sector comprising segments such as handloom and

sericulture which are primarily operated on a small scale, and the

organised sector consisting of fibre production, spinning, and fabric and

apparel manufacturing segments which employ modern machinery and

manufacturing processes. India's overall textile exports (including jute,

coir and handicraft) stood at Rs 2.5 lakh crore (US$ 37.8 bn) in FY17,

representing almost 14% of the country’s total export earnings. The

textile industry is expected to reach US$ 223 bn by the year 2021.

(Source: IBEF)

India has a strong production base across a wide range of fibres and

yarns spanning natural fibres such as cotton, jute, silk and wool to

synthetic/man-made fibres such as polyester, viscose, nylon and acrylic.

Besides China, no other country has such a strong and diverse base in

textile fibres and yarns as India. While the hand-spun and handloom

segments represent one end of the spectrum, the capital intensive and

FIL has a total installed

capacity of 443,000 TPA and

a net production capacity of

328,300 TPA



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17 September 2018

mechanized mills sector lies at the other end of the textile industry. The

decentralised power looms, hosiery and knitting segments are amongst

the largest constituents of the Indian textiles sector.

Manmade Fibres

Manmade fibres (MMF) are synthetically produced from chemical

substances that can be reacted and processed to form fibres. MMFs can

be broadly classified into three groups: fibres made from natural

polymers; fibres made from synthetic polymers; and fibres made from

inorganic materials.

Synthetic or artificial organic fibres are made by chemical synthesis. They

are primarily made from crude oil and its derivatives but can be made

from other raw materials such as coal and limestone (e.g. vinylon). In the

textile industry, synthetic fibres refer to fully synthetic fibres (where both

the raw materials and the fibre are synthetically obtained/produced)

which are differentiated from cellulose fibres which are manufactured

synthetically from naturally-occurring cellulose polymers. The most

common petrochemical-based synthetic fibres are polyester, nylon,

acrylic, modacrylic, polypropylene, and segmented polyurethanes such

as lycra/spandex.

Polyester and viscose together account for approximately 94% of the

total volume of MMF produced in India with the share of polyester alone

being 78%. MMF is used to produce pure synthetic/cellulose as well as

blended fabrics, which are, in turn, used in applications like readymade

garments, home textiles and technical textiles. The most common

products manufactured in the Indian synthetic fibre and yarn industry are

Polyester Staple Fibre (PSF), Polyester Filament Yarn (PFY), Nylon

Filament Yarn (NFY) and Acrylic Staple Fibre (ASF). Indian exports MMF

textiles to more than 146 countries with Turkey, Egypt, Indonesia, Brazil

and Germany being the major importers of Indian manmade fibres and

yarns.

Polyester

Polyester is made from synthetic chemicals with a variety of uses in the

garment, automotive and furnishing industries and is resistant to

wrinkles, general surface damage, mildew and most chemicals. It is a

strong, elastic and non-allergenic material with high resistance to

sunlight, abrasion and chemicals. Polyester holds creases and pleats

well after heat-setting. Its low moisture absorption property does not

have much significance in upholstery applications. Polyester is simple to

print without the requirement for wet processing. Produced from Purified

Terephthalic Acid (PTA) and Mono Ethylene Glycol (MEG), polyester has

emerged as the fastest-growing manufactured fibre. It is suitable for use

in home furnishings such as carpets, upholstery, curtains and sheets,

and is also used as stuffing for pillows and furniture. Sometimes,

polyester fibres are combined with other materials to add new

properties. Some other applications of polyester hoses, ropes, nets, tire

Polyester is the most common

material manufactured in the

Indian manmade fibre and

yarn industry



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17 September 2018

cord and ship sails. The main producers of polyester fibre/yarn are

China, India, Taiwan, Indonesia, Vietnam, Malaysia and Korea. Demand

for polyester is mainly influenced by its supply and price relative to those

of cotton.

Global Textile Industry

The global textile business is estimated to have been worth US $830 bn

in 2015 and is forecast to reach US$ 1,237 bn by 2025 driven by

population growth, rising urbanization, growth in disposable income and

improving lifestyle in the emerging economies such as China, India and

Mexico (source: Grand View Research). The World Trade Organization

(WTO) expects global trade in textiles and apparels (T&A) to expand by

3.3% in 2018 and by 4% in 2019. Innovation and investment in it will be

a key driver of the T&A sector going forward. Further, technical textiles,

with an increasing share of the overall textile pie, will be a key segment

driving overall growth of the textile industry.

The textile industry is moving towards automation from labour intensive

production. Automation has enabled textile manufacturing companies to

increase productivity and reduce costs. The fact that 1.2 million

industrial robots are expected to be deployed by 2025 is a testimony to

the increased adoption of automation in manufacturing and other

businesses. Textile machinery hubs such has China, Germany, Italy,

Switzerland and India have been taking big strides towards bringing

about further technological advancements in textile machinery. Global

Industry Analysts (GIA) estimates the global textile machinery market is

to touch US$ 25 billion by 2018 driven by demand for advanced

machines producing high-quality textiles. Other factors seen to drive the

textile machinery market include global economic recovery and revival of

the capex cycle, rising demand for nonwoven disposable textiles,

increasing demand from emerging economies, especially Asia Pacific,

and growing demand for sustainable textile products. Asia has the

largest installed capacity of textile machinery with 86% of short-staple

spindles, 45% of long staple spindles, 55% of rotor spinning machines,

73% of shuttle fewer looms and 85% of shuttle looms. China, India,

Pakistan, Indonesia and Thailand are amongst the leading Asian markets

in terms of installed capacity.

China dominates the T&A export market with market shares of 40% in

made-ups, 37% in apparels and 39% in fabric. According to the World

Trade Statistical Review 2017, published by the WTO, the value of global

textiles export was US$ 284 bn while apparel exports totalled US$ 443

bn in 2016. India, Italy, Germany, Bangladesh, Hong Kong, Vietnam and

Turkey are the other major exporters of textiles and apparels. China’s

share of the T&A export market of 39% is followed by India at a distant

second place with a 5% share. While the EU, the US, China and Vietnam

are some of the top textile importers, top importers of clothing include

the EU, the US, Japan and Hong Kong. Apparel imports by emerging

economies such as Russia, China and India have shown some

momentum lately.

China dominates the textiles

and apparels export market

with market shares of 40% in

made-ups, 37% in apparels

and 39% in fabric



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Globally, the textile yarn market is fragmented, capital intensive marked

by stiff competition between a large number of players operating at

regional and local levels. On the demand side, long term prospects are

robust on account of an expanding middle class in the emerging

markets. Profitability is subject to volatile raw material prices, rising

wages, intense competition and changes in consumer preferences.

Asia Pacific is the largest textile manufacturing region with 68% market

share followed by North America in a distant second position with a 9%

market share. Asia Pacific’s dominance in textile manufacturing can be

attributed to the presence of many fabric, apparel and home furnishing

manufacturing facilities in the region.

Indian Textile Industry

India is the world’s second largest textile manufacturer and exporter

after China. The share of the T&A sector in India’s total exports was

12.4% in FY18 while the country commands a market share of 5% in T&A

international trade. The EU and the US are major destinations for Indian

T&A exports with these two geographies accounting for 47% of T&A

exports from India. Being a labour intensive sector, the T&A sector

directly and indirectly generates employment for close to 120 million

people. The T&A and related industries also employ a large number of

rural people as well as women.

The fundamental strength of India’s textile industry lies in its strong

manufacturing capacity across a wide range of fibres and yarns including

natural fibres such as cotton, jute, silk and wool as well as MMF such as

polyester, nylon, acrylic and viscose. India produces 14% of the global

output of textile fibres and yarns. The country is the leading producer of

jute, second largest producer of silk and cotton, and third largest

producer of cellulose fibres in the world.

Indian Textiles Market FDI in India’s Textile Sector

7078

8999

109

137

150

250

0

50

100

150

200

250

2009 2010 2011 2014 2015 2016 2017* 2019F

US

$ b

n

566

1,2191,002

1,700

4,147

0

900

1,800

2,700

3,600

4,500

FY13 FY14 FY15 FY16 FY17

Rs c

rore

Source: IBEF; Office of the Textile Commissioner, Ministry of Textiles; *data up to November



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17 September 2018

The Indian MMF textiles industry manufactures products of international

standard and quality across categories. It is the world’s second largest

producer of manmade fibre and filament, having produced 211 million

kg in FY17. One of the leading exporters of MMF textiles to the EU and

the US, India is the second largest producer of polyester and viscose

globally. The country is also the sixth largest exporter of MMF in the

world, generating about US$ 6 bn in annual export earnings. India’s

manmade textiles segment has strong fundamentals and a rich base of

raw-materials. India has a robust MMF textile value chain with presence

across the raw materials, fibre, yarn, fabric and fashion segments. While

the upstream segments play an important role by supplying the much-

needed inputs down the value chain, the downstream segments’ value

addition contributes to the sector’s overall output and exports. The

forward and backward integration imparts fundamental strength to the

sector and puts it in an advantageous position to exploit the growth in

demand for MMF textiles across different end markets.

Yarn Market and Polyester Yarn Products

A key segment of the Indian textile industry, yarns are one of India’s top

textile export products. The most important export markets for Indian

yarn include China, Turkey, Egypt and Brazil. In the Asian market, India

primarily exports yarn to Bangladesh, Pakistan and Vietnam. The key

products exported by India in the spun yarn segment are cotton and

cotton-blended yarn. Polyester is the largest segment of the Indian MMF

textile industry. Indian exports MMF textiles to more than 146 countries.

Turkey, Egypt, Indonesia, Brazil, and Germany are major importers of

Indian MMF yarns.

The global yarn market was estimated to be US$10.3 bn in value terms

in 2015. It is expected to reach US$ 12.6 bn by 2020, expanding at a

CAGR of 4.2%. While natural yarns such as silk, hemp and viscose are in

Cloth Production in India by Fibre Type Fabric Production Trend in India

Cotton

60%

MMF

21%

Blended

17%

Khadi, wool

and silk

2%

0

10

20

30

40

50

60

70

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Billio

n s

q m

Cotton Blended 100% Non-cotton

Source: Office of the Textile Commissioner, Ministry of Textiles; IBEF



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17 September 2018

demand due to consumers’ preference for comfortable clothing, the

blended yarn market has been witnessing stronger growth in the last few

years due to their characteristic of possessing advantages of both

natural and manmade yarns. Cotton fibre is facing increasing

competition from synthetic fibres, most notably polyester. The

heightened competition is attributable to factors such as increased

volatility in cotton prices and variations in characteristics of cotton fibre

due to genetic, environmental, harvesting and ginning factors. On the

other hand, advances in manufacturing processes and quality, especially

in terms of usability in clothing, have contributed to greater acceptance

of polyester and other MMFs. Going forward, cotton yarn will see

increased competitive pressure due to substitution by MMF yarn,

particularly polyester.

Polyester Partially Oriented Yarn: Partially oriented yarn (POY) or pre-

oriented yarn is the primary form of polyester yarn. It is the first form of

yarn made directly from PTA and MEG or by spinning polyester PET chips.

POY is mainly used in texturizing to make textured yarn, also known as

Polyester Drawn Textured Yarn (DTY). It is used to make textured yarn,

draw warping for weaving and warp knitting of fabrics. POY is durable,

tolerant to sunlight or soap exposure, and wrinkle resistant, having good

abrasion resistance, and drape and crease recovery properties. POY is

made in different lustres such as semi-dull and bright.

Polyester Fully Drawn Yarn: Fully drawn yarn (FDY) is also known as

polyester filament yarn (PFY) and spin draw yarn (SDY). Primarily used in

home furnishing fabrics, terry towel, fashion fabrics and denim, FDY can

be knitted or woven with any other filament yarn to get fabric of different

varieties. FDY is generally available in three lustres, viz. semi-dull, bright

and trilobal bright. FDY with trilobal bright lustre is widely used in

curtains, bed spreads and carpets. FDY is available as raw white and

Yarn Production in India (‘000 tonnes)

513 555 570920 972 1,035

5,4885,665 5,660

0

1,500

3,000

4,500

6,000

FY15 FY16 FY17

MMF yarn Blended yarn All spun yarn

Source: Office of the Textile Commissioner, Ministry of Textiles



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17 September 2018

dope dyed. Dope Dyed FDY yarn can be used to make the coloured fabric

directly instead of making the fabric with FDY Raw-white first & then

dyeing it. Cationic FDY is another variation of polyester filament yarn.

Polyester FDY yarn can also be twisted to make polyester embroidery

thread which is widely used in sewing. India and China are the leading

manufacturers of polyester FDY.

Polyester Drawn Textured Yarn: DTY is manufactured in a process where

polyester POY is simultaneously twisted and drawn. It is primarily used to

make fabrics for applications such as clothing and home furnishing. DTY

can be full-dull semi-dull, bright or trilobal bright. It can be moulded in

several ways to make it suitable for various applications, and can be

made with several combinations of Intermingle points. Intermingle or

interlaced yarn is a substitute for lightly twisted yarns. This variety of yarn

can be heat-set to make the twist permanent. Cationic DTY, a variant of

polyester DTY made from cationic PET chips, is mainly used in blankets.

Polyester Spun Yarn: Polyester spun yarn (PSY) can be made from either

virgin or recycled polyester staple fibre (PSF). Waxed spun yarn is used

for knitting while un-waxed spun yarn is primarily used for weaving. PSY

can be raw white or dyed. Both dope-dyed and conventional dyed spun

yarns are used to make fabrics.

Indian Polyester Industry

The Indian MMF industry primarily produces polyester, viscose and

acrylic. In volume terms, polyester accounts for the largest share of 66%

of overall MMF production in India followed by viscose (27%) and acrylic

(7%). India produced 1,364 million kg of MMF in FY17 out of which 899

million kg was polyester. The country exported 211 million kg of

polyester fibre in FY17 (+16% y-o-y) while the import volume stood at

105 million kg (+6% y-o-y).

The total domestic production of manmade filament yarn (MFY) in FY17

was 1,159 million kg, out of which polyester filament yarn (PFY)

accounted for 91% or 1,060 million kg. The export volume of PFY was

593 million kg in FY17; India does not import any significant quantities of

PFY.

Textiles is the principal end-market for polyester yarn. The Indian textiles

industry is growing at a brisk pace driven by robust domestic

consumption and export demand. The textiles sector has witnessed

strong investment flows in the past few years on the back of a strong

textiles and clothing export market with readymade garments accounting

for the largest share of the pie. Although the Indian textiles market is still

cotton-oriented, consumption of polyester is on the rise aided by factors

such as cotton price fluctuations, growth of value retails, growth of

women’s wear, and extended presence and sourcing by global brands

where polyester fibre is dominantly used.

Polyester accounts for 66% of

India’s overall manmade fibre

production volume



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17 September 2018

Policy Support

The government has taken various steps over the years to develop the

textile industry and create an enabling environment for it to grow further.

The Technology Mission on Cotton (TMC), Technology Upgradation Fund

Scheme (TUFS) and rationalization of fiscal duties are amongst the policy

initiatives taken to help support the textile industry. The rationalization of

fiscal duties has provided a level playing field to all segments resulting in

the holistic growth of the industry. While TMC led to an increase in cotton

output and helped reduce contamination levels, TUFS has allowed the

commissioning of state-of-the-art textile machinery at competitive capital

costs.

Technology Upgradation Fund Scheme: Launched in 1999, TUFS is the

Textile Ministry’s flagship scheme for facilitating upgrade of technology in

the textile industry by providing access to capital at internationally

comparable interest rates. The scheme has enabled the installation of

state-of-the-art machinery by the textile industry. A modified form of the

scheme was implemented during FY08 to FY11 following which it was

relaunched in FY12. The outlay for TUFS for the period 2012-17 was Rs

15,886 crore.

Scheme for Integrated Textile Parks: The Indian textile sector was largely

fragmented with little integration across the segments of the value chain.

Further, it suffered from the lack of availability of quality infrastructure.

The Scheme for Integrated Textile Parks (SITP), launched in 2005, aimed

to set up textile manufacturing units in a cluster and provide

infrastructure facilities of global standards on a public private

partnership (PPP) model. 40 projects were sanctioned under SITP with

an aggregate cost of Rs 4,183 crore including government assistance of

Rs 1,420 crore. Up until June 2010, the programme had received a grant

Production and Delivery of Polyester Fibre (‘000 tonnes)

0

200

400

600

800

1,000

FY13 FY14 FY15 FY16 FY17

Production Delivery

Source: Office of the Textile Commissioner, Khambatta Research



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17 September 2018

funding of Rs 812 crore while it had a budget of Rs 1,400 crore for the

Twelfth Plan period of 2012-17.

Integrated Apparel Development Scheme: The Integrated Apparel

Development Scheme (IADS) involves setting up of integrated apparel

clusters with the objective of generating employment opportunities in

selected villages and cities identified by the state governments. The

programme looks to promote self-employment, entrepreneurship

development, industrialization and ancillarisation in the textile and

apparel value chain. The incentives provided under the programme

include fiscal benefits, power subsidy, transport subsidy, industrial

infrastructure development, incentives for employing equipment for

environmental protection, employees’ accommodation and other

benefits. The budget allocation for the scheme was Rs 1,000 crore for

the period 2012-17.

Integrated Skill Development Scheme: The Integrated Skill Development

Scheme (ISDS) looks to support the manpower needs of the textile sector

and its value chain segments such as apparel, handicraft, handloom,

jute, sericulture and technical textiles through skill development

programs. The scheme engages state government agencies, training

institutes and the private sector as implementing agencies. The

programme aims to enhance the capacity and employability of the

targeted trainees as it covers all facets of skill development such as

basic training, upgrading of skills, advanced training in emerging

technologies, training of trainers, orientation towards modern

technology, and managerial skills. A total of 11.3 lakh training targets

have been sanctioned under 76 projects involving 58 implementing

agencies spread across India. Approximately 3,250 training centres are

present in both urban and rural areas across almost all states including

remote and backwards regions. 357 out of 664 districts across the

country have been already covered by the programme.

Some other policy initiatives towards strengthening and driving the textile

sector are:

Announcement of a special package of Rs 6,000 crore for the T&C

sector in 2016 which was subsequently extended to the made-ups

sector.

Increase of the reward rate under the Merchandise Exports from

India Scheme (MEIS) for readymade garments and made-ups from

2% to 4%. Rewards under MEIS are given in the form of duty credit

scrip which can be transferred or used for paying duties/taxes

including customs duty.

The organization of India’s first mega international trade event for

the textile sector in 2017. The event was attended by CEOs and

other delegates from over 100 countries and saw the signing of 65

MOUs.

The Indian government lends

strong policy support to the

textiles sector for its

significant contribution to

GDP, employment and export

earnings



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17 September 2018

The extension of Gujarat government's textile policy by a year until

September 2018 is expected to attract an incremental investment of

Rs 5,000 crore across the textile value chain. According to

government estimates, up until September 2017, 1 million units of

spindle capacity were added and over 1,000 technical textile units

were set up since the commencement of the programme in 2013.

The Textile Ministry has earmarked Rs 690 crore for setting up 21

readymade garment manufacturing units in seven states with the

objective of developing and modernizing the Indian textile sector.

The Ministry of Textiles and the Energy Efficiency Services Limited

(EESL) has launched a technology upgrade scheme called SAATHI

(Sustainable and Accelerated Adoption of Efficient Textile

Technologies to Help Small Industries) for reviving India’s powerloom

sector.

Outlook

The Indian textile and apparel industry is projected to reach US$ 223 bn

by 2021 from US$ 137 bn in 2016, implying a CAGR of 10%. The key

drivers of this growth will be growing domestic demand as well as a

buoyant export market, which, in turn, will be helped by the cost

advantage of domestic production. The Indian yarn market is estimated

to be worth US$ 12.6 bn by 2020, growing at 4.2% CAGR from 2015 to

2020. Indian textile and apparel exports are expected to more than

double from US$ 40 bn in 2016 to US$ 82 bn in 2021, translating into a

CAGR of 12%. (Source: Ministry of Textiles; IBEF)

Production of MMF and non-cotton spun yarn in India has witnessed an

upward trend in the past few years. As of the end of FY17, the total

installed capacity of spindles was 52.5 million while there were 870,000

rotors. This excludes worsted spindles used for spinning wool yarn. The

production capacities of MMF and manmade filament yarn (MFY) were

1,782 million kg and 2,239 million kg, respectively in March 2017. A

total of 1,604 million kg of non-cotton yarn was spun in FY17 while the

output of MFY was 1,159 million kg. The production volume of MMF was

1,363 kg during the same period.

India’s per capita apparel consumption was US$ 45 versus US$ 172 of

China in 2015. In 2010, the per capita consumption in India was US$ 30

compared to China’s US$ 119, the US’s US$ 690 and the EU’s US$ 701.

By 2025, India’s per capita spend on clothing is expected to increase by

more than 1.7x to US$ 123 but the market will remain relatively

underpenetrated. As a matter of fact, India’s projected per capita

consumption in 2025 will still be lower than 2015 levels in most

developed countries and BRIC economies. (Source:

www.fashionunited.in; Technopak Advisors)

The demonetization of high value notes in November 2016 affected

almost all sectors of the economy and especially the consumer markets.

India’s per capita apparel

consumption was US$ 45

compared to China’s US$ 172

in 2015



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17 September 2018

The T&A sector too saw a slide in demand on account of lower consumer

spending during 2H FY17. This resulted in inventory accumulation at

retailers leading to a slowdown in orders at apparel and home textile

manufacturers. The tightened money supply also led to holdups in

payments which trickled across the entire textile value chain resulting in

a temporary slowdown. As the supply of currency notes increased and

cashless transactions picked up, end market demand saw some traction.

Subsequently there was another round of destocking preceding the

launch of GST in July 2017 with business activity accelerating in the

following months. The effect of GST will be positive in the medium-to-long

term as it eases up the movement of goods and services across the

textile value chain as well as across states. Moreover, GST is beneficial

for the organized sector as it creates a more level playing field by

improving compliance and increasing market efficiency.

While the Indian polyester yarn manufacturers were hard-hit as the

global market was flooded with Chinese production, there has been a

slowdown in the Chinese polyester yarn industry due to the government’s

clampdown, driven by environmental concerns, and a decline in China’s

cost competitiveness owing to wage inflation. Further, the Indian

government has taken measures to restrict the import of Chinese

polyester by imposing anti-dumping duties and increasing the import

duty on polyester (discussed in detail in the Investment Thesis).

The Indian textile industry is growing at a brisk pace driven by robust

domestic consumption and export demand. The textile sector has

witnessed strong investment flows in the past few years on the back of a

strong textile and clothing export market with readymade garments

accounting for the largest share of the pie. The Indian textiles market is

still cotton-oriented with low penetration of MMF-based textiles unlike in

the developed and other global markets. Consumption of MMF-based

fabrics, especially polyester is on the rise in India aided by factors such

as cotton price fluctuations, growth of value retails, growth in women’s

wear, and extended presence and sourcing by global brands where

polyester fibre is dominantly used. In India’s export market for yarn, fibre

and made-ups, MMF’s growth (7% y-o-y) outpaced cotton’s (5% y-o-y)

during the period April to December 2017 (source: Textile Times, January

2018, Confederation of Indian Textile Industry). The under-penetration of

MMF in India presents a robust opportunity for the industry with

consumer preferences changing further in line with the global trend,

driving increased consumption of MMF in the medium to long term. The

Indian spinning sector is technologically advanced and enjoys a

competitive advantage in the international market due to its quality

standards and cost advantage. Furthermore, with demand for MMF-

based textiles, particularly polyester, expected to increase in the

domestic market, Indian polyester yarn manufacturers are poised to

witness robust growth going forward.

China’s polyester yarn industry

is witnessing a slowdown due

to environmental concerns

and erosion of cost

competitiveness



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PEER COMPARISION

FIL directly competes with a number of privately-held as well as listed

companies. For the purpose of this research, we are comparing FIL with

some of its listed peers.

JBF Industries: JBF is a vertically-integrated polyester company engaged

in the manufacturing of polyester chips, partially oriented yarn (POY) and

polyester film as well as yarn texturising. It is amongst the largest players

across product categories, both domestically and internationally.

Indo Rama Synthetics: Indo Rama Synthetics (India) Limited is India’s

largest dedicated polyester manufacturer with a capacity of over

600,000 TPA. However, the company is currently running at low

utilization levels due to working capital issues and high indebtedness.

Indo Rama produces PSF, PFY, DTY, FDY and polyester chips.

Sumeet Industries: Sumeet Industries Limited (SIL) is another vertically-

integrated polyester value chain company engaged in PET chip

manufacture, and yarn manufacturing, twisting and texturising.

AYM Syntex: AYM manufactures and sells synthetic yarns in the domestic

as well as export markets. The company was formerly known as Welspun

Syntex Limited and changed its name to AYM Syntex Limited in

December 2015.

Ganesha Ecosphere: Ganesha Ecosphere Limited (GESL) is India’s

largest producer of recycled polyester staple fibre (RPSF) which is made

from reprocessing PET waste. It also produces recycled spun yarn (RSY)

and twisted filament yarn (TFY).

CIL Nova Petrochemicals: CIL Nova Petro is a manufacturer of POY, DTY,

FDY, texturized yarn and micro-filament yarn. The company was earlier

known as Nova Polyyarn Limited and changed its name in 2009.

While Alok Industries is another significant polyester yarn player, we have

not considered it in our peer comparison as it derives only about a fourth

of its revenues from polyester yarn with the majority of topline

contribution coming from apparel fabrics. The polyester yarn industry

suffers from high indebtedness and large players such as JBF and Indo

Rama are not profitable at the net level. FIL, on the other hand, has been

able to generate profits consistently over the last few years. FIL’s

margins at both the operating and net levels are higher than those of its

peers expect GESL. Being a recycled polyester manufacturer, GESL’s

cost of production is lower than that of virgin polyester manufacturers.

However, recycled polyester manufacturing is not as easily scalable as

conventional polyester due to challenges associated with the availability

and procurement of PET bottles which is the main raw material used in

recycled polyester. FIL’s ROIs are amongst the highest in its peer group.

While the polyester yarn

industry suffers from high

indebtedness where some

large players are unprofitable,

FIL has been able to

consistently generate profits



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INVESTMENT THESIS

FIL’s state-of-the-art manufacturing facility and strong operational setup

will support its growth leadership

FIL’s Dahej plant, based on the continuous polymerization (CP)

technology, produces polyester chips and yarns. Chips manufactured in

Dahej are used as raw material in the extrusion-based Dadra plant. The

state-of-the-art facilities have been set up using German and Chinese

technologies. Certain process of CP are fully automated and require no

or minimal human intervention. FIL has a rigorous quality control system

including chemical and physical testing of raw materials as well as of

intermediate and final products along different stages of production.

While the properties of materials are tested in laboratories manned by

qualified experts, workers physically inspect the yarns on the shop floor

in real time as the process runs.

FIL’s integrated operational setup, sophisticated technology, a diversified

product mix comprising chips, POY, DTY and FDY of semi-dull and bright

varieties, a pan-India client base and a healthy share of export income

will enable the company to achieve industry-leading growth going

forward.

Capacity expansion will drive growth and profitability over the next couple

of years

FIL’s expanded capacity, which was commissioned late into 4Q FY18,

has taken its net production capacity from 237,000 TPA to 328,300 TPA

during FY19. The expanded facilities include a gross installed capacity of

443,000 TPA and a captive capacity of 114,700 TPA. FIL’s captive

capacity primarily produces polyester chips (for the Dadra plant) and

POY, which are used as inputs in further downstream processes.

Further, with a lead time for commissioning new plant and machinery

being more than 2 years, the overall industry capacity is not expected to

Peer Comparison: FY18 key financials (standalone)

Rs crore FIL JBF Indo Rama Sumeet AYM GESL CIL Nova

Revenue 1,928.0 3,501.5 2,255.6 1,070.8 839.8 753.7 243.7

EBITDA 157.0 113.1 92.0 85.3 63.8 86.1 8.4

EBITDA margin 8.1% 3.2% 4.1% 8.0% 7.6% 11.4% 3.4%

PAT 59.8 (122.8) (82.7) (3.2) 8.0 35.2 1.3

PAT margin 3.1% -3.5% -3.7% -0.3% 1.0% 4.7% 0.5%

Diluted EPS (Rs) 13.53 (15.00) (5.45) (0.31) 2.02 18.37 0.47

ROCE 13.3% N/A N/A N/A 8.6% 14.3% N/A

ROE 15.5% -8.0% -18.0% -1.1% 3.3% N/A N/A

Source: Company data; moneycontrol.com; Bloomberg

FIL has a diversified product

portfolio comprising chips,

POY, DTY and FDY of semi-dull

and bright varieties



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17 September 2018

increase at least over the next couple of years. Consequently FIL’s

capacity utilization is expected to remain high as the company caters to a

large part of the incremental demand over the next couple of years.

Higher duty on polyester imports and GST regime will positively impact

polyester yarn manufacturers

Last year, the government increased the basic customs duty on polyester

products from 10% to 20% or Rs 38/sqm, whichever is higher. This will

have a positive impact on Indian polyester yarn and fabric manufacturers

as it makes Indian polyester more price-competitive and discourages

import of polyester products. Further, the GST regime has brought about

greater uniformity in the indirect tax structure by replacing the earlier

inefficient system involving multiple authorities and cascading taxes.

Processes in GST administration are getting fine-tuned as the new

regime is settling down after some expected teething problems. For

instance, recently, the GST refund claim process has been simplified by

replacing the submission of invoices with a single-form. We expect to see

further streamlining of GST processes going forward, leading to

increased efficiency and lower transaction costs. Overall, we expect

continued policy support for the textiles sector, presenting a favourable

environment for growth.

Buoyant demand in textiles end markets and increasing use of polyester

will drive growth of Indian polyester manufacturers

While global polyester demand overtook that of cotton in 2002, cotton

continues to be the most popular fabric domestically (cotton has a share

of 60% of the Indian fabric market), leaving a significant room for growth

for polyester going forward. Polyester demand in India is expected to

grow in tandem with the end-use markets. Improvements in quality and

increasing awareness are expected to have a positive impact on the

Profitability at the Operating and Net Levels

0%

2%

4%

6%

8%

10%

0

50

100

150

200

250

300

FY16 FY17 FY18 FY19E FY20E

Rs c

rore

EBITDA EBITDA margin

0%

1%

2%

3%

4%

0

20

40

60

80

100

120

FY16 FY17 FY18 FY19E FY20E

Rs c

rore

PAT PAT margin

Source: World Economic Outlook Update, July 2018, IMF

The basic customs duty on

polyester products has been

increased to a rate of 20% or

Rs 38/sqm, whichever is

higher, from 10% earlier



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17 September 2018

consumption of polyester going forward. Instability in cotton prices has

also resulted in higher use of polyester in fabric blends in clothing and

home textile products. Consequently the Indian textiles industry is

expected to consume higher proportions of polyester in the coming

years. Further, the Indian textiles sector, especially fabric and apparel

manufacturing, is witnessing increased interest from both domestic and

foreign investors as a result of the government’s 'Make in India' policy.

FIL’s primary end market is clothing and home textiles. Expansion in

these end markets and investments in downstream textiles products will

be amongst the key growth drivers for FIL.

Being a key contributor to GDP and employment, the textiles sector will

continue to find policy support

Being a labour intensive sector, the T&A sector directly employs 51

million people and indirectly engages another 68 million. As a matter of

fact, the textiles industry generates the maximum number of jobs in the

country after agriculture, and contributes 14% of India’s manufacturing

output and 5% of GDP. The share of the T&A sector in India’s total

exports was 12.4% in FY18. The importance of the sector to the

country’s overall economic health cannot be overemphasized.

Consequently the government provides strong policy support towards

capacity building of the industry and its stakeholders as well as

protection from predatory trade practices. In the past, the Indian

government has imposed anti-dumping duty on polyester yarn originating

from supplier countries at cheap prices. Investigations conducted by the

Directorate General of Antidumping and Allied Duties (DGAD) last year

concluded that dumping of polyester yarn was taking place from China,

South Korea, Taiwan and Vietnam. Going forward, we expect

continuation of favourable policies for the sector which will help the

domestic textiles industry including yarn manufacturers and keep a

check on imports.

VALUATION

Our valuation informs a BUY rating with a target price of

Rs. 102

We expect FIL’s topline to grow by ~50% in FY19, driven by an increase

in production volumes (on the back of incremental capacity) and higher

average realization due to increase in raw material prices. Subsequently

we have modelled normalized revenue growth of ~12% in FY20. The

company has plans to further expand its manufacturing capacity

(additional 150 tonnes/day of polymerization, 180 tonnes/day of POY,

and 200 tonnes/day of DTY) but as the incremental capacity is expected

to come on-stream around 4Q FY20, we have not modelled it into our

forecasts for FY20. While raw material prices have a direct relationship

with crude rates, polyester manufacturers are generally able to pass on

the higher raw material cost through price adjustments. Margin

improvement will be driven by economies of scale and optimization of

resources. The FIL stock is currently trading at very inexpensive levels of

The Indian government has

imposed anti-dumping duty on

cheap polyester yarn imports

in the past



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17 September 2018

11.3x and 9.0x FY19E and FY20E EPS, respectively. We value FIL at 17x

its FY20E EPS on account of its robust operations, its ability to

consistently generate profits, and expansion of production capacity. Our

target price of Rs 102 with a potential upside of 89% informs a BUY

rating.

Valuation: Price-to-Earnings

Current FY19F FY20F

Filatex India 19.6 11.3 9.0

AYM Syntex 19.5 N/A N/A

Ganesha Ecosphere 18.8 17.6 15.3

CIL Nova Petro 56.5 N/A N/A

Source: Bloomberg; Khambatta Research

Profit & Loss Account


Operating revenue 1,278.2 1 ,550.6 1 ,928.0 2 ,907.6 3 ,272.4

Growth 21.3% 24.3% 50.8% 12.5%

Operating expenses 1,190.3 1,417.8 1,771.0 2,658.9 2,976.2

EBITDA 88.0 132.8 157.0 248.7 296.1

EBITDA margin 6.9% 8.6% 8.1% 8.6% 9.1%

Depreciation & amortization 21.3 28.6 30.8 43.5 43.0

EBIT 76.9 115.6 136.8 212.7 263.0

Interest expense 51.2 56.9 44.1 50.0 58.2

PBT 32.7 55.2 92.7 162.7 204.7

Tax expense 6.4 14.0 32.9 57.0 71.8

PAT 26.3 41.2 59.8 105.7 133.0

PAT margin 2.1% 2.7% 3.1% 3.6% 4.1%

Diluted EPS (Rs) 8.08 9 .45 13.53 4 .77 6 .01

Note: Standalone financials; EPS estimates reflect 1:5 stock split in FY19; source: company data; moneycontrol.com; Khambatta Research

Key Balance Sheet Items


Total shareholders' funds 209.5 289.6 385.5 491.2 624.1

Total debt 445.4 484.5 640.1 610.0 760.0

Trade payables 120.4 111.3 224.1 192.8 216.0

Total equity & liabilities 880.8 1 ,029.9 1 ,437.5 1 ,544.5 1 ,876.9

Cash & cash equivalents 12.5 14.8 25.5 66.0 370.2

Inventory 98.6 149.1 193.7 257.0 288.0

Trade receivables 216.4 203.6 170.5 239.0 269.0

Total assets 880.8 1 ,029.9 1 ,437.5 1 ,544.5 1 ,876.9

Note: Standalone financials; source: company data; moneycontrol.com; Khambatta Research



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KEY RISKS

Our forecasts are based on FIL operating at high utilization levels of

its expanded capacity. Failure to reach the projected utilization

levels poses a risk to our forecasts.

Polyester yarn is a commodity-type product with a low scope for

product differentiation and production technologies are available to

all manufacturers. Although we believe no further significant

capacity expansion by competitors is coming on stream in the next

couple of years, any oversupply either in the domestic or

international markets poses a risk to our forecasts.

Polyester is a cheaper material compared to cotton. If crude prices

continue to rise beyond expectations, polyester’s price

competitiveness will erode.

Ratio Analysis

FY16A FY17A FY18A FY19E FY20E

ROA 3.0% 4.0% 4.2% 6.8% 7.1%

ROCE 11.7% 14.9% 13.3% 19.3% 19.0%

ROE 12.5% 14.2% 15.5% 21.5% 21.3%

Debt-to-equity ratio 2.1x 1.7x 1.7x 1.2x 1.2x

Source: Company data; moneycontrol.com; Khambatta Research



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Guide to Khambatta’s research approach

Valuation methodologies

We apply the following absolute/relative valuation methodologies to derive the ‘fair value’ of the stock as a part of our fundamental research:

DCF: The Discounted Cash Flow (DCF) method values an estimated stream of future free cash flows discounted to the present day, using a company’s

WACC or cost of equity. This method is used to estimate the attractiveness of an investment opportunity and as such provides a good measure of the

company’s value in absolute terms. There are several approaches to discounted cash flow analysis, including Free Cash Flow to Firm (FCFF), Free Cash

Flow to Equity (FCFE) and the Dividend Discount Model (DDM). The selection of a particular approach depends on the particular company being researched

and valued.

ERE: The Excess Return to Equity (ERE) method takes into consideration the absolute value of a company’s return to equity in excess of its cost of equity

discounted to the present day using the cost of equity. This methodology is more appropriate for valuing banking stocks than FCFF or FCFE methodologies.

Relative valuation: In relative valuation, various comparative multiples or ratios including Price/Earnings, Price/Sales, EV/Sales, EV/EBITDA, Price/Book

Value are used to assess the relative worth of companies which operate in the same industry/industries and are thereby in the same peer group. Generally

our approach involves the use of two multiples to estimate the relative valuation of a stock.

Other methodologies such as DuPont Analysis, CFROI, NAV and Sum-of-the-Parts (SOTP) are applied where appropriate.

Stock ratings

Buy recommendations are expected to improve, based on consideration of the fundamental view and the currency impact (where applicable) by at least

15%.

Hold recommendations are expected to improve, based on consideration of the fundamental view and the currency impact (where applicable) between 5%

and 15%.

Sell recommendations are expected to improve up to 5% or deteriorate, based on consideration of the fundamental view and the currency impact (where

applicable).

Analyst Certification

I/We, Research Analysts and authors, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject

securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in

this report.

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Khambatta Securities is one of the merchant bankers. We and our associates might have investment banking and other business relationship with

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relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by Khambatta Securities and are subject to change without any notice. The report and

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Khambatta Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding

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Khambatta Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report.

Khambatta Securities or its analysts do not receive any compensation or other benefits from the companies mentioned in the report or third party in

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It is confirmed that Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding

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The Research Analysts engaged in preparation of this Report (a) may or may not have any financial interests in the subject company or companies

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